Microfinance Under Fire
By DAVID BORNSTEINFixes looks at solutions to social problems and why they work.
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Munir Uz Zaman/Agence France-Presse — Getty ImagesMuhammad Yunus, center, outside the high court building in Dhaka, Bangladesh, on March 6 where he contested the government’s decision to remove him from his post in Grameen Bank.
At Fixes, our focus is typically on implementing new or underutilized ideas to help those in need. But sometimes it’s just as important to protect institutions that are already working well. Which is why I’m writing today about the Grameen Bank, the Bangladeshi organization that won the 2006 Nobel Peace Prize, along with its founder Muhammad Yunus, for its work extending microloans to some of the world’s poorest, and has been crucial in global efforts to lift millions of people out of poverty.Both the bank and Yunus, have come under attack by the government of Bangladesh and its prime minister, Sheikh Hasina Wazed. It has taken 35 years of painstaking effort to build Grameen into a world-class institution that serves millions of poor people. That progress could be lost if the country’s leaders fail to appreciate what makes the Grameen Bank work.
Anyone who cares about international development, microfinance or social entrepreneurship should pay attention. The Grameen Bank is not just the largest microlender in the world, with 8.4 million borrowers (most of them women villagers) who received more than $1 billion in loans last year, it is the flagship enterprise in an industry that, in 2009, served 128 million of the world’s poorest families. It is also a leading example and inspiration for millions of citizen-led organizations that have been established in recent decades to address social problems that governments have failed to solve.
Yunus, the founder of the bank, is an entrepreneurial figure cut from the same cloth as Steve Jobs, the founder of Apple. He has devoted himself since the 1970s to demonstrating, institutionalizing and spreading microfinance. Recently, the government issued orders that Yunus is to be removed from his post as managing director of the bank. Yunus has taken the case to Bangladesh’s Supreme Court.
Government officials initially seized on a Norwegian documentary that accused Yunus of improperly diverting funds in 1996 that had been donated by the country’s aid agency. The Norwegian government investigated and found that, while funds were transferred internally from one Grameen-owned affiliate to another, there was no indication that the funds were misused. Since then, government officials have engaged in attacks against Yunus and challenged the work of all microlenders in Bangladesh.
Legally, the government owns 25 percent of Grameen and has the right to appoint a quarter of its board members, including its chairperson. In practical terms, however, the government has little justification to intercede in the bank’s operations. Today, of the Grameen Bank’s paid-up share capital, only 3.5 percent comes from the Bangladeshi government. It is the bank’s borrowers who are its majority owners. They control 75 percent of the board seats and they have supplied 96.5 percent of the paid up share capital. And it’s the savings of villagers — about $1.5 billion — that now finances the bank’s activities and growth.
Nevertheless, the government is proceeding to remove Yunus against the objections of its majority owners and will probably succeed. The stated reason is hollow: Yunus, who is 70, is over the mandatory retirement age in government banks.
Rafiqur Rahman/Reuters A rice farmer who is a borrower of small credit from Grameen Bank, tended to her paddy field in Dhaka, Bangladesh.
What’s the real reason behind the government’s attacks on Yunus? The most likely explanation is that Yunus is being punished for criticizing the government and making a bid to start a political party in 2007.This is a threat to be taken seriously — not because the bank will collapse without Yunus. The Grameen Bank is a strong, well-managed institution with 25,000 employees. It could probably withstand his departure. Indeed, given Yunus’s age, it’s critical to pave the way for a successor. But if he is replaced in a manner that diminishes confidence, the bank could face problems.
When an organization has a founder who is intimately associated with it (as Jobs is at Apple), the leadership transition needs to be handled with great care. This is particularly important because the Grameen Bank depends on unusually high levels of motivation among its staff and high levels of trust among its borrowers. A forced removal of Yunus that is seen as illegitimate, politically-motivated, or vindictive could alienate thousands of employees and trigger a run on savings or loan defaults.
Even the perception that it has come under the influence of the governing party, the Awami League, could cause damage. Bangladesh has a long history of banks and cooperatives being used as political instruments. The state-owned banks have regularly extended loans to elite borrowers (who default at high rates) as a form of patronage. Unlike Grameen, which is financially self-sufficient, the state banks are perpetually in need of cash infusions from the government.
Here’s an example of what could happen: The Prime Minister has made it clear that she believes the interest rates are too high. Her concerns for the poor may be well-intentioned. But historically, subsidized loans have been seen as goodies — and have gone to the most powerful, not to those they were intended for: the poor. Grameen’s rates are, in fact, considered low among microlenders, whose administrative costs are far higher than that of traditional banks. However, if a politically-minded managing director decided to cut the interest rate, it could jeopardize the bank’s solvency.
Similarly, if the government installed a bureaucratic manager who failed to appreciate the bank’s entrepreneurial culture, it could suck the life out of the bank. Managing a bank that actually works with poor women in villages means, above all, recruiting people who care about the poor and training them in creative ways. Before Grameen Bank workers get hired, for example, they spend close to a year demonstrating their interest in serving the poor. They have to do things like write detailed case studies about the lives of village women to show that they genuinely care about, and understand, their clients. Managing this workforce is nothing like managing a run-of-the-mill bank.
In an institution like this, the management needs to be perceived as honest, responsive and open. If corruption, politicization or bureaucratic torpor began to infect it, the disease would be irreversible.
The government has tried to maintain the appearance that its attacks are merely about following the law. That is hard to believe. Over the past few months, officials have sought to damage Yunus’s reputation, claiming without evidence that he has enriched himself at the expense of the poor, intentionally harmed borrowers, and engaged in fraud. The prime minister has called microlenders loan sharks “sucking the blood of the poor.” Her son circulated a letter which contained a litany of unfounded accusations against Yunus — the most outrageous being that the government created the Grameen Bank, not Yunus.
It’s not as if Bangladesh is lacking real problems that require government attention. There can be no sense in destabilizing the leading institution in an industry that provides financing to more than half of the households in the country. In fact, the field of micro-finance needs solid, innovative leadership today more than ever. There remain questions about its effectiveness in alleviating poverty. It’s crucial for lenders to make honest appraisals of their impact and experiment with other services to determine how it can be made to work better.
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On March 15, the Bangladeshi Supreme Court postponed ruling on Yunus’s case for two weeks. Hopefully, common sense will win the day and a solution will be reached so that this vital institution — and the millions of villagers who depend upon it for their livelihoods — are not jeopardized. Given that Yunus understands Grameen’s culture better than anyone, he should have a key say in any leadership change.
As we’ve noted in several previous Fixes columns, the involvement of governments in anti-poverty programs is often essential. Wise governments should view microfinance programs not as adversaries, but as partners in furthering public goals — organizations that need to be regulated, but not controlled. Not all do. So it’s important for leaders of micro-finance organizations to take steps to safeguard their independence well before political attacks come. Foreign governments and multi-lateral institutions have invested hundreds of millions of dollars in the Grameen Bank and other large microfinance organizations in Bangladesh, and elsewhere, with the goal of alleviating poverty. They also need to remember that it’s not enough to finance development organizations. They need to protect them, too.
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David Bornstein is the author of “How to Change the World,” which has been published in 20 languages, and “The Price of a Dream: The Story of the Grameen Bank,” and is co-author of “Social Entrepreneurship: What Everyone Needs to Know.” He is the founder of dowser.org, a media site that reports on social innovation.
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