Norway clears the bank of fund anomaly allegation
Norwegian Minister Erik Solheim yesterday said Grameen Bank had neither embezzled Norad fund nor used the money for unintended purposes.
The minister for environment and international development also said the microfinance institution was not involved in corrupt practices, according to a press release on the website of the Norwegian foreign ministry.
The remarks came after the Norwegian Agency for Development Cooperation (Norad) on Tuesday submitted a report on the Grameen Bank’s alleged fund transfer to one of its spin-off organisations.
He had earlier requested Norad to prepare a report on it following the broadcast of a series of documentaries on a Norwegian TV channel.
“According to the report, there is no indication that Norwegian funds have been used for unintended purposes, or that Grameen Bank has engaged in corrupt practices or embezzled funds. The matter was concluded when the agreement concerning reimbursement of the funds was entered into in May 1998 under the government in office at the time,” said Erik Solheim.
In an instant reaction, Grameen spokesman Mohammad Shajahan told AFP, “We are very happy that the actual proof (of Grameen’s innocence) has come to light and we hope this will end all debate about Grameen.”
The microfinance institution has all along maintained that the transfer of aid to Grameen Kalyan was legitimate and done to minimise tax on the money.
Norad’s report shows that Grameen Bank transferred a total of NOK (Norwegian Kroner) 608.5 million to its sister company Grameen Kalyan in 1996. Norway’s share in it was approximately NOK 170 million.
The Norwegian Embassy in Dhaka reacted immediately as soon as it came to know about the transfer in 1997. In the embassy’s view, the transfer was not done in accordance with the agreement. The matter was raised before Grameen Bank. Following negotiations, it was agreed in May 1998 that NOK 170 million was to be transferred back from Grameen Kalyan to Grameen Bank.
The issue came to the fore recently after Norwegian National TV, NRK ran a series of documentaries early this month on micro-credit with mentions of Grameen’s transfer of funds to Grameen Kalyan.
On December 3, Grameen Bank in a statement denied any wrongdoing and said it had transferred $96 million of aid to Grameen Kalyan and had it back as loan the same day to enhance funds for micro-borrowers.
Nobel Laureate Prof Muhammad Yunus, founder of the bank, has defended himself saying this had been done to ensure maximum transparency and responsible use of the Bank’s revolving fund.
The whole episode took place about one and a half decades ago. And then it was presumably ironed out, as the documentary showed a compromise had been reached concerning transfer of the funds Norway granted to Grameen Bank. Under the agreed compromise, 170 million Norwegian Kroners was transferred back to the Bank.
Some local media and an online news agency picked up the issue. They gave a new twist to the event alleging that Yunus had “siphoned off” the fund.
ALLEGATIONS AGAINST GRAMEEN BANK
The documentary claimed the Norwegian embassy in Dhaka at a meeting with the bank on December 3, 1997 learnt about the May 7, 1997 agreement between the Bank and Grameen Kalyan. The deal was made effective on December 31, 1996 for transfer of funds of Tk 3.914 billion.
In a letter to Yunus on December 15, 1997, the embassy said: “In line with the agreement, Grameen Bank transferred all funds accumulated up to December 31, 1996 received from donors for revolving funds, to Grameen Kalyan, which on the same date transferred the amount to Grameen Bank as loan.
Of the amount, Tk 1.927 billion was related to the revolving funds for housing loans. Grameen Kalyan is in fact a spin-off created in 1996 by Grameen Bank, which set up an internal fund called Social Advancement Fund (SAF) by imputing interest on all the grant money it received from various donors.
SAF has been converted into a separate company to carry out social advancement activities such as education, health and technology among Grameen borrowers. It has 30 health clinics across the country. Most of these are attached to Grameen Bank branches.
The letter, signed by Ambassador Hans Fredrik Lehne, said: “The agreement concerning these transactions has not made provisions for any interest rates to be charged for this part of the loan, nor any terms of repayment.”
The agreement was signed between the governments of Norway and Bangladesh on November 30, 1994 to support Grameen Bank’s Phase IV project.
Annex 1, clause 4 of the agreement said: “The amount of the Grant used for housing loans will be used as a revolving fund.”
The Norwegian embassy was concerned that it had not been informed about the agreement between the two organisations. It said, “The agreement was contrary to the quoted clause of the agreement between the governments.”
It observed that the Grameen Bank accounts as of December 31, 1996 did not reflect any revolving fund for housing loans in operation under the Bank.
The embassy said “The ownership of Grameen Kalyan is of another nature, and Norway has not entered into an agreement with Bangladesh to provide funds to Grameen Kalyan for lending to Grameen Bank”.
“The agreement has further left uncertainty about future repayment of the loan to Grameen Kalyan, since it is not regulated by the agreement.
“The agreement is also silent about Grameen Bank’s use of the loan from Grameen Kalyan.”
In the light of it, the embassy considered the agreement between Grameen Bank and Grameen Kalyan “as a change which affects two agreements between the two governments to support Grameen Bank.”
It requested Yunus to explain in writing “why Grameen Bank entered into the agreement with Grameen Kalyan, and of the consequences for the owners of Grameen Bank and the beneficiaries of the housing loans.”
