Saturday, 1 September 2012

The Grameen Bank's Unique Organizational Form


Errata: "GB could sell part or most of the 60 per cent remaining (after the GoB's 40 per cent) ownership stake .."
It should be: "GB could sell part or most of the 40 per cent remaining (after the GoB's 60 per cent) ownership stake .."

Mo Chaudhury

A recent ordinance of the Government of Bangladesh (GoB) to gain more control over the appointment of the Managing Director of the Grameen Bank (GB) has set off a furious worldwide debate about the legitimacy and the implications of the move for the future of the Nobel winning institution. The control move has assumed much importance since it is preceded by the removal of GB's Nobel-winning founder and long time Managing Director Dr Muhammad Yunus using a retirement rule that existed for long but was not applied until now. At the heart of the debate is the unique organisational form of GB and the role this uniqueness played in its widely admired achievements. A short digression in this regard is therefore very useful.

Is GB a government institution (not seeking profit) like the Bangladesh Bank (BB)? Is it a government-owned corporation (not seeking profit) like the Investment Corporation of Bangladesh (ICB)? Is it a public enterprise (government owned but profit seeking) like the nationalised banks? Is it a shareholder-owned (seeking profit, shares may or may not be listed for trading) corporation like the private sector banks? Is it a non-profit private sector organisation like the non-governmental organisation (NGO)-type microfinance institutions? Is it a cooperative bank? Is it a mutual bank?

The answer is none of the above. GB has a unique hybrid form that has elements of different types of organisations. GB is profit seeking and shareholder owned organisation like a public enterprise and the private sector banks, but the GoB has only 3.0 per cent ownership (unlike a public enterprise) and GB is not an incorporated business with limited liability for the shareholders (unlike the private sector banks). Like the cooperative and mutual banks, GB's member/borrowers are its main clients and depositors. But GB's profits are not normally passed on to the member/borrowers in the form of reduced borrowing rate or increased deposit rate or cash dividends (unlike a cooperative bank) and GB has non-member depositors and the GoB as part owner (unlike a mutual bank). In sharp contrast to the above profit-seeking corporate and membership-oriented cooperative/mutual character, GB shares a very important feature with government institutions like the BB and the ICB, namely, GB was created in 1983 by a special act (not under a general act) that conferred important governance and operational control rights to the GoB, much in excess of and unrelated to its ownership proportion.

It is worthwhile to explore at this point the implications of the unique hybrid form of GB as an organisation. The cooperative/mutual/NGO like features of GB kept the central focus of GB activities on the interests of the member/borrowers rather than profit maximising non-client shareholders. However, to do this with no initial deposit and capital contribution by the member/borrowers, to expand the membership significantly, and to offer more and better services, GB needed to raise a large amount of funds at a low cost of funding during the early years. This is where the special nature of the GoB sponsorship and GB's corporation like ownership structure played a vital role. In 1983, when GB was formed, the GoB injected equity capital in exchange for about 60 per cent ownership with the remaining 40 per cent allocated to the member/borrowers. The nationalised banks were instructed to provide loans to GB, and GB raised additional funds from international sources primarily in the form of loans, all at low interest rates as the 1983 GB Act essentially offered guarantee for GB liabilities by the GoB. It is to be noted that as of 1983 it was not yet proven that the microfinance model of Dr Yunus would be viable with a large number of member/borrowers with no collateral and equity of their own. The principal asset in the balance sheet of GB was the loans to its member/borrowers that are of poor quality by normal credit standards and as such the credit worthiness of GB to raise funds was of poor quality as well.

In other words, absent the GOB's partial ownership and its guarantee to backup GB loans, it is quite doubtful that GB could raise at the time the necessary funds at a low cost, the low cost being necessary to cover the high administrative costs of the microfinance model while keeping the interest rate at reasonable level for loans to the member/borrowers. While GB could sell part or most of the 60 per cent remaining (after the GoB's 40 per cent) ownership stake to local and foreign institutional investors, such an action would have taken away the majority representation of the member/borrowers in the Board of Directors and hence overall management of GB, very importantly including the selection of the Managing Director of GB. Without the majority representation by the member/borrowers and the selection of the Managing Director by the Board of Directors and not the Chairman, as is typical in a private corporation, one has to wonder whether GB's visionary founder-leader Dr Yunus could have continued as the Managing Director for as long as he did and as such whether GB would have turned into one of the most successful financial institution in the history of banking as it admirably did.

