In the past few weeks, I’ve been silent here about the microfinance crisis events in India. But why not let others do the talking? This blog published (what I think was) the first analysis of the A.P. events right after the crackdown ordinance; following up with a two-piece search for the underlying causes (1, 2). Most of the causes I speculated about at the time are pretty much turning out to be true:

  • interest rates were far too high and have been rushed down
  • the sector was under-, or practically un-, regulated (especially, if Kaushik Basu says so)
  • the borrowers were/are overindebted (far more than the MFIs were aware of, I assume)
  • and the profit motive created perverse incentives for MFIs.

One prediction I won’t make, though, is whether microfinance in India will pull through. That depends on politics in Delhi (bailout or not?) as much as it does on the adaptiveness (not the resilience, which means “no change”) of the sector. But I wouldn’t bet my money on an MFI in India at the moment, given the pessimism of Vijay Mahajan (“If this situation continues, there will be no microfinance sector in 2011.”) or the SKS’ shareholders (shares down by 52 percent).

The real surprise story of the week, however, were WikiLeaks’ diplo-inslults.

Or really, were they? Only the Americans are really making a big deal out of the leaked diplomatic cables. If anything, the now-public secret assesments of sundry politicians should provide a few good-natured jokes at upcoming international summits. Would-be Israel-nukester Ahmadinejad will hardly be insulted by being compared with “Hitler”, and German Chancellor Angela Merkel and Foreign Minister Guido Westerwelle already had their share of laughs about “their” leaks.

So Merkel is an “un-creative”, “risk-averse” politician so slippery she must be coated with Teflon, Westerwelle is “incompetent” and “vain”, and finance minister Schäuble is an “angry old man”. So, what? Every German could have told you that – even the ones who elected them (only 36% percent would re-elect Merkel’s government).

And the people love it. Wikileaks has provided a global public good: a healthy laugh, for normal people, at those in power.

Leaked Grameen Bank letters

Perhaps more of a surprise is this newly “leaked” information: Allegedly, Muhammad Yunus (Bangladesh’s microfinance poster-boy) diverted approximately USD 100 million of Norwegian development agency NORAD’s microfinance money from Grameen Bank to a non-microfinance enterprise. So reports the BBC, based on the findings of a recently-aired Norwegian documentary (scheduled for release in English in January).

Or, is that really such a surprise, either?

As early as 1999 Jonathan Morduch (in a seminal paper) uncovered accounting flaws in Grameen’s operationa. The bank claimed profitability despite heavy subsidisation, without which it could hardly have survived: “Despite reporting profits, Grameen is in fact subsidized on a continuing basis,” Morduch concluded, arguing that in fact there should be nothing wrong with subsidising microfinance, as long as you are honest about it. Even Dr. Yunus’ Vanderbilt thesis advisor felt the urge at the time to point out his disciple’s deviance from the free-market approach to poverty reduction which both were propagating. (Though at least the fact that Grameen Bank still pays no profit or income taxes in Bangladesh is consistent with the free-market dogma.)

And then, perhaps the 2006 Nobel Peace Prize for Dr. Yunus and Grameen should have been given greater scrutiny. No reason at all to question the fact that Telenor, then majority investor of GrameenPhone, was and is a key sponsor of the Nobel Peace Center and other Nobel events, right? Or that Stein Tonneson, who nominated Yunus, used to work for Telenor? Norway is a small country. And the full prize granting process is only made public by the committee 50 years later; but one would be free to speculate.

Against this background, the irregularities exposed by the documents featured in the new documentary seem rather minor. I read through the documents, which are available here. They begin on 17 December 1997 with a disgruntled letter from the Norwegian embassy in Dhaka, alleging that funds had been re-transferred to Grameen Kalyan (the healthcare subsidiary) which was loaning them out to Grameen Bank (GB); “Norway has not entered into an agreement with Bangladesh to provide funds to Kalyan for on-lending to GB.” Kalyan was charging GB interest on the loan.

Yunus replied to the Ambassador in January 1998, explaining the transfer as a means of ensuring “financial discipline” on the part of GB. Yunus also explained the creation of Kalyan as a means of avoiding taxes. In a separate letter in April to the Managing Director of NORAD, Yunus begs, “I need your help,” against a complaint written by the embassy to the Bangladeshi government. “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 real problem [sic.] in Bangladesh.”

Grameen responded to the whole story today with a combative press release, stating, “The fund in question never went out of the Grameen Bank’s account and the question of Professor Yunus siphoning this amount is false and baseless. All these talk [sic.] about siphoning off are just empty words for sensationalism.” Heinemann actually doesn’t allege Yunus used the funds for personal enrichment, but he does accuse Grameen of intransparency. Yet, despite Yunus’ request for suppression of the issue, the documents were apparently rather easily obtainable, just not noticed so far. “I got most of the documents from the archives of NORAD, the Norwegian aid agency in Oslo,” Heinemann told the BBC.

Are these documents a big deal, then? Well, maybe if your belief in microfinance/Grameen depends on the soundness and transparency of the accounting.  More interesting, or shocking for the general public, should be the documentary’s footage from Bangladesh. Some illusions may be at risk.

The documentary also looks at the effectiveness of Grameen Bank along with it’s miracle stories of transforming people’s lives and concludes that it has had little impact on poverty in all these years. In one segment Heinemann visits the home of the celebrated original grameen loan-taker – Sufiya Begum in Jobra village. Celebrated in grameen folklore that is. He finds some very uncomfortable stories and comes to know that she died in poverty and all her daughters today are beggars. (indiamicrofinance)

The poor always pay back“; did Yunus? It remains unclear how much was paid back, since the documentary’s figures and Grameen’s figures in the press releas diverge. The upshot of the whole scenario, though, is that Grameen operates in an intransparent and sometimes secretive way.