Leadership and Change

The Ouster of Muhammad Yunus: Can Politics Destroy the Grameen Bank?

"Dismissed." A single word on April 4 from Bangladesh's highest court ended a bitter legal battle that has grabbed world attention. The loser in this case: Muhammad Yunus, Nobel Peace Prize laureate and founder of Grameen Bank, the groundbreaking Bangladeshi microfinance institution (MFI) he is no longer allowed to run. Upholding a previous ruling that Yunus, 70, illegally remained managing director of the MFI past the age limit of 60, the court sided with the government of Sheikh Hasina Wazed and the central bank. But as with many of the highs and lows of microfinance -- the industry that provides small loans and other financial services to the world's poor -- there is much more than meets the eye to this boardroom shakeout.

At a minimum, the recent Grameen saga is what Mary Ellen Iskenderian, president and CEO of non-profit Women's World Banking (WWB) in New York, calls "flash points" -- events over the past year that have shaken the collective confidence of the fast-growing, $60 billion (in assets) global microfinance industry. Once hailed for their promise of alleviating poverty by providing capital to the millions of "unbanked" poor around the world, MFIs from Morocco to Mexico have been accused of exploitation and profiting from aggressive sales tactics and the usurious double- or even triple-digit interest rates they charge customers.

Among the most dramatic turns were suicides reported in India last autumn. Struggling to pay back their loans, as many as 50 micro-borrowers allegedly took their lives in Andhra Pradesh (AP), the southeastern Indian state -- home to many of the country's burgeoning, and increasingly profitable, private micro-financiers. The tragedy underscored both the aggressive sales and collection tactics of MFIs and their uneasy relationship with governments. According to Iskenderian, the suicides gave the government of Andhra Pradesh, "which had been looking for a mechanism to meddle in the way microfinance has played out in AP for some time," a reason to impose severe regulations around it.

Next door in Bangladesh, tension between Yunus and the Bangladeshi government had been on the rise. That already tenuous relationship took a turn for the worse following the November airing of a documentary film that challenged the merits of microfinance and cited, among other things, the misuse of aid the Norwegian government gave to Grameen in the 1990s. Though officials in Norway quickly issued a statement saying that the aid case had been settled amicably long ago, the ball was rolling. Sheikh Hasina -- stoking a longstanding personal feud with Yunus -- weighed in. Using a press conference in February, she accused MFIs of "sucking blood from the poor." Her government has since launched various investigations into activities at Grameen Bank.

'An Accident of History'

Should the microfinance sector be worried? In many respects, Grameen Bank is not like other MFIs, nor is Yunus like other MFI executives. The industry does boast a number of equally charismatic pioneers, such as Shafiqual Haque Choudhury of ASA in Bangladesh. A respected leader in a related field is Ela Bhatt, founder of the India-based trade union SEWA (Self-Employed Women's Association). But few can match the high profile of Grameen's Nobel laureate, whose friends in high places include Barack Obama, Nelson Mandela and others who have rushed to voice their support for him.

As for Grameen, its special role as a microfinance institution under a government charter is what Stuart Rutherford, founder of SafeSave, a for-profit organization providing banking services to the poor in Bangladesh, calls "an accident of history." Set up only a short while after Bangladesh's battle for independence from Pakistan 40 years ago, Grameen has been at the forefront of microcredit development in this densely populated country of 147 million. Grameen was enveloped into the central bank in the 1980s and given an unusual charter that has become both a blessing and a curse.

Though the Bangladeshi government owns a small percentage of capital in Grameen, holds three of its 12 board seats and has a say in the appointment of key executives, it has been a relatively passive stakeholder, reflecting its laissez-faire attitude toward MFIs in general. According to Rutherford, who is also an honorary fellow at the University of Manchester's Brooks World Poverty Institute in the U.K., while Bangladesh's short, violent history has vacillated between democracy and martial law, the country's microcredit providers were left alone, without much interference from governments or the business sector, including formal banking.

"Bangladesh got going early in microfinance for several reasons, some of which have to do with its particular situation," notes Rutherford. "The government there has always been weak compared to, say, India. For example, the Indian government tends to enforce rules, such as interest rate caps, much more effectively than in Bangladesh. So microfinance entrepreneurs like Yunus had more scope to experiment."

Slippery Times

With more than eight million customers, Grameen has flourished. The bank has lent $10.3 billion since it began operations in 1976 and has a loan recovery rate of around 97%. It has doubled the number of its offices over the past 10 years to more than 2,900 and employees to some 23,000, including more than 13,000 loan officers, nearly all women. The average loan balance per borrower is $123, with the cost per borrower over the years hovering between $8 and $13 annually. As of 2009, Grameen had $1.5 billion of assets and a return on equity of 5.64%.

But are Yunus -- and Grameen -- now paying a high price for that high-profile growth? Yes, says Tayyeb Shabbir, professor of finance at California State University in Dominguez Hills and an affiliated faculty member at Wharton. He echoes the widespread view that in Yunus's otherwise stellar career, he made one major miscalculation -- going briefly into politics in 2007. Though he quickly disbanded the political party he had set up then, politicians like Prime Minister Sheikh Hasina now view Yunus as unwelcome competition. "It is clear Yunus has dedicated his life to helping the poor, but if he had not decided to become a political animal, none of this might have happened," according to Shabbir. "If push comes to shove, [the prime minister] could make it difficult for Yunus. There's a reason why politics is called a dirty game."

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