After the Fall

The court's verdict on the government's move to dismiss Muhammad Yunus is now expected tomorrow. Bangladesh's judiciary is not reputed for independence from the executive branch.The foreign press and diplomatic corps have been united in their verdict on the affair: it is wrong. I agree. The vitriol from the country's most powerful politician, the frivolous lawsuits, the yellow journalism from outlets with reportedly prospective business links to Hasina's advisors...all are hard to justify if the Prime Minister's goal is merely an orderly succession at an important institution. They are abuses of power.Here, I'll offer some angles on the story that haven't been aired much (at least in English---I don't know about the Bangla media).

• One message I've heard privately from Bangledeshis is that foreigners are failing to appreciate that the Grameen Bank has real management problems. Orderly succession at the top is a real challenge. This may be the primary concern for Finance Minister Muhith, who worked with Yunus to create the Bank in 1983. Here too, I agree. As I blogged last year after yet another Yunus #2 and heir apparent left Grameen, it looks to me like the Bank has a case of founder's syndrome, a problem that I am primed by personal experience to recognize. Here's a fragment from the Wikipedia article about that:

  Founder's syndrome is a label normally used to refer to a pattern of behavior on the part of the founder(s) of an organization that, over time, becomes maladaptive to the successful accomplishment of the organizational mission. The term is anecdotal/unofficial and does not actually refer to a medical syndrome. It is particularly common where there has only been one person leading the organization or the board of directors since its inception and commonly occurs in both non-profit and commercial organizations as they develop.An organization faces founder's syndrome as the scope of activities widen and number of stakeholders increase. Without an effective and inclusive decision making structure and process there is potential for conflict between newcomers, seeking effective involvement with organizational development and the founder(s) who seek to dominate the decision making process. This can be very disruptive, both to the organization and to the individuals concerned

  Muhammad Yunus is a great man who, inevitably, has great faults. Bangladeshis who know him better may resent the interventions of less-informed foreigners who dwell too exclusively on his virtues.
• I would have thought that if the government were looking for rationales for intervention, instead of arguing over technicalities about whether the Bangladesh Bank tacitly approved the appointment of Yunus a dozen years ago, and whether the Grameen Bank is a government institution subject to civil service retirement rules, it would have focussed on Grameen's capital adequacy. As I blogged last year, Grameen's cushion of loss-absorbing capital has probably fallen below the regulatory minimum, as a percentage of outstanding loans. Its ratio has fallen not so much because its capital has shrunk, but because it has kept expanding lending while other big players like BRAC and ASA have cut back. This raises legitimate questions about the management of the Grameen Bank. Is its continuing expansion prudent or is it masking bad loans? Does the Bank need more capital? Should this come from the government, which would be entitled to ask tough questions in return? Or can members be persuaded to contribute enough? If not, does that point to limits of Grameen's cooperative ownership structure?It could be that capital adequacy is less of a problem than I'm suggesting. Maybe the Grameen Bank can easily shore itself up by, say, selling part of its stake in Grameen Phone---I don't know. [See comments below.]
• Prime Minister Hasina's political history includes assassinations, imprisonment, and hangings. Assuming Yunus is under no such personal threat, the important question is what will happen to the Bank. Hasina's intentions are unclear. As I wrote before, one possible outcome is that she fails in her quest to smear Yunus while doing the Bank a favor in forcing a succession.
• At the other extreme, perhaps when Hasina gets control of the Bank she will declare universal loan forgiveness in a bid for popularity. That would destroy the Bank. It might destroy the rest of the microfinance industry too since expectations of microcredit would shift. Why should I repay BRAC if I don't have to repay Grameen?
• Between these extremes are outcomes that are perhaps more likely and less understood. As we have seen repeatedly in financial history, banks are delicate things. They are built on faith. Seemingly strong banks can disintegrate in days. And microfinance banks rely doubly on faith. Not only must they keep the faith of savers to dissuade them from withdrawing, but they must keep the faith of borrowers, who are much less likely to repay current loans if new ones might not be on offer in the future. Loss of faith on either side is self-reinforcing. On the savings side, it is called a bank run. Besides being bad for millions of Bangladeshis, a bank run could blow up politically in Hasina's face.Update: here's how BRAC founder Fazle Abed has put it, coming to Yunus's defense:

  We must understand that microfinance institutions like Grameen Bank are different from traditional organizations. A big capital of such organizations is the intrinsic community level trust that they have earned. This trust element must not be underestimated. If this trust is lost, then there may be delinquencies, intentional refusal to repay loans or large scale withdrawal of savings by the members -- in effect potentially bringing the organization’s future in jeopardy.A sudden exit of the founder and the managing director of Grameen Bank and a legal battle between the board and the government may potentially cause a loss of confidence among its borrowers putting the organization’s future in doubt. For the sake of the millions of its members, we must take utmost care in not letting this happen. A carefully planned succession for Dr. Yunus can help a smooth transition and give the organization the stability that it needs to ensure the welfare of its members.

  Thus even a light touch from an avowedly hostile government could fatally contaminate the Bank with doubt. If there are hidden problems in its credit portfolio, then the Bank is especially vulnerable. On the other hand, a controlled reduction in Grameen's deposit base might be healthy. It has been promising interest rates of 10--12% for five- and ten-year deposits. Those are high numbers in today's interest rate environment, and the pursuit of earnings adequate to those interest obligations may be what is leading the Bank to expand lending while others are retrenching.In fact, Grameen's deposit base did shrink in January for the first time on record, according to its monthly reports. Evidently some depositors are already skittish. Most of the drop occurred among non-members, who may be better off than members (the latter use Grameen for credit as well). Though eye-catching in the graph below, the drop was modest. At 1.2%, it was much smaller than large increase the previous month. (Why the reported increase is always big in December I don't know.) But it is a sign that Grameen's world has changed.