Educating the Poor for Profit and Positive Press: Park III

So what is the new policy that I’m suggesting, and how does it correlate banking and poverty?  It all boils down to one simple word: education.  Teaching those in poverty about simple financial planning topics that most of us take for granted is the key to eliminating poverty.  It is my sincere belief that the majority of those in poverty are in that state because they literally do not know how to be anything else.  Rank argues that many non-poor wrongly blame laziness as the cause, and I agree that the cause is much deeper.  These people are willing to better their lives; they just need a friendly hand to guide them and give direction

Roxanne Tsosie’s mistake was merely a lack of understanding of what she was signing.  To her, this business appeared clean, friendly and inviting; at its core, however, it was nothing more than a legalized loan shark.  When she was no longer able to make her payments, she had to return the car to the dealership.  J.D. Byrider was able to keep her payments as well as the car, which they were then able to resell.  The business was out nothing, but Tsosie was further behind than when she started.  Had Tsosie had some basic budgeting concepts under her belt, she might have thought twice about committing to a payment that left her with next to nothing to feed her children.

An interesting example of a strategy that American banks should model is that of Grameen Bank in Bangladesh, founded by Nobel Prize-winner, Muhammed Yunus.  Growing up in poverty himself, Yunus understands what it means to eek out a living and rise above the hardships that were placed in front of him.  In 1983, he founded Grameen Bank, whose primary focus of business lies with those who, quite literally, have nothing.  Where most other banks are hunting for clients with the most assets as possible, Grameen Bank only loans money to those in poverty in an attempt to give them the edge they need to get ahead and succeed in life, while profiting the company at the same time.

Yunus spawned the idea of “microfinance”, a term that larger banks might consider preposterous.  Microfinance is the offering of financial services to the lowest of low-income clients.  These people have no access to traditional banking as no other banks will bother to lend them money due to the high amount of risk.  With poverty on the rise, this made for a large pool of clients for Yunus to offer his services to.  His method has been proven successful, as the bank boasted a net income of nearly twenty million USD, and revenues of over ninety-two million USD in 2006 (Ahmed and Ahmed).  Yunus has proven that being a positive influence in the community while still making a highly profitable financial institution is quite possible.  A similar approach must be taken with American banks. The efforts will contribute to the well-being of communities while increasing the quality of clientele, thus increasing profits.

One might argue, however, that such a grass-roots approach won’t work in America where poverty has a somewhat twisted meaning compared to third-world countries.  Rank claims that the poverty line for a family of four living in America is around $18,000 per year (Rank 23); the common international poverty line, which was updated the same year Rank wrote his book, is currently $1.25 per person per day (Ravallion 163-84).  That’s $1,825 per year, a number that pales in comparison to Rank’s figure.  The point is that the American “poor” have a drastically different lifestyle than those living in countries like Bangladesh.

Since Yunus’ microfinance concept is based on trust, the method probably wouldn’t work in America where credit card debt alone is nearing a trillion dollars.  There is no legal contract between Grameen Bank and their customers; the lines of credit are issued and interests collected based simply on the recitation of the Sixteen Decisions, a set of values that is more or less a Bangladesh guideline than a law.  Bottom line, if Grameen Bank’s customers default on their loan, Grameen Bank is out the money since there is no collateral to collect and the bank has no legal recourse against the client.  This simply wouldn’t work in America, as too many people would take advantage of this type of generosity and the bank would go out of business very quickly.

So what can both financial institutions and the government offer as an alternative to merely giving out free money (welfare) or entrusted money (microfinance)?  The answer is simply a government-funded education program that is channeled through financial institutions, like banks.  Rather than handing out taxpayer’s funds to people who could just as easily spend it on alcohol and cigarettes, I suggest funding a nationwide operation to educate those same people on simple financial topics that, quite simply, aren’t being taught in our schools.  People need to know how to keep a checking ledger, balance their checkbooks, budget their income, save for the future and prioritize their spending.  They need to be taught the difference between the cost of needs (housing, food, utilities) and the cost of wants (dining out, cable/satellite television, designer clothes).  They need to understand the importance of saving money for emergencies and for the future.  These are all simple concepts that many take for granted, but would greatly improve the lives of those in America living in poverty.

One might ask what would motivate those in poverty to accept the education offered by banks.  In America, money talks; quite simply, we motivate them with money.   Jack Hough, a writer for the Wall Street Journal, researched a campaign entitled “Financial Access @ Birth” (FAB) in which the government would offer a $100 savings account to children whose parents create a birth certificate identity for them at birth (Hough Article).  The idea is to make financial services available to those who currently have no access while encouraging census standards.  I suggest a similar approach be taken in the form of education.  The government and banks should not only fund the education alone, but also offer two separate cash deposits upon completion of a financial basics training course.  For instance, a client who completes the required education might receive a $100 bonus into their savings account that could be put toward anything, and a second $100 could be deposited into an Individual Retirement Account (IRA) to encourage further long-term savings.

Much like FAB, this education program will encourage the poor to actually use financial services, but rather than being concerned with census numbers, the focus will be on educating future clients to be financially savvy.  These courses shouldn’t necessarily be easy; they should be designed in such a way that requires class time, individual study and one-on-one training in order to be able to pass.  The student will need to, by the time of final examination, be able to do simple additions and subtractions, keep a month’s worth of transactions in a checking account ledger, and balance a check book.  Additional financial concepts such as budgeting, calculations of interest (both for deposits and loans) and simple investing should also be included.

Finally, continuing education should also be instituted where clients are rewarded for taking further classes or revisits of concepts they previously learned to stay sharp.  Like any learning process, repetition is the key; teaching a single class isn’t going to drive the message home, but the concepts need to be drilled into the heads of those who wish to succeed.  In order to keep getting that repetition, clients need to keep coming back for more training.  This is where the rewards come in.  I propose that banks divert the money that is handed out for opening a new checking account to those who take the time to learn, retain, and process financial topics that will make them better clients.  Completed courses reward a small cash deposit or savings bond to the “graduate”, and each additional completed course earns them a larger and larger reward until the student reaches graduation complete with a formal recognition ceremony.

This policy will not only improve the quality of bank customers, but also improve the quality of poor residents in their areas to put financial intuitions in a positive light once again.  It’s no secret that banks are in the business of making money, and helping to educate those that most business avoid is an ethical method to increase their bottom line while making a difference in their communities..  As Muhammed Yunus has proven with Grameen Bank, there are poor people who have a bodacious desire to succeed in life and they are an untapped natural resource to those in the financial services profession.


~ by Scott L. Clark on July 27, 2010.

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