A run on Grameen Bank’s integrity, as founder’s career ends in disgrace

17 May 2011 by Patrick Bond


Bangladesh’s once-legendary banking environment is now fatally polluted. The rot is spreading so fast and far that the entire global microfinance industry is threatened. Controversy ranges far beyond poisonous local politics, the factor most often cited by those despondent about Grameen Bank’s worsening crisis.

True, at first glance we see an oppressive state’s persecution of a courageous academic-turned-entrepreneur and 2006 Nobel Peace Prize laureate, a man passionate about uplifting poor women’s socio-economic status through unsecured credit and group borrowing: Muhammad Yunus. On April 5, the Bangladeshi Supreme Court confirmed that notwithstanding huge aid inflows he catalysed for one of Asia’s poorest countries – based on Bangladesh’s world-leading 25% microfinance market penetration rate – Yunus must be ousted from Grameen Bank’s leadership.

At second glance, observe that the notorious corporation Burson-Marsteller (B-M) is spin-doctoring for Yunus, and as MSNBC television social critic Rachel Maddow has observed, “When Evil needs public relations, Evil has Burson-Marsteller on speed-dial.” B-M did PR for Three Mile Island’s nuclear operator after its meltdown, the US tobacco industry (to organize the ‘National Smoker’s Alliance’), the Argentine military dictatorship which killed 35,000, the Indonesian regime which committed massacres in East Timor, Nigeria’s military, Union Carbide against residents of Bhopal, the late Romanian president Nicolae Ceausescu and the Saudi royal family.

In February, Mary Robinson, Ireland’s first woman president and the main public face of Friends of Grameen, began helping B-M defend Yunus. It didn’t work: in early March, Yunus was fired by the government of Sheikh Hasina Wazed, whose Awami League party won the 2008 election by a landslide.

The current power struggle between state and bank began, according to Hasina’s son, Sajeeb Wazed, when “massive financial improprieties at Grameen” were revealed by a documentary on Norwegian state television late last year. The film, Caught in Micro Debt, showed how fifteen years ago, $100 million in aid was irregularly moved from the (non-profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. ) bank to one of dozens of lucrative private firms controlled by Yunus, Grameen Kalyan.

Norwegian aid bureaucrats were furious and demanded that $30 million be returned. Yunus’ own personal correspondence about the matter is embarrassing, even damning. “In several cases,” Wazed charges, his behavior “was completely illegal and constitutes embezzlement.”

Wazed also alleges usury: “Grameen Bank charges up to 30 percent in interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate on loans and up to an additional 10 percent in ‘forced savings’ to the poorest sections of society. Their collection methods are draconian and collection officers who fail to collect payment have the uncollected amounts deducted from their pay. There are many documented cases which constitute abuse and the criminal offence of ‘molestation’ under Bangladesh law.”

The country’s central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
and courts have ruled that Yunus must immediately leave Grameen, on an absurdly ageist technicality: he is older than 60, hence disqualified to run a bank (a matter ignored the previous 11 years). More seriously, on April 25, the 90-page report of the state’s formal committee of inquiry found that “in all the activities [researched]… there has been a tendency to violate laws and rules in Grameen Bank. In fact, the organisation did not follow rules and laws, rather grew completely dependent on one individual.”

Years back at a World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

conference, Hasina had firmly endorsed Grameen’s work, but in the meantime, Yunus attacked the existing political class in a short-lived 2007 attempt to start his own party. Last December, Hasina labeled Yunus a “bloodsucker of the poor.”

The roles of Robinson, her Friends of Grameen co-chair James Wolfensohn (World Bank president during its most protest-ridden decade, from 1995-2005), B-M, the US State Department, and the Bangladeshi government are emblematic of the messiness of state, capital and civil society working at cross-purposes.

To illustrate, Wolfensohn visited Hasina in March. After his demands were apparently rejected, suddenly the Bank and International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
cut $500 million in loans Hasina was expecting. Another factor in that decision was the $756 million Hasina was charging Grameenphone for a 15-year license, similar to other cellphone providers pro-rated by marketshare. As New Age newspaper reported, the World Bank considered this fee “far too high” – yet another case of that institution’s pro-corporate, fiscal-shrinkage bias?

