Much Grameen Bank Investigation, Signifying What?

The machinations around the Grameen Bank over the last two years have a had a paradoxical, dreamlike quality. Harsh words have been spoken by mighty leaders. Eminent dignitaries have rushed to the defense. Court battles have been fought. Crimes have been alleged. The mighty Muhammad Yunus has fallen. The government has wrested away the power to replace him. Someone was even tortured. Yet through it all, as in a nightmare in which you are running fast but not moving, the Grameen Bank has hardly changed. Yes, Yunus is no longer the Managing Director, but no permanent successor has been picked, so his longtime deputy Mohammad Shahjahan is filling the seat for now. Yunus continues to be Yunus, speaking around the world about social business. Atop the Grameen Bank home page, Yunus and a borrower are still seen accepting the Nobel Prize. There has been no run on the Bank. The products appear not to have changed. And the fraction of the loan portfolio considered to be at risk of nonrepayment continues to crawl upward, reaching 10.9% at the end of last month.In short, it is still unclear whether catastrophe---corrupt political meddling, sweeping loan forgiveness, or a bank run---will befall the Grameen Bank or whether it will thrive beyond its founder, as all involved profess to hope.On February 9, the second commission appointed in recent years by the government to investigate the Grameen Bank released an interim report. Where the fist commission's report focused on themes in the Tom Heinemann documentary---Did Grameen charge high interest? What happened to that Norwegian aid money?---this one sticks mostly fundamental to legal questions. Is the Grameen Bank a public institution or do its 5 million-plus shareholders, mostly poor women, own it? Was it legal for the Grameen Bank---or at least its top people---to have created a web of related companies? Did the governing board exercise appropriate oversight?After a close reading of the ordinance that created the Bank, board minutes back to 1983, and other documents, the Commission arrives at controversial conclusions. The nine female member-borrowers on the Grameen Bank's board should resign immediately. The Bank should un-invite 90% of its members by buying back their shares. The remaining 10% should elect new board members, with only those who have completed 7th grade eligible to run. The license to operate a digital mobile network held by Grameenphone, Bangladesh's largest phone company, should immediately be suspended---but as a matter of practicality, the firm should keep operating. All these conclusions rest on what are, if not technicalities, then purely legal issues. For example, as the Grameen Bank grew, it needed authorization to sell shares to more members; the report says that share expansions in 1991 and 1994, unlike in 1986, were merely approved by the Ministry of Finance and not effected by amendment of the Ordinance. Therefore they were illegal and all shares sold in excess of of the 1986 limit---90%---should be bought back. Similarly, the Bank's support for some other Grameen organizations, given through loan guarantees, was illegal because those organizations strayed from the Bank's official mission to serve landless poor in rural areas. Are you indignant yet?I learned a lot from the careful analysis in this interim report, and I think it contains valid criticisms and questions about how the Grameen Bank was run. In particular, and unsurprisingly for a successful founder-led institution, it appears that the Board was ineffectual and that Muhammad Yunus ran the bank with a free hand. The highly touted female borrowers who constitute the board's majority could not be expected to understand the octopus-like complexity of the Grameen family of companies, assuming they were apprised of it. And they certainly could not be expected to perform appropriate oversight. In the event, they hardly ever said anything at the meetings beyond pleasantries.But I think the best way to understand the report is to start with what it does not say and does not change:

• After this report, as before it, there is no suggestion that Yunus was corrupt, or that any of the alleged illegalities were perpetrated for purposes other than the social good. This in a country known for corruption petty and grand. (A possible exception has to do with the alleged failure of the Norwegian phone company Telenor to comply with an agreement to sell Grameen Telecom 16% of Grameenphone. But nothing in the report implicates people at the Grameen Bank in connection to this.)
• After this report, as before it, it was clear that the Grameen Bank suffered from ills typical of successful founder-led organizations, notably the inability of the board to impose accountability. And it was clear that the founder's departure creates both challenges and opportunities.
• After this report, as before it, the government can do whatever it wants to the Grameen Bank, because Prime Minister Sheikh Hasina commands an overwhelming majority in Parliament. The report's rationales for government intervention were hardly required. Hasina awaited no such investigative findings before changing the rules last summer to take control of the process for picking Yunus's successor.
• And, on that point, after this report, as before it, the Grameen Bank is less independent of a historically corrupt and unstable government than it was for its first 29 years.

Here are some key points from the report, with commentary:

• The Grameen Bank is a public institution, created by a special law. Even if Bangladeshi women own almost all the shares, the Bank is not private property. In reasserting control, the government has not seized private assets. The shares entitle holders only to participate in elections of board members, and perhaps to dividends---and probably not even that. I find these arguments largely convincing. I do wonder whether they go too far in interpreting the Ordinance's dispensation that the "annual profit...shall be utilised in such manner as the Board may determine" as barring dividend issuance. ("Utilise," the report's argument goes, doesn't encompass giving the money to others.) I do buy that the Grameen Bank is a public institution whose governance happens to give clients a say in the selection of the majority of the board. That doesn't change the fact the the government just, um, emasculated the board by taking away its most important function, picking the director.
• The Grameen Bank has illegally strayed beyond the ends and means set forth in the Ordinance. The Ordinance opens this way:

  Whereas it is expedient to establish a Grameen Bank to provide credit facilities and other services to landless persons in the rural areas and to provide for matters connected therewith or incidental thereto...

