The Investigators Speak

Like the jurors after the OJ trial, members of the committee to investigate the Grameen Bank are talking to the media. And they are doing some of it in English, which is giving those of us who don't read Bengali more insight into the panel's deliberations.Mohsin Rashid, perhaps the only lawyer among the five members, posted a lengthy, not-so-amicus brief that questions the legality of two fundamental Grameen practices over the years. These are the routine issuance of shares to new Bank members and the creation of sister organizations to do things the Bank is not allowed to do. Unable to read the main report, I am not sure to what extent Rashid is dissenting from it versus reinforcing it. I think more the latter.Rashid's document also includes a couple of dozen-year-old internal memos from Muzammel Huq to Muhammad Yunus, one in English, one in Bengali. Huq served as General Manager (#3 or thereabouts in the Bank hierarchy), left the Bank some time after, and recently returned when the government appointed him to chair the board. He is the one who told New York Times reporter Lydia Polgreen, "I think he [Yunus] is a good man with a small heart."The specifics of the issues at hand are interesting and complex, and no one should take lightly the charges of routine illegality. Still, it remains the case that there are no credible allegations of violations that enriched the officers of the Grameen Bank or hurt poor people. Here's the chair of the committee in a must-read interview with David Bergman (who I think has been doing excellent journalism but, it should be noted, is married to one of Yunus's lawyers):

Yet whilst extolling the virtues of Yunus, along with the Grameen Bank which he said ‘brings undeniable benefits,’ in his extended interview Monaw-war Uddin Ahmad stuck firmly to another of the report’s conclusions that ‘we have observed that the Grameen Bank has a serious tendency to violate norms in the management of the organisation.’‘These [irregularities] were not isolated incidents,’ he said. ‘It is not contradictory to both support the achievements of the Grameen Bank and also say that it broke the rules.’In addition, however, Monaw-war said that these irregularities can be corrected. ‘It is quite possible for all these things to be regularised by administrative and legal reforms. As long as the goal [of the irregularities] was honest, it is okay.’The committee’s chair, who handed the report over to the finance minister on Monday, also emphasised that the committee had found no evidence of individual corruption like ‘misappropriation of funds by Yunus or others.’

Further thoughts follow.On Rashid's main points:

• Normally when people join the Grameen Bank, they buy one share in the company for 100 taka (about $1.40 today). As of the end of 2009, Grameen reportedly had 5.24 million shares held by members (p. 25) and 7.97 million members---why the difference, I don't know. Against that 524 million taka in "paid in" capital from members, Grameen reports only 18 million taka from the Bangladesh government or banks it controls, giving it just 3.35% ownership. Over the years, members' capital grew much more than the government's. Rashid argues (p. 7) that the increase in members' paid-in capital was illegal because it occurred without government authorization. Section 7(2) of the Grameen Bank ordinance states that the "Government may increase the paid-up share capital of the Bank from time to time," which Rashid interprets to mean that the Bank does not have the authority to do so on its own. Ergo millions of tiny, public transactions over the years---sales of individual shares of the Bank to poor Bangladeshis---were illegal.I'm no Bangladeshi lawyer, so I can't gainsay Rashid's analysis. But even if correct, this hardly seems outrageous. If this were such a big problem, the government could have paid in more capital at any time. It was hardly the helpless victim of a secret conspiracy to dilute its holdings.
• In effect, Rashid responds a bit to the plea at the end of my last Grameen post for more details on the transactions between the Grameen Bank and its sister organizations. He states that the Grameen Bank "funded" entities called the Grameen Fund and Grameen Kalyan (the latter being the one at the center of Norwegian controversy). These in turn "funded" many other Grameen organizations. Whether funded means "donated to" or "invested in," I don't know.What are the legal implications? As I noted <a href="http://blogs.cgdev.org/open_book/2011/04/whats-new-in-the-grameen-investigation-report.php">last time, the law authorizes the Bank to invest in organizations engaged with the rural landless poor in activities other than banking. Rashid does not seem to be arguing that the financial links are in themselves illegal. Rather, I think he is making the case that the sister organizations are from a legal point of view parts of the Grameen Bank. Since most of these organizations are doing things other the financial services, the argument goes, the Bank as a whole is engaged in activities beyond its mandate.As I wrote before, it is not obvious to me that there is anything wrong with officers of the Bank setting up independent legal entities that have "Grameen" in their names to do things other than banking. And it is not obvious that there is anything wrong with the Grameen Bank partly "funding" them. How does that make them part of the Grameen Bank?And keep in mind the example of BRAC. It's doing a hundred things in Bangladesh---education, health, rice breeding---but all under one roof. At any given time, some activities are making money and some are losing money. Some are self-financing. Some are donor-financed. If each activity was done by a separate company, then there would need to be a complex web of intra-company transfers, which a motivated investigator could use to make BRAC look like Enron. Grameen, no doubt influenced by BRAC, and able to recruit many partners, was moving beyond banking in order to help the poor.On the other hand, I could imagine this being a principle of corporate law: if it walks like a subsidiary, quacks like a subsidiary, looks like a subsidiary, it must be a subsidiary. That way, ExxonMobil could not dodge an environmental law or tax provision by setting up an independent company with "ExxonMobil" in its name, putting its officers in charge of the new company, and passing money to it. (On the third hand, I wouldn't be surprised if ExxonMobil can do exactly that...)That is the state of my understanding on this legal question. Perhaps others can explain more. Committee chair Monaw-war commented on these arguments in his interview with David Bergman:

