Restoring sanity

Microfinance has had it real bad lately. When I first came across news about the Norwegian documentary that apparently exposes Mohd Yunus, it sounded like a terrible misfortune and one that would surely sour the pitch further for microfinance in South Asia. This is why I am relieved to read David Roodman, who in his typically nuanced style, explains –    

What is revealed is that in 1996 the Grameen Bank transfered some $100 million in aid receipts from Norway, Sweden, and other donors to a separate, non-profit entity called Grameen Kalyan—without informing those donors. Grameen Kalyan then lent the money back to the Bank at 2% interest. According to the Bank’s just-released account, this interest supplied a Social Advancement Fund which was to provide services such as scholarships to Grameen members and employees. A Norwegian official first detected the transaction in a footnote of the Bank’s 1996 annual report, which was published in mid-1997. The Norwegian government became alarmed that money it had given to a specific institution for a specific purpose (housing loans) had been transfered to another institution for other purposes without the donor’s knowledge. It also pointed out that this gift to Grameen Kalyan reduced the net worth of the Grameen Bank, thus of its shareholder-members. (A good timeline is here.)

The Bank’s explanations for this strange transaction were and are disturbingly dubious. One rationale was and is that the Bank gave the money away and borrowed it back because it was afraid that otherwise it would burn a hole in the Bank’s pocket. This Bank, entrusted with the serious responsibility of using foreign funds to help the poor, would not entrust itself with the basic function of a bank: holding money safely. Or—more likely—the Bank was and is lying. Another reason given was and is that the deal could reduce Grameen’s tax liability. But according to an Norwegian embassy official, Yunus first emphasized this rationale, then deemphasized it months later. (And the Bank disowned the rationale in a letter to Tom this August.) The dissembling raises suspicions: perhaps the move was nefarious, as sensational headlines have insinuated in the last few days. But lacking evidence to the contrary, I am prepared to believe that the real motive was indeed to set up the social fund, and that the Bank got trapped in rationalizing a contract violation. In the end, the disputants compromised: about half the funds (I think) were moved back, after which the Norwegians judged that their interest in the appropriate use of their money was served. On what basis should we second-guess them?

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