Wednesday, January 15, 2014

What's Up with Muhammad Yunus and Grameen Bank?

Back in 2006, the Nobel Peace Prize was awarded to Muhammad Yunus and Grameen Bank "for their efforts to create economic and social development from below." With a few exceptions, like the award to Norman Borlaug for his work on the "Green Revolution" back in 1970, The award is usually given for efforts involving human rights, democracy, international affairs, and peace. I know I wasn't alone among economists in appreciating the recognition that improvements in economic life could contribute to peace, too.

But what's up with Yunus and Grameen Bank today? Here's an interview that Sophie Shevarnadze recently conducted with Yunus for the World Public Forum. The tone of the interview can be inferred from the title: "Bangladesh Govt Destroying System That Saved Millions from Poverty."

I don't follow these issues closely, but I had not known that the Bangladeshi government required that Yunus step down as head of the Grameen Bank in 2010, on the grounds that he had exceeded the mandatory government retirement age of 60. This was odd for at least two reasons. One is that Grameen is not a government bank, so it wasn't clear that the government retirement age applied. The other is that Yunus had turned 60 back in the year 2000. Here's Yunus:
"As I said, it’s very painful because it was done in a kind of inconsiderate way, because we were not taken as a government bank, government applied the government bank rule onto Grameen Bank, saying that we‘re not following the Grameen Bank’s rules of retirement. We said this is a bank owned by poor women. We have our own rules, our law allows that, so this restriction about age limit doesn’t apply to Grameen Bank and our board is very clear on that. But in any case I was asked to resign, so I resigned and came out of it."
Before forcing Yunus out at Grameen, the prime minister of Bangladesh proposed splitting Grameen into 19 separate banks.  Here's Yunus:

"Well, this all came for political reasons; there is no complete issue about that. I mean, by dividing up and splitting up the Grameen Bank in 19 pieces only – you’ll destroy the bank. If somebody wants to destroy the bank, that’s the best way to do this – cut it up, chop it off and it’s gone. That idea was dismissed by government as it is not in favor of chopping it off, they would rather do something else. But in any case behind everything else it looks like there is an attempt to control Grameen Bank. And the law that we started out with makes it very clear that it should be guided by its own board. A board is ultimate decision-making body. But the present government somehow didn’t like that, so they want to intervene into the activities of Grameen Bank. And that’s why all these 19 pieces and all control mechanisms, and changing the law, amending the law to intrude into the bank – all these things came about. And this seems to be not very friendly to the bank itself and any action that is being taken, and nobody in the world will say that it is in the interest of the bank or the poor people. I’m very worried about it and I try to draw attention of everybody, every sane person that, look, you have to stop that, this is a great institution, this brings so much good for the people, particularly poor families and poor women in the world. That has given so much empowerment to the women in Bangladesh and that is becoming a global phenomenon, bringing the same thing in many, many countries. Almost every single country, including Russia, has microcredit programs. So, today, to go back to the origin of that whole idea, Grameen Bank, and to harm it – it will be totally painful and unacceptable."
The government of Bangladesh is now investigating Yunus for overseas tax evasion, and for receiving unfair tax exemptions while working longer than the retirement age for what is now claimed to be a government bank. Yunus said: 
"All the allegations that you have listed, again and again have been demonstrated, we sent all the information to the public to make sure that they understand it’s all baseless, there is no ground for it. For example, the case of tax evasion, it was decided in the cabinet meeting that my tax information should be examined by the tax authorities and that report should be submitted to the cabinet itself, the cabinet of ministers. They did that, they said we’ve investigated every detail, so Professor Yunus has tax returns and if he did everything correctly, we have no problem, we have not missed any single penny in taxes, so we have no problem with that. But the cabinet was not satisfied with that report, they sent it back again to make more inquires so that they can find something else."
If it is possible to have less than zero knowledge of a subject, my knowledge about the internal politics of Bangladesh would qualify. I also know nothing at all about the personal finances of Muhammad Yunus. But it does appear as if the current government of Bangladesh views the Yunus and the Grameen Bank as a force that needs to be brought to heel. Yunus describes Grameen like this: 
"We work it all over Bangladesh, every single village in Bangladesh has access to domain bank microcredit program, so we have borrowers all around the country, we have 8.5 million borrowers, 97 percent of them are women. They are all connected within our system. I should mention that the bank is owned by the borrower, so the borrower is not somebody outside this; she is in control, she is the borrower and she is the owner, and she sends a representative to sit in the board, whoever is making a decision is actually her representative and a borrower like her. So, it’s not something in some big banks when somebody came and give you a loan, and they don’t know you and you don’t know them, it’s not like that, it’s a family kind of thing, it’s 8.5 million women’s family. So, we work at it as a kind of organization to be with them and for them."
For an academic take on microfinance, a useful starting point is "Microfinance Meets the Market"
Robert Cull, Asli Demirgüc-Kunt, and Jonathan Morduch, from the Winter 2009 issue of the Journal of Economic Perspectives. (Full disclosure: I've been Managing Editor of JEP since 1987, and all articles from all issues of the journal are freely available on-line courtesy of the American Economic Association.) The authors point out (citations omitted) that there is enormous controversy between Yunus and those who argue that microcredit should be focused on a social mission of helping the poor, and the commercial banks that are starting to enter the microfinance business. Here's a sample:  

"We estimate that roughly 40 to 80 percent of the populations in most developing economies lack access to formal sector banking services. All sides agree that access to reliable financial services might help hundreds of millions, perhaps billions, of low-income people currently without access to banks or at the mercy of exploitative moneylenders. Muhammad Yunus and Grameen Bank led the way by showing that with donor support a wide range of poor and very poor customers are bankable—they can borrow and save steadily and pay substantial fees. ...
"Microfinance will no doubt continue to expand and become part of the financial mainstream. Experience so far, though, suggests that the profile of commercial banks that offer microfinance in low-income communities looks different from that of nonprofit microfinance institutions run by nongovernmental organizations. Commercial microfinance banks are more likely to have for-profit status and to involve an individual lending method, larger loans, fewer women customers, lower costs per dollar lent, higher costs per borrower, and greater profitability. Nongovernmental microfinance organizations are more likely to be a nonprofit employing a group lending method, giving smaller loans, serving more women, employing subsidies more heavily, facing higher costs per dollar lent, and being less profitable. ...
"The original idea of microcredit focused on funding small, capital-starved businesses. Several decades of experience has shown that the demand for loans extends well beyond customers running businesses. Even customers with small businesses often seek loans for other needs, like paying for school fees or coping with health emergencies. ... [H]half of recent loans taken by poor households in Indonesia were used for purposes unrelated to business. ... The future will likely see a movement toward new loan products for general purposes, new savings products, and better ways to reduce risks. Poor and low-income households typically devote much energy to juggling complicated financial lives, and improving their basic financial capabilities can be greatly beneficial to them, even if it does not lead to wide-scale poverty reduction or national-level economic growth."