Bailout

Tail risk in microfinance, Muhammad Yunus edition

By Felix Salmon

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.

Full post as published by Macroprudential on March 02, 2011 (boomark / email).