M A Taslim

Grameen Bank policy and time inconsistency

September 3, 2012

Grameen_cara1It is now abundantly clear that the government is determinedly progressing toward assuming effective control of the affairs of Grameen Bank. Despite the fact that about 97 percent of the paid-up capital of Grameen Bank is subscribed by its borrowers, mostly poor women, the government saw it fit to deprive them of the right to select their Chief Executive through elected Board members. The Grameen Bank Ordinance 1983 that established the Bank required the Managing Director (MD) to be selected by a Selection Committee set up by the Board of Directors, which now comprises 3 members appointed by the government and 9 members elected by the borrower-shareholders (MD is also a member but without voting rights). The efforts of the government to appoint someone of its choice as MD since the ouster of Dr. Yunus were not successful because of the stout defence of the elected members of their right. The government has now amended this provision and has given the Chairman of the Board, who is appointed by the government, the power to pick the Selection Committee. Both the Minister of Finance and the Cabinet Secretary had earlier admitted that the purpose of the amendment was to make the appointment of an MD easier.
Grameen Bank was set up as a public private partnership (PPP) banking company to enable Professor Yunus to implement the vision of Microcredit as a means to reduce poverty. It needed a separate ordinance as it fit neither the Companies Act nor the Banking Companies Act because of its innovative and pioneering nature. Companies around the world are run on a simple concept of what may be called ‘economic democracy’. Shareholders have votes in proportion to their shares in the paid-up capital of the company. Persons with the highest votes constitute the board of directors which oversees all activities of the company on behalf of the shareholders.
Grameen Bank Ordinance was also fashioned according to this time-honoured tradition which underlies the company law all over the world. It stipulated that ‚Äú… the voting rights of any of its shareholders are proportionate to the contribution made by him to the paid-up capital of the company‚ÄĚ. The government had provided 25 percent of the paid-up capital when it was established, while the rest 75 percent was supplied by Grameen Bank borrowers. The Board of Directors of the Bank was also split in this ratio (3:9). However, the government retained the right to appoint the Chairman of the Board, which should have been the prerogative of the majority of the directors of the Board. This is now being used by the government to wrest control of the Bank from its majority shareholders.
A great deal has been written in the media, both domestic and overseas, on the ‚Äėvengeful‚Äô way the government has ousted professor Yunus and its ‚Äėdeplorable‚Äô acts to emasculate the shareholders by amending the Grameen Bank Ordinance. This paper does not purport to revisit these widely discussed issues. Instead, it will draw attention to the harm this unilateral amendment will do to the credibility, and hence efficiency, of government policies in general.
Two economists, Finn E. Kydland and Edward C. Prescott, were awarded the Nobel Prize in economic sciences in 2004 for their contribution to what has come to be known in the macroeconomic literature as the time inconsistency of economic policy. A policy maker, such as the central bank, may announce a policy it will adopt at some future date. (For example, Bangladesh Bank (BB) announces monetary policy in advance for the following six months.) It does so in a bid to influence public expectations by giving firm indications about its intentions. However, when the future arrives the situation may have changed and the pre-announced policy may no longer be the desired policy. The policy maker may be tempted to adopt a different policy that is desirable in the current situation. (BB frequently failed to adhere to the announced targets in the past.) However, the public might have anticipated that the policymaker could renege on its promise, especially if it had a history of doing so. In this case they would not fully trust the policy announcement and take offsetting measures to ensure they were not fooled or surprised. The end result of this sort of strategising is that the economy ends up in a worse state (say with higher inflation).

