Bangladeshi Microfinancing Pioneer Faces Charges of 'aid anomalies'

Dec 2010
Bangladesh, December, 03 2010 - Norway says it is examining allegations that Grameen Bank, founded by Nobel Peace Laureate Muhammad Yunus, has diverted millions of dollars of aid money to one of its sister concerns, reports BBC online.

International development minister Erik Solheim said that it was "totally unacceptable that aid is used for other purposes than intended".

A documentary maker has alleged that cash was diverted from Grameen Bank to other parts of Grameen.

In a statement, the Bank said that the allegations were false. It said that a full explanation with more details would be provided at the "earliest convenient time".

Our staff correspondent adds: The documentary has alleged that Grameen Bank (GB) had transferred about US$100 million it received from donors to Grameen Kalyan in 1996 and then got back the money as loan in breach of agreement. This led to a spat between the Norwegian government and Grameen Bank.

But Dr Muhammad Yunus, who pioneered microfinancing through the Grameen Bank and won Nobel Peace Prize for it in 2006, has defended himself saying this had been done to ensure maximum transparency and responsible use of the Bank's revolving fund.

The documentary, titled Fanget i Mikrogjeld (Caught in Micro debt), was aired on Tuesday (November 30) on the National Norwegian Television, NRK. The whole episode took place about one and a half decades ago. And then it was presumably ironed out, as the documentary showed a compromise had been reached concerning transfer of the funds Norway granted to Grameen Bank. Under the agreed compromise, 170 million Norwegian kroners ($27.9 million) was transferred back to GB.

Contacted, Grameen Bank said the allegations of fund misuse are false. It will release a detailed statement on the affairs soon. The Bank is already working on the issue, but since the incident took place about 14 years ago, it is taking some time to get all the facts together.

The documentary claimed the Norwegian embassy in Dhaka at a meeting with the Bank at its office on Dec 3, 1997 came to know about the May 7, 1997 agreement between Grameen Bank and Grameen Kalyan, which became effective on Dec 31, 1996 for transfer of funds of 3.914 billion taka (US$55 million).

In a letter to Yunus on Dec 15, 1997, the embassy said: "In line with the agreement, Grameen Bank transferred all funds accumulated up to Dec 31, 1996 received from donors for revolving funds, to Grameen Kalyan, which at the same date transferred the amount to Grameen Bank as a loan.

1.927 billion taka (US$27 million) of the amount was related to the revolving fund for housing loans.

Grameen Kalyan is in fact a spin-off created in 1996 by Grameen Bank, which set up an internal fund called Social Advancement Fund (SAF) by imputing interest on all the grant money it received from various donors. SAF has been converted into a separate company to carry out social advance activities related to education, health and technology among Grameen borrowers. It has 30 health clinics across the country. Most of these clinics are attached to Grameen Bank branches.

The letter, signed by Ambassador Hans Fredrik Lehne, said: "The agreement concerning these transactions has not made provisions for any interest rates to be charged for this part of the loan, nor any terms of repayment."

The agreement was signed between the governments of Norway and Bangladesh on Nov 30, 1994 to support Grameen Bank's Phase IV project.

Annex 1, clause 4 of the agreement said: "The amount of the Grant used for housing loans will be used as a revolving fund."

The Norwegian embassy was concerned that it had not been informed about the agreement between the two organisations. It said: "The agreement was contrary to the quoted clause of the agreement between the governments."

It also observed that the accounts of Grameen Bank as of Dec 31, 1996 did not reflect any revolving fund for housing loan in operation under the Bank.

The embassy said "the ownership of Grameen Kalyan is of another nature, and Norway has not entered into an agreement with Bangladesh to provide funds to Grameen Kalyan for lending to Grameen Bank".

"The agreement has further left uncertainty about future repayment of the loan to Grameen Kalyan, since it is not regulated by the agreement.

"The agreement is also silent about Grameen Bank's use of the loan from Grameen Kalyan."

The embassy in that consequence considered the agreement between Grameen Bank and Grameen Kalyan "as a change which affects two agreements between the two governments to support Grameen Bank".

It also requested Yunus to explain in writing “why Grameen Bank entered into the agreement with Grameen Kalyan, and of the consequences for the owners of Grameen Bank and the beneficiaries of the housing loans”.

