How Legal Steps Can Help to Pave the Way to Ending PovertyBy Muhammad Yunus |
| There is no better time for a serious discussion of how the law and lawyers can enable the poor to help themselves throughout the world, and especially in the United States. Right now, highly regulated banks in the developed world (many of them in the United States) are having trouble pricing and trading complex mortgage-backed securities. At the same time, however, trust-based microfinance banks like Bangladesh's Grameen Bank continue to do well, unaffected by the financial uncertainty in the rest of the world. How the Trust-Based Grameen Bank Works The Grameen Bank issues loans using very simple trust-based financial arrangements; no legal documents are involved. In part, that is because our borrowers are poor and have no collateral. So, we rely on trust and the positive incentives of continued access to credit and other support to ensure our repayments; and our repayment rates have averaged better than 98%. Because our loans are based on trust and positive incentives and no legal documents, we have never used lawyers or courts to collect any of our loans. We have about 7.5 million borrowers in Bangladesh, and we have loaned approximately $7 billion since our inception, with an average loan size of about $150. When a potential borrower wants a loan from us, she has to form a group of five or join such a group of borrowers from her neighborhood and agree to meet with that group once a week.Each loan is made to an individual in the group and is the responsibility of that one individual, but others in the group cannot get the usual raise in their loans if any member of the group is late in her payments. Our borrowers are also required to maintain a regular savings plan, and today our borrowers and their nonborrowing neighbors as a group have $150 in savings for every $100 in loans outstanding. Today, the Grameen Bank is funded by the savings deposits of the poor. It has been profitable for all but 3 of the last 25 years. Our interest rates for loans and savings are clearly available to all at www.grameen.com. All of our loans are intended for income-producing activities, housing, or education, not for consumption. Our basic interest rate for most of our business loans is 20%. In addition, we have issued more than 600,000 housing loans at 8% and about 20,000 educational loans at 5%. We also have loans to about 100,000 beggars, whom we call "struggling members." We have no time-limit for loans for these borrowers and we charge them no interest. Our goal is to encourage them to leave begging and to become regular savers and borrowers. To date, 10% of these borrowers have left begging completely. The Grameen Bank is 96% owned by the borrowers, 97% of whom are women. Nine of our 12 directors are women. Our bankers go to a borrower's neighborhood for the weekly meetings, using bicycles or motorcycles. Typically, ten or so groups of five borrowers (60 individual borrowers total) meet every week for about an hour to pay back existing loans, to receive new loans, and to exchange ideas in an open and transparent way in front of the whole group of fellow borrowers. The approach is practical also because our borrowers typically cannot read financial statements. Our borrowers have established some of their own rules. We call them the Sixteen Decisions and we have made them available on our Internet site. Many of these rules have to do with the health of the family and the care and education of children. When I consider the general financial uncertainty in the world, I am not sure how helpful complex legal contracts have proved to be for the Subprime borrowers or for the lenders themselves who are currently experiencing difficulties. How useful are these contracts if the transactions are not ultimately based on trust between bankers and borrowers who know each other? I saw a report that said that in 50% of the current housing foreclosures in the United States, there was no direct communication between the borrower and the lender. Our bankers and borrowers meet and look each other in the eye each and every week during the group meetings. I'm also not sure how successful all of the disclosure statements are if they are buried in a large pile of documents that are so long and complex that no one, including the bankers, seems to fully understand the implications of the interest rate adjustments in the documentation. So many of the more complex mortgages and mortgage-based securities in the United States are faltering or failing. But our much simpler trust-based loans to poor women with no collateral seem to be doing well. A similar situation occurred in 1997, when microfinance continued to grow steadily despite the financial instability that accompanied the Asian currency crisis. The macro economies in a number of Asian countries declined steeply when a bubble of speculative lending burst, but the microfinance organizations in those countries continued to thrive. During a financial crisis, microfinance organizations can be an island of stability. When I recently visited Ben Bernanke in Washington, he commented that the United States has less of an informal or unregulated sector than developing countries do. The discussion turned to the importance of a culture of thrift, hard work, savings, and mutual aid, and to whether those qualities remained important in the United States. Federal Reserve Board Governor Randall Kroszner was at the meeting and cited the book From Mutual Aid to the Welfare State by David T. Beito. Beito's book documents the importance of thrift, hard work, and savings in the growth of the United States, where local community-based voluntary mutual aid societies provided bottom-up delivery of health care and financial services and promoted a culture of thrift and work for the poor. What makes the trust-based Grameen bottom-up model so valuable is that it builds human, family, and social capital by helping the poor (poor women in particular) to help each other in a voluntary and business-like fashion that builds respect and self esteem. We have learned that the poor can take care of themselves, and that they can support each other and make important contributions to society. The resulting knowledge, experience, confidence, pride, and self respect had become the basis on which Grameen successfully built its lending program. Where the Legal Profession Can Help Lawyers can provide vital help to encourage