Background: Grameen Bank’s Model Under a Foreseen Threat

Monte Dei Paschi Di Siena

Good old-fashioned partnership merchant banks lending out proprietary money is where banking started (hence the picture of Monte Dei Paschi Di Siena, the oldest surviving bank):  a partnership with long money to lend, taking the risk and the profits of new ventures from the next crop to the next shipload of whatever coming into port.

Modern banks are built around the concept of borrowing short and lending long:  borrow money short-term (from depositors or worse, short-term money markets) and lend long-term.  That’s where the image of the bank (and the banker) becomes critical.  Essentially, banks then become a legally sanctioned Ponzi Scheme: they take your deposits with the promise you’ll get it back plus interest whenever you need it though they don’t always have it at the ready.  They couldn’t because they’ve lent it out so they can make the interest rate (plus profits) that attracted you in the first place.  It’s not rocket science but it sure can get complicated in a hurry.

The Grameen Bank (GB) in Bangladesh hit on an even better model:  borrow long and lend short, at eye-watering interest rates.  To GB’s founder Dr Mohammed Yunus and a few others:

Microcredit looks like a miracle. It involves providing unsecured small loans to poor people in developing countries whom most banks would turn away. Yet these small borrowers almost always repay their loans (and the fairly steep interest charges) on time, which suggests that they find productive uses for the money. The industry’s backers make some big claims as a result: Mohammad Yunus … reckons that 5% of Grameen Bank’s clients exit poverty each year.

Yunus’ claims that it alleviates poverty gets GB long-term donor loans/grants (though now it claims to supplement it with deposit finance) as well as the low tax rates for a charity.  In a sense, Yunus is on to a great Ponzi scheme.  He convinces people that he’s doing good and he’s great (before his legions of fans get upset, I’m not suggesting he’s not.  Yet); they fund him at laughably low rates; he lends at high rates to the poor and skims off the middle.  That even leaves enough free cash to invest in things like Grameen Phone (GP)— though that was pretty much all Telenor with Yunus providing the image — or goodwill to convince Franck Riboud (Danone CEO) to set up yogurt micro-factories in Bangladesh (Grameen Danone Foods).  I’m not trashing either of those two by the way, GP was a brilliant play and the free cash flow from that alone would make one hell of an endowment on its own.

Image via Wikipedia

The risk to all this is obvious.  The Grameen brand is very fragile, dependent as it is on the “Saint Yunus of Bangladesh” image.  Any tarnishing of that image could rip the scheme apart and that may be about to start.  There have always been rumblings against microfinance but recent events in India have provided more potency to these.

Vikram Akula founded SKS (Swayam Krishi Sangham) with borrowed money in India’s Andhra Pradesh along the Grameen model.  Pretty soon he got backing from VC heavyweights like Vinod Khosla and Sequoia Capital, IPO-ing to a USD 1.5 billion valuation in August.  A spate of suicides led to a media firestorm and the inevitable political backlash.  Yunus had publicly criticized SKS’s blatantly for-profit orientation but it was only a matter of time before people rounded on him.  Strangely enough, this time he’s provided the ammunition himself.

The Norwegian TV documentary “Fanget i Mikrogjeld” (“Caught in Micro debt”) aired on November 30 alleging cash was diverted from GB to a related organization called Grameen Kalyan (GK).  The affair was old (circa 1998) and resolved but the story was enough for Norway’s International Development Minister Erik Solheim to talk about a probe within two days.  The documentary claimed as much as USD 100 million had been siphoned away and — notwithstanding Norwegian claims that Yunus is not corrupt — led to lurid claims in Bangladesh media like Yunus ‘siphoned Tk 7bn aid for poor’.  GB’s detailed riposte notwithstanding, the damage has been done.

On the face of it, GB essentially created a cutout to avoid a potential 40% tax rate.  This was advised by a local accounting firm (Rahman & Rahman, they advise all the multinationals in-country and I know of them) affiliated with KPMG and in basic outline is as follows:

1. Donors (Norad et al) gave a large cash grant to GB
2. Instead of paying back interest or principal (not sure on the latter), GB was to put aside 2% of those funds for employee welfare projects (SAF)
3. GB was afraid of a regulatory change levying 40% tax on that outflow and wanted to give SAF the “attention it deserves”
4. So GB created GK, gave them a large amount of cash and borrowed it back at 2%

Norad‘s problem was that

1. GB never told them about this particular piece of legerdemain they happened to find out almost by accident (the bdnews24 story has a few PDF files of those communications)
2. Their memorandum of understanding (for want of a better word) was with GB and the Bangladesh Government about the use of the 2% for SAF, not with GK, so this left things in the kind of vacuum they wouldn’t be comfortable with

Of course, unsaid — but blatantly obvious to anyone but a blithering idiot — is that GB was using a tax dodge for funds from Norad (and other European) taxpayer-funded entities!

There’s no use dragging Rahman & Rahman or KPMG into this, they’re just accountants, Yunus was advised either by

1. People with singular tin-ears about the nuances of dealing with some rather generous and supportive donors, or
2. Spectacular idiots

Of course, it’s not quite clear if Yunus sought out dissenting advice.  My due-diligence suggests he doesn’t much like listening to advisors who disagree.  The irony is that I’m pretty sure that if Yunus/GB had been clear with Norad et al, they very probably would have paid the taxes off themselves! Now, no matter how this particular fracas pays out, the daggers will be out.  And they will be sharper.

In case you’re wondering:  yes, I’ve been watching GB and GP for a while.

Which leads to the inevitable question:  would I invest?

More on that later.

Related Articles

• Bangladesh Grameen aid is probed (bbc.co.uk)
• Grameen Bank denies cash claim (bbc.co.uk)
• Yunus Siphoned Tk 7bn Aid for the Poor (bdnews24.com)
• A Big Split Over Microfinance (forbes.com)
• Grameen Bank’s Response to Recent Press Reports (grameen.com)
• Leave well alone (economist.com)
• Yunus’ Letter to the Ambassador (thedailystar.net)
• Transcription of Norad Report (thedailystar.net)