Hasina was also prime minister from 1996-2001, when Transparency International considered Bangladesh the world’s most corrupt country. In 1975, the army had assassinated her father, considered the local equivalent of Nelson Mandela, and her mother and three brothers. Hasina and senior Awami League leaders have since been attacked – and several killed – on other occasions.

Another woman’s political icon, Hillary Clinton, has entered the fray, demanding that Hasina halt the attack, even though her Bangladeshi “Hillary Village” is considered a prime case of microfinance failure. Last month, US Assistant Secretary of State Robert Blake threatened that US-Bangladeshi bilateral relations would be ‘impacted’ if Yunus was fired.

WikiLeaks recently disclosed that under George W. Bush, the State Department had an overtly political agenda four years earlier, as Yunus “could offer a possible out from the present Hasina-Zia zero-sum game that cripples Bangladesh’s democratic process.” The same leaked cable revealed Yunus’ desire to have Grameen finance a Bangladeshi “megaport” to promote regional trade, including with Burma. Yet like Robinson, Yunus is joined on Mandela’s “Elders” group of notables by Burmese democracy activist (and fellow Nobel laureate) Aung San Suu Kyi, who has been a strong advocate of sanctions.

To assess genuine feminist perspectives on Yunus’ financing legacy, beyond the maneuvers of politicos Robinson, Hasina and Clinton, consider an important new scholarly work on Grameen by University of Oregon anthropologist Lamia Karim: Microfinance and Its Discontents: Women in Debt in Bangladesh.

In a recent interview with my colleague Khadija Sharife, Karim pointed out, “Bangladeshi women give the loans to their husbands. Women are the conduits for the circulation of capital in rural society. This has resulted in increased domination and violence for indivdual women both at the household and community levels.” As a result, she argues, women have become “custodians of honor and shame in rural society. By instrumentalizing these codes, NGOs shame rural women to recover their defaulted sums of money.”

The crisis is of world importance because it reflects the limits of microfinance, and comes on the heels of suicidally-high interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
(literally) charged by lenders elsewhere in South Asia. As London’s Guardian reported last month, 30 million Indian households had borrowed more than $3 billion in microcredit since the mid-1990s. “In recent months, the industry has been thrown into crisis as it has become clear that a significant number of borrowers – between a tenth and a third, depending on the estimate – cannot afford to repay their loans.”

This predatory lending parallels the 2007-09 ‘sub-primate mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
’ crisis in the US. According to the Guardian: “The past five years have seen the aggressive selling of loans to often illiterate villagers, followed by equally aggressive debt collection.” As a result, the past decade witnessed more than 200,000 farm suicides in India. Reports India’s leading rural journalist, The Hindu’s P. Sainath: “Those who have taken their lives were deep in debt.”

Another major Bangladeshi NGO operator, BRAC, engaged in “loan pushing,” its microfinance programme head Shameran Abed concedes. This was due to “excess liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. ” and “lack of communication between lenders,” and as a result, "In the mid 2000s, the microfinancing industry grew too fast.”

As Karim describes even the main Bangladeshi microcredit NGOs, “Many of these organizations operate like loan sharks! The idea that the poor are bankable and they pay back their loans at 98% is like music to the ears of donors and large corporations. Grameen Bank exemplifies neoliberal ideas of development: individual entrepreneurship and competition.”

Karim concludes, “Let’s replace the word credit with debt. Debt as a human right? How does that sound? Debt is a relationship of power and inequality between the loan institution and the borrower.”

Milford Bateman of the Overseas Development Institute criticizes Yunus and Hernando de Soto, the Peruvian economist who authored The Mystery of Capital: “The microfinance industry makes a fatal mistake in believing that sustainable poverty reduction and ’bottom-up’ development actually lie within the gift of the informal microenterprise sector.”

The filmmaker behind the Norwegian documentary, Tom Heinemann, makes similar arguments against microcredit evangelism. Heinemann was named the leading Danish investigative journalist in 2007 and 2009, and his earlier work won prizes at the Prix Italia, Aljazeera Documentary Film Festival, GZ Docs in China, and Envirofilm festivals.

