By Emily Wax
Washington Post Foreign Service
Saturday, January 15, 2011; A08
NEW DELHI - In the latest crisis to hit the global microcredit industry, the Bangladeshi government launched an investigation this week of Nobel Peace laureate Muhammad Yunus's Grameen Bank, whose microfinance - or small loans - model was once hailed as revolutionary and replicated worldwide.
The government authorized the probe last month after allegations surfaced in a recent Norwegian documentary that, in the 1990s, a portion of $100 million in aid money from Norway and other countries was transferred from Grameen Bank, which Yunus founded, to one of 30 companies he controls in order to avoid Bangladeshi taxes.
It was also alleged that Grameen used aid money to benefit other bank operations unrelated to microfinance. Yunus denies the allegations.
A Norwegian investigation last month absolved the Bangladeshi economist of any wrongdoing, saying the issue was resolved after the money was traced. Yunus, 70, told reporters last week that he welcomed the Bangladeshi inquiry as an opportunity to "bring the truth to the citizens of Bangladesh as soon as possible."
The investigation comes as other governments are scrutinizing the microcredit industry following reports of wildcat loans, sky-high interest rates and coercive debt collection sinking borrowers - many of them women - into financial quicksand. In neighboring India, alleged abuses of the country's $6 billion microloan industry is blamed for dozens of suicides by defaulting borrowers.
"The lobbying against Professor Yunus seems baseless, but there are larger problems here. It's a smaller version of the American mortgage crisis, with no sound risk management and a drive to pursue growth at any cost," said Vikash Kumar, managing director of MicroFinance Focus, an online magazine that tracks the industry. "This scrutiny had to happen. The industry is in a period of correcting itself."
Some observers say the Bangladeshi investigation of Yunus is politically motivated, led by Prime Minister Sheikh Hasina, who was angered when the economist tried to set up his own political party in 2007. Yunus later abandoned the idea, saying he wasn't cut out for the rough-and-tumble politics in the country of 140 million people.
A shaggy-haired former economics professor, Yunus first came up with the idea more than 30 years ago of providing small loans to the poor so they could buy a cow or a sewing machine or a small shop. His first loan of $27 came from his own pocket and went to a group of rural women who made bamboo furniture.
Known as "the Banker to the Poor," Yunus won the praise of prominent anti-poverty campaigners such as U2's Bono and former president Bill Clinton and was awarded the 2006 Nobel Peace Prize.
Yunus became a folk hero to Bangladeshis, who wrote songs about him and revered him for changing the face of a nation better known for cyclones, floods and famines.
Alok Prasad, chief executive of the Microfinance Institutions Network, an Indian industry association, cautioned against dismissing microcredit completely because of abuses by a few companies.
"It's human nature to look for profits," he said. "The real issue is that many poor people still need these services. This industry is going through a phase, and hopefully we will come out stronger."