Muhammad Yunus was awarded the Nobel Peace Prize in 2006 for his work in alleviating global poverty. He is the pioneer of the micro-lending movement, which targets the world’s poorest people for small loans that can be used for launching personal businesses. Yunus’s theory is that the best way to bring people out of poverty is to enable them to do it themselves. Yunus’s Grameen Bank never gives away money. They do not forgive loans when borrowers fall on hard times, instead merely restructuring terms and offering more money to alleviate immediate hardships. In Banker to the Poor, Yunus describes the path he and his bank took to discovering a winning formula that has saved the lives of millions of the world’s most desperate people.

The fundamental premise in Banker to the Poor is that everyone has some skill they can use to earn a living. One of the largest barriers to escaping poverty is lacking sufficient capital to secure a large enough share of labor value from productive activities. Muhammad Yunus found that in small Bangladeshi villages the extremely poor barely eked out a living from their work. Rather, a majority of the value these people created through work was transferred to moneylenders who provided working capital in exchange for usurious interest rates.

Micro-lending turned out to be an incredibly elegant solution to this dilemna. By lending small amounts to the poorest enabled these people to operate their own independent businesses. The formula ended up being a mixture of individual responsibility blended with social reinforcement.

Borrowers are required to form local support groups, linking each person’s success to everyone in the group. This approach integrates communities, provides social gratification through relationship building, and safeguards the bank in repayment; it is rare for a borrower to let down her friends by defaulting on debt. In this way Grameen experiences higher than a 97% repayment rate, proving that impoverished borrowers are actually more likely to repay debt than wealthier ones.

A big lesson Yumus learned is that governments are more often than not contributing factors to perpetuating poverty.  This comes in two forms: (1) outright corruption and waste, and (2) structural problems in well-meaning welfare programs.

Yumus cites that rougly 75% of foreign donor assistance to Bangladesh never reaches the country. The remaining 25% mainly goes to government officials and affluent businessmen, with a mere trickle flowing down to the people in need. This is a problem endemic to bureaucracies. Most international aid programs spend large sums in hiring high-paid employees, consultants, economists, etc. who are rarely even physically located in trouble spots.

“In the developed world, my greatest nemesis is the tenacity of the social welfare system. Recipients of monthly handouts from the government feel as afraid to start a business as women in Bengali villages. Many calculate the amount of welfare money and insurance coverage they would lose by becoming self employed and conclude the risk is not worth the effort.”

“Welfare in the United States creates disincentives for welfare recipients to work. Those who receive welfare become virtual prisoners not only of poverty but of those who would help them.”

These two statements summarize Yunus’s views on welfare. He states that these systems started with great intentions, but are standing in the way of real progress to help alleviate poverty. In addition to immediate disincentives from work, there is a long-term human capital issue. Workers have resumes with experience that builds over time and translates into greater skillsets and higher future incomes. Taking people out of the labor market for prolonged periods of time degrades their long run prospects of achieving equivalent prosperity.

Finally, if we are to truly attempt to eradicate global poverty, Yunus says we must destroy all barriers to trade. Protectionism and other artificial barriers harm the poor the most:

“Protectionism is built up in each nation in the name of the poor, but its real beneficiaries are the rich and clever people who know how to manipulate the system. By contrast, the poor have a better chance in a bigger open market than in a smaller protected one. Everyone would benefit from the free flow of commodities, finances, and people.”

Overall, Yunus says that “Government, as we know it, should pull out of most things except for law enforcement, the justice system, national defense, and foreign policy, and let the private sector, a ‘Grameenized private sector,’ a social-consciousness-driven private sector, take over its other functions.”

The good thing about a free society is that people have the ability to take matters into their own hands and do what they can to make the world a better place. Bureaucrats, protectionist legislation, and welfare programs stand in the way of truly helping those most in need. Karl Marx had his heart in the right place, but missed the intellectual substance that Dr. Muhammad Yumus highlights in Banker to the Poor.