Does Savings Keep Microfinance Safe from Politicians?

CGAP's Greg Chen lives in Dhaka, the capital of Bangladesh. He has closely followed the microfinance difficulties in South Asia. On CGAP's main blog he ruminates on the contrast between India---where the pure-microcredit industry continues to stagger under the Andhra Pradesh Ordinance and politicians' escalating demands for lower interest rates---and Bangladesh, where the government has gone quiet since it forced Muhammad Yunus out of the Grameen Bank:

...because Grameen Bank is a full financial intermediary holding more savings balances from the public than loan portfolio the situation is quite a bit more delicate. It would be difficult and costly, for example, for those controlling the bank to reduce Grameen Bank’s interest rates (already acknowledged to be the lowest in Bangladesh) or to relax loan terms. Any loss of margins or weakening of asset quality would make it more difficult and more costly for the Bank to meet its obligations to its depositors. Those in control of Grameen Bank are responsible for the safe keeping of the deposits of millions of Bangladeshis.I can only speculate that it is the delicacy of this balancing act that has also pushed the government to try to bring Grameen Bank more directly under the supervision of Bangladesh’s central bank; a shift under the more technocratic supervision of a central bank would likely provide an added layer of protection from political manipulation. While the future of Grameen Bank still hangs in the balance, I hold out hope that it has a better chance of carrying forward a sustainable useful role in part because it already provides substantial deposit services.

If you scan the table in my post about Where Microfinance Institutions Get Their Finance you'll see find most of the countries that have suffered microfinance crises at the top. They get a small share of their lending funds by taking deposits, as opposed to loans and equity from investors. Greg is offering a partial explanation for this apparent fragility of credit-dominated microfinance. I think it reinforces an ecology-inspired idea in my chapter 8, that microfinance contributes more to the institutional fabric---to development in that sense---when it connects to diverse actors in diverse ways.