  He agreed that this and a number of the findings in the report relied solely on legal interpretations by Mohsin Rashid, a committee member and Supreme Court lawyer.‘We heard [Rashid] at length and were convinced by what he said,’ Monaw-war told New Age.He said that the committee did not consider it necessary to seek any additional legal advice or opinion, and had not asked the Grameen Bank or its lawyers to explain why they thought that all their actions were conducted lawfully.‘These are difficult decisions as we are not professional lawyers,’ he acknowledged. ‘In the end it will be for the courts to decide on these matters.’

  That last thought scares me because of the Bangleshi courts' reputed lack of independence. Rashid's line of attack could be all the government needs to take over the entire Grameen empire.

On Huq's 1997 letter to YunusLike the correspondence between the Norwegian government and Grameen that Tom Heinemann obtained through a freedom-of-information request, this letter provides a fascinating and unflattering glimpse inside the Grameen Bank of the 1990s, and doesn't reveal anything nefarious. It begins:

I feel compelled to put a number of issues on record to you so that Grameen Bank does not become ore of the most "successful failures of the 90's". I have been forced to do this as you have not given me the time I repeatedly requested for over the last three months, for a face to face conversation.First of all, let me state that I regard myself as one of the founders of the Grameen Bank. I have given 15 years of my time, effort and utmost commitment to building Grameen Bank up to what it is now today. To this end I have used and abused all the resources familial and otherwise, at my command. You of all persons are aware of this.

I read this and the accusations of autocratic management that follow as classic founder's syndrome. An intelligent man deeply committed to the organization he has long served sees problems but hits a wall in trying to convince a boss whose judgment is increasingly distorted by success. Going by the reportedly falling morale of his colleagues, Huq was not alone.Huq's letter also reveals inside knowledge of the Grameen Bank's repayment difficulties in the late 1990s, which was later reported most famously by Daniel Pearl and Michael Philipps in the Wall Street Journal. He decries Grameen Phone for making a profit. (Doesn't bother me much: Grameen Phone started the mobile-phones-for-the-poor revolution globally.) And Huq raises doubts about Yunus's decision to award a contract to a packaging business owned by his family. That definitely looks improper, but see Bergman's case that it generated no profit for Yunus's family.On the interview with committee chair Monaw-war Uddin AhmadThe guy sounds like me: genuinely trying to hear out all sides, giving Yunus his due, pointing up real problems, and perhaps (like me...) being a bit naive about how little such nuanced analysis will affect what happens.