What is the relevance of this abstruse economic theory to the Grameen saga? Potentially, a great deal. It has been mentioned that the Grameen Bank was set up as essentially a PPP enterprise. The private sector (in this case the poor women borrowers of Grameen Bank) had subscribed to the capital on the understanding that the Bank would be run according to the Grameen Bank Ordinance 1983. The Bank grew enormously and earned a worldwide reputation that won it a Noble Peace Prize. Now that the bank has become profitable and internationally influential the previously declared policy of the government that gave substantial autonomy to the Bank is no longer desirable from the point of view of this government; it now wants more control over the Bank. Hence, the recent amendment to ensure that the bank can be run in any manner the government chooses.
The amendment is a fundamental change in the agreement that the Grameen shareholders had with the government, and this has been imposed on them without their consent. This unilateral action of this government will not go unnoticed by the private sector, and especially by those who harbour a desire to engage in a PPP deal with the government.
While the impact of the amendment will fall on government policies in general, the most directly affected will be the potential PPP agreements. Any private investor hoping to ink a PPP deal with the government will be acutely aware that the agreement it reaches with the government now may not be adhered to in the future. This is all the more important in view of the possibility that a future government may not take kindly to a company that has done a deal with an adversarial political group. Since the probability of raising the entire cost of a substantial PPP project within the tenure of a single government is very small and the probability of the same party elected consecutively is also small, the risks associated with investing in a PPP project will be correspondingly high. Indeed, by amending the Ordinance without the consent of the shareholders, the government has effectively undermined the prospect of a productive (from the nation’s point of view) PPP during the remaining period of its tenure.
Even when this government is replaced by a government run by a different group, they would not find it easy to attract investors for a PPP project. Since the perceived risks of PPP have risen considerably due to the unilateral action of the Government, investors will not be very keen to invest without adequate risk premiums. This will raise the costs of a PPP project to the extent that it may bring the very concept of PPP into disrepute. There could be public opposition to such ventures at high costs.
The amendment of the Grameen Bank Ordinance was no doubt done by the government to gain greater control over Grameen Bank, and this was perhaps driven by the desire to eliminate any influence Dr. Yunus may still have in the Bank. By focusing exclusively on Grameen Bank and Dr. Yunus, the government seems to have overlooked the full range of consequences of reneging on past commitments.
The objective of the government to have greater control over Grameen Bank may have been realised. But it is unlikely to greatly reduce the reputation of Dr. Yunus who is already a global iconic figure. He has attained an international eminence that few of his countrymen ever attained. By vilifying him the government has severely tarnished its own image both inside and outside the country.
An irony of this sordid saga is that the amendment will give the effective control of this unique institution owned by more than eight million poor women of the country to a coterie of male-dominated government, and this will happen under the watch of a woman prime minister. The principal victims will be the poor women of Bangladesh and the cause of women empowerment.

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M. A. Taslim is a Professor of Economics of the Department of Economics, University of Dhaka. He is currently holding the charge of the Chairman of the Department. He was formerly the Chairman of Bangladesh Tariff Commission.

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7 Responses to “ Grameen Bank policy and time inconsistency ”

  1. Charbak on September 5, 2012 at 2:06 am

    Interesting article. But the argument can be viewed from another angle as well. In future, no government will support a GB type initiative anymore from any individual since the individual may claim a right to run the instituition life-long (as with Dr. YUNUS).

  2. lemon on September 4, 2012 at 1:44 pm

    Our Govt. has no problem with Grameen Bank rather its a problem between Dr. Younus and Prime Minister Shiek Hasina. and everybody knows why this occurred?and this incident also proved that now we are living in a so called democratic country.

  3. Mahfooz on September 4, 2012 at 2:11 am

    A Nation of greatness!

    Prof Taslim has analyzed some of the apparently mindless actions taken by this govt of Bangladesh vis-à-vis Grameen Bank and their consequences.

    Let us try and put things in some sort of perspective. A series of great scandals and financial scams were unearthed in the last couple of years. To name a few, but not all: The Great Share Market Scam, The Great Pyramid Schemes led by the Mafia Orgs. such as Destiny, The Great Padma Bridge Corruption, The Great Bank Embezzlement led by Hallmark and others. I am sure many more are in the pipeline, waiting to see the light of the day in future. This sequence of financial scams and scandals that clearly point towards the highest levels belie another great ’scheme’ of outright loot and embezzlement of people’s money and assets. Seen in this light, the act of the Great Takeover of the Grameen and the side act of the Great Kicking-Out of Yunus are currently being played to a full house at the national stage!

