I apologise for the recent radio silence from the microfinance heretic. This has not been due to a shortage of items to write about – to the contrary. I have lost track of how many frauds, collapses and scandals there have been in Ghana; some of the Finca data emerging currently is deeply disturbing; India is embarking on the same trajectory that ended in tears in Andhra Pradesh. Media coverage challenging the wisdom of indebting poor people en mass has continued unabated. It seems the tide has turned on microfinance, and the assumption that small loans miraculously alleviate poverty is increasingly treated with scepticism. Greeks are making similar discoveries regarding large loans. Obviously the Kivans are still convinced, but there is little way to get through to fanatics, especially when they refuse to ask basic questions about their beloved intermediary. (As an aside, I found Murakami’s Underground surprisingly insightful regarding the Kivan cult like following!). Kiva’s a drop in the ocean, so not worth expending too much energy on.
There may be some glimmers of hope in the sector. As players are under increasing pressure to demonstrate actual positive impact, things can only improve. Pressure, even if merely reputational, sharpens the mind.
I periodically receive tip-offs, leaked documents, or hear rumours about frauds and failures amongst the MIVs, and to their credit, these have been few and far between these last few months. The only big lament is that Smart Campaign still exists. I spoke to Isabelle Barres in a conference in Guayaquil, needless to say she is not my greatest admirer. I confronted her with the obvious and disappointing observation that their client protection principles fail to address the interests of children, and that microfinance is disturbingly correlated with high incidents of child labour. See Bolivia and Peru for example. However, there was zero scope for negotiation. She did not deny that illegal child labour was taking place, the vast majority in the informal sectors that are the hunting grounds for the microfinance sector, but that including the rights of children is utterly out of the question.
The reasons for this are obvious. Firstly, the microfinance sector is facing huge criticism, and associating it with yet another crime, especially one as sensitive as child labour, is a reputational hit they can ill-afford currently. Secondly, if Smart dared to include child labour in their otherwise watered-down principles, very few MFIs would want to get certified, and that is, after all, Smart’s business. But perhaps the main driver behind their refusal is simply that microfinance depends on child labour. Who else can do the hard work for minimal or zero salary in the typical low-margin, labour intensive, competitive activities that so-called micro-entrepreneurs engage in?
Bolivia is probably the birthplace of Latin American microfinance. Illegal child labour is chronic in the country, so the Bolivian government hatched a remarkable plan to reduce it: legalise child labour. See an interesting article in the Guardian (Bolivia’s child labour law shames us all), which begins:
“It is depressing to hear that Bolivia has become the first country to legalise child labour, reducing the minimum age of employment from 14 years old to just 10. The new law contravenes the International Labour Organisation’s (ILO) minimum working age protocol and is an abandonment of a child’s right to a childhood”.
The legal labour force for micro sweatshops just expanded – paradoxically this is probably good news for the microfinance sector. Smart’s response: children do not require protection. So, ethical investors in Europe, and naïve Kivans, can comfortably lend to micro-enterprises in Bolivia that employ 10 year-olds, and this is entirely legal. In Ali-G’s manifesto for reducing crime, he makes six suggestions: “Make crime legal; Give all da legal aid money to da criminalz instead of da lawyers, then da criminalz wouldn’t have to do da crimes in da first place; Legalize crime; Make it not illegal to do a crime; Make it illegal to not do a crime; Make it illegal to not not do a crime”
The astute reader will observe that Ali-G is a comedian. Smart are actually taken seriously by some people. Meanwhile Truelift, the Wonderbra of the sector, seems to have all but vanished.
The other sad bit of news is that MFTransparency (MFT) closed. I will write about this in detail at some point, but essentially one of the few effective transparency initiatives was no longer sustainable. But what is the concept of sustainability when it comes to transparency? Surely it is a public good? Police forces are not sustainable. In a nutshell, there were too few people out there willing to pay someone to actually report on the actual interest rates paid by the poor. Naturally the insiders publicly lamented this, while quietly breathing a sigh of relief that their dirty laundry will no longer be aired in public. If the Microfinance CEO Working Group were all so distraught at the demise of MFT, how come even they fail to publish their own interest rates on their own websites, leading by example?
However, Finca did reduce their highest interest rates in Zambia from 347% to a mere 95.4%, and Opportunity seem to be phasing out the triple-digit interest rates to some extent. But without MFT these folk can go about their exploitative businesses with even less scrutiny than before. I find it unlikely that MFTs closure is going to improve matters. Once again, the call is for local, sensible regulation and the wise use of interest rate caps to prevent overt exploitation. Interest rate caps of 20% will distort the market and reduce the supply of capital. Interest rate caps of 100% prevent exploitation. And we do not have to look far for examples of where such protections are enforced:
“To prevent usury (unreasonable and excessive rates of interest), some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions outlaw payday lending entirely, and some have very few restrictions on payday lenders. In the United States, the rates of these loans were formerly restricted in most states by the Uniform Small Loan Laws (USLL) with 36%-40% APR generally the norm.”
