Tail risk in microfinance, Muhammad Yunus edition

By Felix Salmon
March 2, 2011
looked like Muhammad Yunus was going to survive as head of Grameen; today, it looks as though he's out.

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On Monday, it looked like Muhammad Yunus was going to survive as head of Grameen; today, it looks as though he’s out. As David Roodman explains, it’s all very complicated and murky, but the base-case scenario is that everything will be decided in court, and that the courts will side with the Bangladeshi government.

This is a major diplomatic issue: if Yunus is indeed ousted, the US has promised to end all high-level diplomatic interaction with Bangladesh. Yunus has powerful friends, but that doesn’t seem to have helped him here.

Yunus himself, of course, will be fine whatever happens. The worry is what happens if and when the Bangladeshi government seizes control of Grameen. It seems that the attempt to oust him is a reaction to his anti-corruption campaigns, and the obvious risk here is that Grameen itself will become a vehicle for graft — especially if, as prime minster Sheikh Hasina reportedly wants, the government’s stake in the bank is raised to 60%. (Right now, it seems that the government owns about 3.4% of Grameen, although by law it’s meant to own 25%.)

Nick Kristof is clear about how important this is:

If Grameen is turned into a state bank, that would be a catastrophe — above all for the impoverished people who depend on it. And if a Nobel Peace Prize winner can be shunted aside, then all of civil society is in jeopardy.

This would be dreadful, too, for the broader cause of microfinance. Grameen is the shining example of how microlenders can avoid disastrous implosions by dint of being owned by their borrowers. If that changes and it becomes the shining example of how governments can swoop in and seize ownership and control for their own ulterior motives, then it becomes very hard to envisage any ownership model which looks strong and sustainable over the long term.

Today’s news, then, is a stark reminder of the huge amount of tail risk in microlending. The weakness of the model isn’t in high default rates, it’s in the way that extreme events, often orchestrated by politicians, can strike even the biggest and most successful lenders. If Grameen and Muhammad Yunus aren’t safe, then no one is.


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Professor Yunus is a blessing for Bangladeshi people, his noble winning enhanced the visibility of Bangladesh 10 times more, the used to be known as bottomless busket, now people know also as noble winning country. Govt. should step back from this conspiracy against Yunus.

Posted by Quazi68 | Report as abusive

Agree with Quaz. According to the Financial Times: in the mid 1970s, about 80 percent of the population of Bangladesh was below the poverty line. By December 2010 (when the FT ran these figures) that number was down to 38 percent.

That’s an amazing change, and it seems very likely that microfinance is part of the reason.

Posted by Christofurio | Report as abusive

@christofurio: Actually it seems very likely that microfinance has played a small role in poverty reduction whereever it has been used. That doesn’t mean no role, but a small role. All of the high quality evidence on the impact of microfinance basically tells the same story: small but important benefits of the poor; no large scale impact on poverty.

Compare Bangladesh to Pakistan for instance. Penetration of microfinance in Bangledesh is far higher than Pakistan; neither country has what could be called effective government or policy. When you compare HDI scores for the two countries over the last 30 years, Pakistan does better.

Back to Felix’s point: Yunus and Grameen should be defended from all attacks from the Bangladeshi government using whatever reasonable means are to hand.

But, and this is a big but, I really hope that all of those defending Yunus from Hasina will take the next step of defending Grameen from Yunus. A big factor in the tenuous situation that Grameen is in now is Yunus’s failure to create an institution independent of himself. He has routinely pushed out anyone within the organization that appears to challenge his authority and power. Grameen can’t afford to lose Yunus right now because it doesn’t have a good succession plan and doesn’t have the leadership talent to easily replace him.

No one is at fault for that other than Yunus and the “Friends of Grameen” that have abetted his reluctance to separate Grameen from himself for the good of the people that it serves.

Posted by timothyogden | Report as abusive