    Indeed, we are a Great people, ruled by a Great Government, live in a Great Country, led by none but Great Patriots such as Abul Hosain, and rapidly heading towards further Greatness and soon will reach the Greatest Pinnacle of glory in the comity of nations! Great Things are progressing very well indeed! Any one who doubts our Great Progress and a Great Future, is surely unpatriotic and most probably a criminal against humanity!

    In this great progression toward Greatness, sacrificing a mere man like Yunus and dismantling of the Bank that he along with the most deprived and exploited poor women of Bangladesh created, is really of no consideration. For, another Great loot is in the offing.

    Leaving aside the obtuse and scholarly reasons that Prof Taslim proffers above, the real reason for the Great Schemers who are planning and executing these Great Acts is simple. Having looted all nationalized banks, stock market and embezzled the general public by one Great Scam after another, there is nothing much left to loot any more. But, behold, here is Grameen Bank, a sound financial institution where interest rates may be high but corruption is unknown and strangely the borrowers are also the owners. So the Great Powers That Be now covets this juicy, unblemished apple (or Mula in our Great expression) and simply wishes to grab, eat and digest its huge assets like they have done in the case Sonali Bank.

    This is the main reason for these heinous actions. There is no other plausible explanation of these self-defeating and suicidal acts.

    May Allah save us and this poor, hapless nation from these shameless thieves and looters, for, as things stand, only He can save us as we are incapable of saving ourselves!

  4. Ali on September 4, 2012 at 12:16 am

    If hell bent on this transformation in its operation and constitution, Grameen Bank will change to the likes of Rupali Bank! Nearly breathing somehow.
    But with all good intentions, GB may lose its size, role and ‘business’. Are we forgetting that along with Prof. Yunus, GB also is recipient of Nobel peace prize for the uplifting role it has been playing?

    This action will not earn the country any laurels or bring forth some set of ‘great’ corporate rules and culture, or even grow its business further more.

    Let GB enjoy some autonomy for the character that it has adopted and continue to grow into a global bank one day. After all it belongs to millions of Bangladesh rural subscribers and share-holders to decide on its future.

  5. Mohammad A. Kalam on September 3, 2012 at 10:12 pm

    I offer my heartfelt thanks to Prof. Taslim for drawing our attention to a unique dimension of the wrong doings of the government concerning the GB and Dr. Yunus. Indeed, there is hardly any room for disagreeing with the possible consequenses that has come out of this invaluable and insightful discussion.

  6. Ana Dil on September 3, 2012 at 6:56 pm

    I respectfully disagree with Dr Taslim, ex-CEO of a failed institution Bangladesh Foreign Trade Institute (BFTI), a fact he may like to hide by mentioning only the past CHairmanship of Tariff Commission. Dr. Taslim, with all your impressive credentials and arcane knowledge repository, you fail to understand a PPP concession contract signed by the government with foreign parties involved cannot be reneged on a whim. The aggrieved party can easily sue the counterpart.

  7. Kalam Ahmed on September 3, 2012 at 4:36 pm

    A very well written and thought provoking article. At one point the author says that “However, the government retained the right to appoint the Chairman of the Board, which should have been the prerogative of the majority of the directors of the Board. This is now being used by the government to wrest control of the Bank from its majority shareholders.” Is the right ‘retained’ when it is in the original Act that set up Grameen and which was agreed to by the non-governmental shareholders that this should be the structure? By the same coin is it majority power ‘retained’ by majority shareholders through their directors on the board when the government agreed that representation should be 9:3. Should the whole thing be seen now as government versus them when the original structure was arrived at through consensus, with the government now the villains? Grameen is a statutory body, and the statute that created it are in effect its governing rules. If they now are seen to be a sword hanging over Grameen perhaps then its founding member should have been aware of it with regard to his actions and pronouncements. They should have known that in a dispute the rules will be enforced by the superior power. So maybe they should have had a stronger sense of self-preservation.

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