In this context, it is very important to recognise the very positive role the various regimes of the GoB have played, until now of course, in the governance of GB. Interestingly, the positivity comes from a historically passive, but facilitating, role of the GoB. By and large, successive regimes of the GoB have accommodated the various statutory changes requested by GB, including the crucial one that allowed GB to become a depository institution that can accept deposits from non-members as well. On the operations side, the GoB regimes permitted GB to expand its portfolio of services and investments without much of a hitch. In a nut shell, the GoB regimes awarded Dr Yunus utmost flexibility in building the world acclaimed institution that GB is today. Importantly, this flexibility included the continuation of Dr Yunus as the Managing Director beyond the stipulated retirement age for public employees although it remains controversial whether Dr Yunus was legally a public employee. In fact, the historical role of the GoB in the development of GB constitutes an exemplary case of optimal level and manner of government intervention in an otherwise free enterprise system. It has indeed been a virtuous trinity for socio-economic development, a path breaking concept of enterprise, a visionary leader and successive government regimes that passively facilitated the development of the enterprise, as and when needed, instead of actively governing or managing it.

In the backdrop of this history-making virtuous trinity and with the enforced departure of GB's visionary leader, the latest ordinance of the GoB to empower the government appointed Chairman of GB (instead of the Board of Directors) to select its Managing Director can only loom monstrous. Not only the move disenfranchises the 8.3 million poor and mostly female members of GB who now owns 97 per cent of GB, it represents a radical departure from the historical passive and facilitating role of the GoB in the management and governance of GB. Inevitably someday someone had to step into the shoes of Dr Yunus, and it is also entirely possible that the next GoB (via the Chairman) selected Managing Director will be the best qualified leader available, and both the GoB and the new Managing Director would have the wisdom of not toying with the proven and time tested business model of GB. But that possibility is just that, not a guarantee, nor even a reasonable expectation.

This is because the unique form of GB has been changed drastically by the latest ordinance since the GoB has effectively assumed operational control of GB as in the case of the public enterprises. As worldwide history would have it, enterprises operated by governments are rarely the most successful ones. Considering the dismal record of the GoB operated enterprises in particular, all well-wishers of GB, especially the vast army of member/borrowers, have good reasons to be terrified about the future of GB. Even greater than the risk of poor management by the GoB is the risk of instability in the GoB management goals, principles and priorities as the GoB regimes change or the preferences of the same regime shift. As a matter of fact, the latest ordinance itself demonstrates how the preferences of the same GoB regime can change abruptly and dramatically.

In this context, one argument to justify the assumption of operational control by the GoB is that, in the absence of Dr Yunus, the nine representatives of the member/borrowers (in the thirteen-member Board of Directors including the GoB appointed Chairman) do not have the necessary qualification and wisdom of making important decisions such as the selection of the Managing Director. And this could indeed be the case with a specific set of the nine representatives. However, such possibilities always exist in any shareholder owned corporation anywhere in the world where the Directors are elected by the shareholders. If at all, the representatives of the GB member/borrowers perhaps command more direct experience and knowledge of the micro level challenges and prospects of the microfinance bank than the elected directors in a typical corporation. Further, in countries with poor literacy rate like that of Bangladesh, democratic governments are elected by the popular support of voters who do not have any more qualification and wisdom than the member/borrowers of GB.

Shouldn't this be taken to mean that the collective wisdom of a large body of electorate, albeit of questionable wisdom at the individual level, is a better choice than the greater individual wisdom of a select few?

To conclude, the unique institution of GB is no more. The member/borrowers and the people of Bangladesh are left helplessly pondering if their prized institution could remain the pride of the nation and for how long.

Mo Chaudhury is Professor of Practice in Finance at McGill University, Montreal, Canada. His 27-year experience includes teaching and research in finance at reputable universities in Canada and USA and financial risk management of two large financial institutions based in USA.

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