  Later, the text defines "landless" as owning less than half a hectare of land, or total assets worth less than a hectare. The commission's lawyer-members read this to say that Grameen should not be engaged in, say, microcredit in the cities or solar energy in the countryside. Yet you see how the text fuzzes the boundaries of Grameen's aims ("matters connected therewith or incidental thereto"). And even if those fuzzy words are ignored, it must be recognized that strict respect for the law's limits is impractical and inefficient. If you want to make loans to poor people in Bangladesh, you should want to keep interest rates down, which means limiting costs, which means lending on a mass scale, to all people poor enough that they are willing to accept the inconvenience of group microcredit. It means not devoting staff labor to tracking clients' land holdings in real time. This is why the Grameen Bank has long lent to people over half an acre, why that has never bothered me, and why, if the law literally means what the commission says, it is an ass.Similarly, the commission questions the legality of the support that the Grameen Bank has given to other organizations with "Grameen" in their names. I think the main objection is to loan guarantees. In these arrangements, a separate organization---imagine Grameen Healthcare Services---borrows money from some other bank. To reassure the other bank as to creditworthiness, the Grameen Bank provides a guarantee: if Grameen Healthcare Services defaults, the Grameen Bank will repay, and then can try to recover its money from Grameen Healthcare Services. Now, providing guarantees is something banks do. But can Grameen do them? Giving guarantees is not in section 19's list of permitted functions, so maybe not. However, the list ends with this clause, which the Commission does not mention:

  generally the doing of all such acts and things as may be necessary, incidental or conducive to the attainment of the object of the Bank.

  Again, the ordinance seems to give the Bank a lot of discretion. Now, the commission may well be right that some of Grameen's activities have strayed beyond the spirit of the law. But given the flexibility of the law and social purposes of the activities---Grameen Shakti has brought solar power to a million families----I don't see cause for indignant finger-wagging.
• The nine elected ladies are a sham. The commission argues that they are selected more than elected, with heavy involvement of Bank staff in each step. Qazi Nazrul Huque describes it nicely in this comment. In a hierarchical process, all the Center leaders, Grameen clients who each represent about 40 peers, who are served by a given branch convene to select one from among them to represent the branch. Branch representatives do the same at the area level, then the zone, then the region level. Each of the nine regions chooses one board member. In the Commission's telling, Bank staff play major, and perhaps heavy-handed, role in the nominations. There is no direct, secret ballot of the 5.6 million shareholders, nor even of the the 540,000 whom the Commission says hold shares legally. Meanwhile, the board members clearly are unqualified to assess the prudence of the Grameen Bank's complex operations. The report says the "election" of board members

  ....was a powerful marketing tool, which resonates throughout the world. It has been used to cloak the hollowness of an elective procedure, which has placed as many as four electoral stages between the borrower-shareholder and the post of a Director of the Board. Worse, the description of this process by an ‘elected’ Director as recorded in the Bank’s Board meeting exposes the exploitation of an emotive slogan.195 There is need to make the participation of the borrower-shareholder more direct and meaningful so that the needs of the landless and poor women is more honestly addressed.

  I imagine that the tension between democracy and competence is common in cooperative financial institutions. Probably the solution is to balance the board between elected representatives and selected, highly qualified ones, and to arrange for candidates to be more qualified than most who vote for them.
• Certain dealings between Grameen Telecom (the nonprofit Grameen company), Grameenphone (the commercial mobile operator controlled by Telenor), and the government look shady. You figure that any process in which the government of Bangladesh sells a private company a potentially valuable asset---in this case, a license---involves some kickbacks. Beyond that, I have not tried to understand the details, which are complex and incomplete. Maybe someone else can explain.

So overall, I find the report interesting and serious, if with occasional flares of bias, archness, and naivete about social science (there is no credible evidence that "but for this mismanagement within Grameen Bank...more people could have been helped"). Strengthening rule of law is essential to Bangladesh's political and economic development. So I'm glad these lawyers advocate for it. But one must consider context before precisely equating any illegality with immorality. In 2011, the report says, a Bangladeshi court found that all laws passed under the martial law regime lasting from March 24, 1982, to November 11, 1986---including the Grameen Bank Ordinance and its first round of amendments---were null and void! All these years, the Grameen Bank was illegal, you see. When then argue about whether it was exactly within the law's limits? And under martial law just a few years ago, the current Prime Minister languished in jail for corruption.The poverty of most Bangladeshi's being urgent, the eagerness of outsiders to work with the Grameen Bank being great, and the dangers of dependence on the government being obvious, it is understandable that Muhammad Yunus and others at the Grameen Bank pushed the limits of their independence in searching for ways to make a difference. I think that is the right way to view the situation even if, in retrospect, we judge that they sometimes strayed too far from the law.