In a letter to the head of Norad in 1998, Yunus wrote: “Some misunderstanding has crept up between us and Norad/Dhaka. Norwegian embassy/Dhaka has written a letter to the government of Bangladesh making an allegation that Grameen is transferring donor money (including that of Norad) to various enterprises outside of Grameen Bank. This allegation will create a lot of misunderstanding within the government of Bangladesh.”

Interestingly, the news about this spat between Norway and Grameen Bank was publicised as if Nobel Peace Prize winner Yunus had himself pocketed the donor money, which is totally removed from the fact. The fact remains that he never had gained from this transfer. The money was transferred just as a matter of organisational accounting to another sister company to carry out the same task - fighting poverty. Grameen Bank's response as written by Yunus to the allegations was also not carried by newspapers.

In his reply to the Norwegian ambassador , Yunus said the agreement between Grameen Bank and Grameen Kalyan was made so that Grameen's financial resources and assets could be managed more professionally and effectively to get the maximum benefits for Grameen's customers.

Grameen Kalyan was established as a separate legal entity to accelerate the pace of social and economic development of Grameen's targeted clientele and also to ensure continued access to loans and other financial services they have been getting from Grameen Bank, he explained.

Yunus said the agreement to transfer funds from the Bank to Kalyan was to ensure maximum transparency and responsible use of the revolving fund.

He argued that in earlier system, the money would have been owned by the Grameen Bank which would use it on a revolving basis. Under the changed situation, he argued, the money will be used for the same purpose but GB will now receive it as a loan from separate legal entity.

The idea of revolving fund was to ensure its continuous reuse for the same purpose and to harness maximum benefit in terms of servicing more clients, Muhammad Yunus said, adding: “But since in the earlier approach the fund was available within the same management structure, in spite of the policy compulsion to revolve it, there remained the possibility that the required financial discipline to recover the money and exercise appropriate caution to effectively monitor the loan operation, may not be enforced.”

This led them to find an alternative method though GK to implement the intention and the spirit of the revolving fund concept. The revolving fund has got an institutional structure so that it can never be absorbed by multifarious other demands of the Bank, he said, adding further that the GK can be viewed as a company set up exclusively to manage the revolving fund.

“We believe that the new arrangement does not in any way violate any of the clauses of the agreement between Norway and GOB, rather it strengthens professionally the financial operation of GB for eradication of poverty,” Dr Yunus said.

He further said that the GB board of directors took the decision within the scope of the agreement with the donors. “It in no way threatened to interfere with the successful utilisation of the grant [and] that is why we did not think of informing the donors.”

On charging interest for the housing portion of the loan given to GB, Dr Yunus said, the GK management consciously decided to avoid charging the interest to keep the interest burden low on the ultimate borrowers. “Adding interest on this loan would have made the fund costly for the GB to transfer it to the borrowers at the existing rate of 8 per cent.”

He, however, added: the issue of adding interest can be reviewed if deemed appropriate by the lending and borrowing organisation.

Prof Yunus said the decision to transfer the money, instead of adversely affecting the owners, has enhanced their interests “by ensuring more efficient and prudent fund management and accountability on the part of GB”.

“This process of mutual obligation and accountability on the part of two organisations has enhanced the immunity of the fund from being eroded due to lack of accountability if handed by a single organisation as was done prior to its transfer to Grameen Kalyan.”

The grant money received from different donors reckoned has increased the liquidity of the loanable funds for Grameen Bank, he added.

Dr Yunus also wrote the ambassador that establishment of GK with endowment fund from GB has broadened the scope for them to address the issue of eradication of poverty and hunger by undertaking different projects and activities.

The profits and income earned by Kalyan, he said, offer the scope for such initiatives to be undertaken for the poor, he said, adding that it was the initial purpose of creating the Social Advancement Fund.


Research Analysis Tools

The fund indexes, institution benchmarks and other market information displayed here are all Symbiotics designed analysis tools, created in-house by our analysts and experts. Symbiotics has one of the oldest track records in microfinance investment analysis dating back to the late 1990s; its indexes and benchmarks have been regularly used as markers by investors, asset managers, financial institutions and practitioners. These, as well as several other research products, are available through the Research Account. Click on the link below to find out more.

Learn More