He is preparing a follow-up, because rebuttals from Friends of Grameen have focused on the film’s misnaming of Grameen’s first borrower (done originally by Yunus), comparative interest rates, and the Norwegian government’s continued support to Yunus. Yet this latter defense says a great deal more about Norway’s internationally-ambitious Minister of Environment and International Development, Erik Solheim, who broke his party’s 2006 “Soria Moria” pledge to defund the World Bank, than it does about the merits of Grameen’s case.

For Solheim, Clinton, Wolfensohn and Robinson, it may seem appropriate, even urgent, to defend Grameen. But looking more closely, it would be better to move on, towards post-microfinance strategies that genuinely reduce poverty and empower women. These strategies typically are strongest when grounded in collective action usually associated with social movements and organized labour.

In the last decade, one of the best examples is access to AIDS medicines, won in Brazil, Thailand, India and especially South Africa, against the US State Department’s self-described “full court press”, under Bill Clinton, to prevent Mandela’s government from providing generic medicines using US-copyrighted drugs. The secret to the victory was not entrepreneurialism but instead popular mass activism, democratic organization and a vigorous critique of the post-Mandela South African government’s AIDS denialism, intellectual property rights and medical monopolies, the World Trade Organisation WTO
World Trade Organisation
The WTO, founded on 1st January 1995, replaced the General Agreement on Trade and Tariffs (GATT). The main innovation is that the WTO enjoys the status of an international organization. Its role is to ensure that no member States adopt any kind of protectionism whatsoever, in order to accelerate the liberalization global trading and to facilitate the strategies of the multinationals. It has an international court (the Dispute Settlement Body) which judges any alleged violations of its founding text drawn up in Marrakesh.

’s Trade Related Intellectual Property Rights system, Washington’s WTO representative Robert Zoellick (now World Bank president) and Big Pharmaceutical corporate profiteering.

The impressive results: Mandela’s successor Thabo Mbeki was fired by his own party, TRIPS now has an exemption to allow local production of medicines (and the US government is helping fund these), and for those who need the AIDS treatment, whereas once it cost above $10,000/year, today the medicine is free. In contrast, South Africa has a notoriously bankrupt microfinance sector.

Given the usury accusations and suicide wave, the industry’s reputation is so tainted that in a recent New Age interview, Yunus publicly backtracked: “Unfortunately, not everyone who uses the word ‘microcredit’ is dedicated to serving the needs of the poor. This is not the microcredit I had in mind.”

As Cambridge University economist Ha-Joon Chang confirmed to Heinemann, “They will never get out of poverty because when you have to pay between 30-40-50, sometimes 100% interest rate. What business makes that kind of profit?”

But Washington-based Grameen Foundation chief executive Alex Counts defends his Nigerian affiliate, LAPO, for its 100% rate: “Well – as it happens – many Nigerian banks that operate in the rural areas charge twice as much as LAPO… What microfinance is trying to do, with very little subsidy from the philanthropic sector is trying to provide a service – on a commercial basis on a business basis to give them a better deal.”

Yet profit-seeking through microfinance represents, even Yunus concedes, “a terrible wrong turn.” Still, Yunus defended his own role to the last, saying of the Norwegian documentary’s allegations, “These attacks have no basis in reality.” Claiming that Grameen interest rates – over 30% including fees, according to Bangladeshi economist Q.K. Ahmad – are reasonable, he continued to insist, “Access to affordable credit is a human right.”

Still, it is difficult to ignore overwhelming evidence that not only for-profit lenders but also non-profit NGOs pushing microfinance as a silver-bullet fix to women’s poverty often do more harm than good. In league with the State Department, the World Bank and Burson-Marsteller, even those like Mary Robinson who strive to raise women’s standing, are actually stumbling straight into the path of both the collapsing Grameen founder and microcredit’s fast-decaying reputation.

(Patrick Bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. is based at the University of KwaZulu-Natal Centre for Civil Society in Durban.)



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Patrick Bond

Patrick Bond is professor of political economy at the Wits University School of Governance in Johannesburg and co-editor of BRICS: An anti-capitalist critique (published by Haymarket, Pluto, Jacana and Aakar).

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