Microfinance: Is Grameen Founder Muhammad Yunus a Bloodsucker of the Poor?

    Commentary

By Parminder Bahra

EPA Nobel Peace Prize winning Bangladeshi professor of economics and founder of Grameen Bank, Muhammad Yunus

You know you’re in trouble when the prime minister of your country accuses you of bloodsucking the poor .

Muhammad Yunus. the founder and managing director of Grameen Bank, found himself on the receiving end of a blistering attack from the Bangladeshi prime minister.  Sheikh Hasina, who has held the office since 2008, didn’t stop there:

“There has been no improvement in the lifestyle of the poor so far. They were just used as pawns to get more aid.”

The devastating critique was not issued by Mrs. Hasina lightly. It attacks the reputation of a figure who was awarded the Nobel Prize and who has achieved celebrity status on The Simpsons and acclaim for efforts to alleviate poverty through microfinance–small loans–to the poor in Bangladesh.

The reason behind these attacks is the revelation that Dr. Yunus has not been entirely transparent with his handling of millions of dollars of aid money from Europe.

Mrs. Hasina was responding to journalists’ questions about a documentary broadcast in Norway last week which claimed that Yunus had mishandled nearly $100 million of aid money from Norway, Sweden and Germany.

The aid had been agreed, in 1994, between Grameen and Norad. the Norwegian aid ministry, to be used for housing loans for the poor in Bangladesh.

It came as a surprise in 1996 to the Norwegian embassy that the money was transferred to a newly created business–Grameen Kalayan–where part of the money was used for projects other than the agreed housing loans.

Tom Heinemann, the director of the documentary “Caught in Micro Debt “, produced letters exchanged between Norad and Grameen Bank which clearly show that the aid agency was deeply disturbed that Yunus had transferred the funds from Grameen Bank to Grameen Kalyan (a newly formed organisation distinct from Grameen Bank)–in contravention of the agreement behind the aid and done in secrecy without informing the donors.

Grameen Bank has issued a response to the documentary saying that the money was transferred to Grameen Kalyan for tax-saving purposes and to create a new not-for-profit fund to help the poor. Yunus also claimed that there would be better governance since Grameen Kalyan would oversee the aid.

However, documents obtained by Mr. Heinemann show that not all of the money was transferred back to Grameen Bank for the purposes of housing loans. His documents show that $8.3 million was transferred to Grameen Telecom and Grameen Phone, a profit-making part of the Grameen business.

In 1996, the Norwegians had concerns about Yunus’ handling of the aid money and wrote to him for an explanation. Yunus turned to the then director general of Norad, Ms. Tove Strand Gerhardesn, and practically begged for her help to assuage an increasingly unhappy Norweigian Embassy in Bangladesh:

“I need

your help.

“This allegation will create a lot of misunderstanding within the Government of Bangladesh. If the people, within and outside government, who are not supportive of Grameen, get hold of this letter we’ll face a real problem in Bangladesh.

“Sorry to bring up all these matters to you. But I have no option left.”

Hardly the sort of letter one would write over a ‘simple’ misunderstanding. The matter did not come to light until last week.

Following the broadcast of the documentary, the story has been picked up across Scandanavia and the issue has been raised in the Norwegian parliament.

The current Norwegian International Development Minister, Erik Solheim, has called for a full report on the matter. In a statement to the BBC he said:

“…the Government of Norway finds it totally unacceptable that aid is used for other purposes than intended no matter how praiseworthy the causes might be.”

It is also likely that the Bangladeshi Government will investigate the matter.

There are many outstanding questions that these investigations must report:

  • how was the matter left between Norad and Grameen Bank
  • how much of the aid money was used for home loans
  • once the loans were repaid, how much of that money was put back into home loans (the aid was meant to be used as revolving loans)
  • what procedures did Norad put in place to evaluate the use and effectiveness of the aid
  • why did Norad let money that was explicitly for home loans be used for profit-making ventures within the broader Grameen group?

This news comes at a time when microfinance, after a decade of rapid expansion, is facing a backlash. In the Indian state of Andhra Pradesh, microfinance loans have been blamed for suicides in the state as customers who fall behind on payments are threatened. Local politicians are seeking legislation to curb interest rates and bank practises.

There is increasing evidence that microfinance is causing over indebtedness and there are serious concerns that the sector is experiencing an asset bubble which is ready to burst.

There has been a collective delusion that microfinance and its link to entrepreneurial activity is a powerful tool to alleviate poverty despite little evidence to show that this model works. The research shows that borrowers do not see significant increases in income. In many instances, people are using the loans for consumption-smoothing rather than entrepreneurial activities. As they fall into debt, they take out more loans to pay back earlier ones and a vicious cycle begins.

But governments, multilateral organisations, philanthropic organisations, corporate retail banks, non-governmental organisations and charities continue to pour billions of dollars into microfinance enterprises.

Yet most of the people who have entered into contracts with the microfinance sector see little change.

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Source: blogs.wsj.com

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