GRAMEEN’S RESPONSE TO ALLEGATION
Immediately after the report, Grameen in a statement said there was no wrongdoing in the agreement between Grameen Bank and Grameen Kalyan.
The Grameen Bank Board made the decisions with due deliberation, good faith, and good intentions to benefit the poor. The actions taken by the Board were viewed as the best use of the funds at the time and a way to ensure Grameen Bank would remain financially accountable for the money and that the borrowers received the most possible benefit from donors’ grants.
For the grant that Grameen Bank received from Norad and other donor agencies under its 3rd extension phase, Grameen Bank and donors agreed that a 2% interest rate would be fixed on the grant and that interest would be used to create a Social Advancement Fund (SAF) for the welfare of Grameen Bank borrowers and employees. “The creation of SAF was our suggestion, donors happily agreed to it.”
Grameen Bank believed that if the SAF was kept within Grameen Bank and managed by the Bank then it would not receive the attention it deserves. The core activity of Grameen Bank, the lending program, would always get precedence. Grameen Bank may not pay sufficient attention to create welfare-based programmes for its members and employees.
Moreover, Grameen’s tax exemption period expired on 31st December, 1996. At that time it was uncertain whether the government would extend the tax exemption period after 31st December, 1996. If the government would not extend the period, the contribution to the Social Advancement Fund as expenses would not be considered as an expenditure of Grameen Bank. As a result, 40% tax would have been imposed on contribution to Social Advancement Fund. It might compel Grameen Bank to reduce or stop charging 2% interest on revolving fund to contribute to SAF, which would be a violation of the agreement with donors. “Prof Yunus explains this in his letter dated January 8, 1998 which we attach with this statement.”
Under these circumstances, the need for a new organisation emerged. This led to the creation of Grameen Kalyan as the dedicated organisation to utilise the interest income.
Empowered by a board decision and executing an agreement between Grameen Bank and Grameen Kalyan under which, an endowment to the extent of Tk 3,917 million and 14 thousand was created by simultaneous notional “transfer” of money. Grameen Kalyan was never given the control and possession of the fund. This simultaneous transfer and Grameen Bank receiving it back in the form of a loan, created an opportunity to charge interest on this loan. That interest income was earmarked to finance borrowers under Social Advancement Fund (SAF) as agreed by the donors earlier within the Bank. It was a financial innovation to benefit the poor. Grameen Kalyan received 2% percent interest on the money. This money was to be used to provide education and other services to the borrowers and employees of Grameen Bank.
The actions taken by the Board, which is comprised of 9 elected representatives of Grameen Bank borrowers, and three senior representative of the government, were viewed as the best use of the funds, a way to ensure Grameen Bank would remain financially accountable for the money while still ensuring that the borrowers received the most possible benefit from donors’ grants. Afterwards not only Norad’s money, but the 100% of all donor’s money to the extent of Tk 3,474 million and 501 thousand was “transferred back”, from Grameen Kalyan to Grameen Bank, although the money was always in the Grameen Bank’s account. Only SAF fund money amounting to Tk 442 million and 512 thousand remained with Grameen Kalyan as it was created out of the interest.
Some print and electronic media reported that Grameen Bank transferred Tk 7 billion to Grameen Kalyan, which is absolutely false. The Bank transferred to Gameen Kalyan Tk 3,917 million and 14 thousand as mentioned before and transferred back Tk 3,474 million and 502 thousand, which is stated earlier. These can be verified through Grameen Bank’s annually audited accounts.
“If we convert the aforesaid amount at the prevailing exchange rate of 1996, then the ‘transfer’ stands at about US$ 96 million and the ‘transfer back’ stands at approximately US$ 85 million.” Thus all the donors’ money was transferred back and only US$ 11 million remained with Grameen Kalyan as it was created out of interest. So the report where it mentions that Grameen Bank transferred US$ 100 million and transferred back only US$ 30 million is completely false.
All necessary entries had been taken in the books of accounts of Grameen Bank to replace the transfer, though no physical fund transfer took place, as the fund was with Grameen Bank all along. The fund in question never went out of the Grameen Bank’s account and the question of Prof Yunus siphoning this amount is false and baseless. All these talk about siphoning off are just empty words for sensationalism.
According to the management and board of Grameen Bank, there was no violation of any provision of the agreement with Norad. It was a matter of differing views on the subject. Norad considered it a departure from the provision of the agreement, while Grameen Bank thought it was done within the agreement. “Grameen Bank did not want go into battle on this issue and so jeopardise our excellent relationship. Grameen Bank reversed its decision and restored the status quo.”
The concerns brought up by Norad and the Norwegian government were treated with the utmost seriousness by Grameen Bank and Prof Yunus, and both sides worked to resolve the differing interpretation of a clause in their initial Agreement and arrived at a solution in a satisfactory manner. By restoring the status quo the matter was amicably resolved. It never came back since then. None of the parties involved felt aggrieved.
This is an excerpt from the Norwegian Embassy’s letter dated 26 May 1998: H.E. Ambassador Hans Fredrik Lehne and Einar Landmark wrote, “The Embassy highly appreciates your cooperation in solving this issue, and is pleased to have arrived at a solution which is satisfactory for Grameen Bank as well as the embassy”.
Reports gave the impression that these transactions were somehow secretive. There was nothing secretive about them. It was a matter of honest disagreement.