As Ha-Joon Chang famously documents in his stellar book Kicking Away the Ladder, our suggestions for developing countries are very different to the practices we ourselves engage in currently, and engaged in when we were at comparable stage of development. “Do as I preach, not as I do, or did.”
However, the fundamental reason for my relative radio silence has been work-related. My second book is currently with the editor, and will be coming out later this year. It involved a lot of travel, often to extremely remote regions without electricity, internet or phone coverage. I will write about it shortly.
The second reason is that I have been working on a fascinating project recently in the DPRK. Yes, North Korea. It took a long time to arrange a trip, non-tourist visas are hard to get, and it was certainly intense. As radical as it sounds, in some regards the country is ideally suited for well-run SME finance (micro less so). Regardless of the reasons, the inhabitants of the country have been obliged one way or the other to be highly entrepreneurial. It is tightly regulated, to put it mildly, so the likes of Accion could not get away with their standard practices. In fact, Americans are less welcome in the country, which in microfinance is possibly not a bad thing – for a country that is only recently making the first tentative steps towards opening up its financial sector, why on Earth would they seek wisdom from their arch rival and instigator of the recent financial crisis? The reception of North Koreans to the Compartamos case study was one of utter bewilderment – how could a government possibly allow a private company to treat poor Mexicans like that? It’s a fair question, somehow permitted under neo-liberal free-market ideology, even with zero evidence of effectiveness. It’s fashionable to criticise North Korea, and I do not wish to enter into that debate, but when they look at the likes of Compartamos with utter disgust, who is the maverick? It took a while to actually explain how an interest rate can go above 100% – the concept is utterly unfamiliar to them – if only this were so rare a phenomenon in the rest of the world.
Anyway, I have dug up some new salary data, which is sobering. Even if the poor are getting a raw deal, some people are pocketing vast salaries. There have been some interesting academic papers recently, and Ramesh Arunachalam’s new book is wonderful, I will review it shortly. The Guardian ran an interesting piece on microfinance recently, written by a professor from the LSE – worth a read. And while this blog has been relatively quiet recently, I did a post on the Month of Microfinance entitled “The Mystical Lure of Microfinance”, where I try to stand back and explain why it is that we became so enthused with an idea that a) makes little sense in the first place, and b) has proved largely ineffective. A simple question few wish to ask. The inspiration for this piece was from a remarkably simple insight. I was reading some academic article about a wave of evidence suggesting that microfinance is not working, and I wondered “if there is no evidence even now of microfinance working, how did Yunus and Grameen ever get the Nobel Peace Prize in 2006?”
I had naively assumed that in order to win a Nobel Prize you actually have to have done something. Have a look at the following texts, from the Nobelprize.org website:
The Nobel Prize in Physics 2013 was awarded jointly to François Englert and Peter W. Higgs “for the theoretical discovery of a mechanism that contributes to our understanding of the origin of mass of subatomic particles, and which recently was confirmed through the discovery of the predicted fundamental particle, by the ATLAS and CMS experiments at CERN’s Large Hadron Collider”
The Nobel Peace Prize 2006 was awarded jointly to Muhammad Yunus and Grameen Bank “for their efforts to create economic and social development from below”
There is a subtle difference here: Englert and Higgs came up with an idea in 1964 that was potentially important, but was not proved correct for 50 years, at which point they received the prize. Yunus merely displayed “effort”. Nice idea, but surely the prize cannot be awarded until it is actually proved to be correct with empirical evidence – there is none, and nor do the Nobel Prize folk claim otherwise. This got me thinking – to what extent was this prize awarded on ideological grounds rather than based on actual evidence? And the UN declared the previous year, 2005, the Year of Microcredit. On what grounds?
Food for thought.
Meanwhile, a fascinating article came out (alas, behind a paywall), by James K Galbraith and Will Butcher at the University of Texas at Austin: “Microfinance Control Fraud in Latin America”. Control Fraud is an economic concept coined by William Black in his famous book The Best Way to Rob a Bank is to Own One. The authors of the article eloquently demonstrate that the core criteria that facilitate control fraud in other sectors are almost unanimously present in the microfinance sector, and we are all too aware of tangible examples of such frauds already. Is this just the tip of the iceberg? I am studying this in more detail now and will comment on it shortly. And finally, Susanne Soederberg’s book Debtfare States and the poverty Industry is a fascinating glimpse into the rise of mass indebtedness – a little heavy going, it’s an academic text, but she excellently places the love affair with debt into a geopolitical and historical perspective: “the illusion of financial inclusion”.
In the meantime, apologies once again for the delay in writing. I’ll make up for it by digging up some juicy dirt and reviewing some of the bright spots.
