Next week, during the Clinton Global Initiative, Nobel Peace Prize winner and Banker to the Poor, Muhammad Yunus, will be meeting with heads of state, CEOs of some of the world's largest corporations and many, many bankers from across the planet. While bankers in the West are presently worried about bank runs and losing their jobs, Prof. Yunus looks at the heart of where this all went wrong in the first place.
One of the aspects of the crisis that is never mentioned is the way that sophisticated and complicated legal contracts are no replacement for basic trust between human beings, and within the financial system itself. Prof. Yunus' Grameen Bank operates with a network of trust. It remains unaffected by today's financial crisis. Read on...
"How Legal Steps Can Help to Pave the Way to Ending Poverty"
by 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...
1. In view of the general financial uncertainty in the world, one wonders how helpful complex legal contracts have proven to be for the subprime borrowers or for the lenders 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? In 50 percent of the current housing foreclosures in the United States, no direct communication exists between the borrower and the lender. Grameen's bankers and borrowers meet and look each other in the eye each and every week during the group meetings.
2. One must also ask 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 Grameen's much simpler trust-based loans to poor women with no collateral seem to be doing well.
3. A similar situation occurred in 1997, when microfinance continued to grow steadily despite the financial instability that accompanied the Asian currency crisis. The macroeconomies 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."
Perhaps microfinance, where it works, and a more straightforward legal architecture for our financial system in the West that allows for more transparency, can work for all of us. After all, without trust, there is no credit. Because the word credit or "credire" means "to believe in" and we all need to believe in and have trust in our banks, or the whole thing comes tumbling down.