and enable lower-income people to take care of themselves in the United States and internationally. The needs are universal, but country laws differ, so perhaps lawyers can form groups in each country to develop or revise laws that ultimately help the poor to help themselves. Perhaps one group of lawyers can be formed for each of these or similar objectives in every country where such changes are needed. Here are some areas to focus on: 1. Everywhere in the world, simpler laws are needed to allow microfinance programs to receive savings deposits and relend that money. The right regulations should allow a microfinance organization to expand through savings deposits. That would be the single most important step in expanding microfinance globally. In the United States, credit union regulations might work for microfinance organizations, and Grameen America is studying that option. Best option would be to have a new law exclusively for creating microfinance banks for low-income people and people on welfare. 2. In the United States in particular, low-income borrowers find that starting and managing a small business can be difficult because laws and regulations either are intended for larger businesses or simply are not essential. For example, I have heard that in the state of Louisiana, a person cannot arrange and sell more than one variety of flowers in a vase for resale without taking a test to get a state license. This regulation discourages new entrepreneurs, reduces competition, and keeps the cost of flower arrangements high. The license could be voluntary and optional, allowing the end purchaser of that flower arrangement to decide if he wants flowers arranged by a licensed or unlicensed business person. 3. Very poor people should have some sort of waiver medallion that enables them to take care of themselves through self-employment opportunities with minimal or no interference from laws that weren't designed with them in mind any way. As I've said before, such a medallion would entitle the very poor to do what they need to do in search of earning their own legal livelihood, and no law should be allowed to interfere with that initiative. We have free trade and special enterprise zones. Let's work to give the poor the individual right to operate in a legal interference free zone to make a living for themselves. 4. Welfare and Medicaid laws often too steeply limit how much a low-income person can save or earn. These laws should be designed to constantly help people get off of welfare and gain self respect and independence by taking care of themselves through income-producing activities. Instead, the welfare laws seem designed to keep people on welfare longer than necessary. Creative policy changes should be put in place to help people help themselves and to lose these subsidies gradually and not all at once. 5. Let's always work to keep laws as simple and uncomplicated as possible for low-income people in particular, to motivate them to take the next steps to be able to help themselves. 6. Governments should create an enabling environment for microcredit programs without getting directly involved in lending money to poor people. The government is a political entity, and it's extremely difficult for a political entity to recover money that it has loaned to poor people. Some people look at government as an agency that has to take care of them. Thus, the importance of discipline of paying back is lost in a government program. Politicians by necessity pays a lot of attention to giving out loans but then do not retain any interest in getting the loans paid back. They are more focused in getting votes than in getting loans repaid. For all these reasons, governments should avoid directly lending money to the poor. Such loan programs should be left to non-government, private sector, and social businesses. 7. In my new book, Creating a World Without Poverty Social Business and the Future of Capitalism, I explain the potential of social businesses. These are designed exclusively to maximize benefits to customers, rather than maximizing profits. Social businesses serve social needs in a business-like manner. It is sustainable and makes a profit, and the investor gets back the capital he invested, over time. Profits in a social business is entirely reinvested to expand the existing social business or start new ones. A charity dollar can be used only once, but a social business investment dollar is recycled indefinitely. Current tax laws offer tax benefits to charitable organizations. Let's come up with new tax laws that put social businesses on at least, an equal footing with charities. 8. The current visa, immigration, and passport systems worldwide are a great source of frustration and wasted time and resources. People everywhere have so much to learn from each other, throughout their lives. So many countries want some of Grameen's 27,000 experienced microfinance employees to come and build programs like those we have in place, but those same countries have complicated and expensive visa procedures. The children of developed countries want to come to Bangladesh to study microfinance, and we want them to come. The children of our poor borrowers want to travel and go to international schools. Let's devise simple programs that allow us to travel more easily to share what we know. The goal should be a world where people can travel freely without the need for passports and visas. 9. Tariffs and trade barriers seem to favor the powerful over the less powerful. The relatively poor country of Bangladesh has to pay one of the highest tariffs on its textile exports to the United States. The goal should be to help poor countries to do more business with rich countries, rather than letting them depend on their foreign aid. In closing, I offer a simple recommendation: we must all believe in people. Believe in people's ability to change their own lives. Believe that all people, including the poor people, have enormous capacity. Despite appearances sometimes, deep inside of every single human being exists a precious treasure of initiative and creativity waiting to be discovered, to be unleashed, to change the life for the better. If we look at each and every poor person from this perspective we will find enormous possibilities for this world. Published in Human Rights Magazine of the American Bar Association Winter 2008 o Vol. 35, No. 1 http://www.abanet.org/irr/hr/winter08/yunus_winter08.html |
