I’m often asked “who are the good guys?”.

It’s fair to say my reporting is somewhat skewed towards the less-than-ethical players, but is the entire sector rotten? I like to think not. I’m hesitant to say “XXX fund is a good one” for a variety of reasons, but I know very few to which such a phrase could possibly apply, and it only takes one outlier to undermine my case. Funds which are often referred to as “clean” include Opportunity International, Vision Fund, Cordaid, Oikocredit, Triodos etc. I don’t know all these guys, and my recent post shed some doubt over at least one of Oikocredit’s investments. There may be other possibly “clean” funds, this list is not exclusive, but I thought I would have a sniff around the so-called “good guys” after receiving yet another email this weekend along the lines of “is XXX a good fund to invest in or work for”?

It’s quite hard to investigate microfinance funds, because they generally disclose very little information about their portfolios. Given that there is clearly much to be ashamed of in the microfinance sector at large, unwillingness to disclose information about a portfolio makes me nervous: if your MFIs treat their clients fairly, have an impact on poverty and charge reasonable interest rates, why not list them on your website? Why not state the APRs charged? Why not provide evidence of an impact of poverty rather than a few isolated success stories and some meaningless statistics like “number of women served”? I don’t care how many women have been “served”, I want to know how many women have been “helped”, and I want proof of such claims. For all the rhetoric about transparency that these funds bang on about, they are remarkably non-transparent themselves. Funds are generally un-regulated, un-rated, opaque and provide much of the fuel for the fire that is currently raging in the microfinance sector.

I was asked specifically about Opportunity International in a talk at Politics and Prose in DC, to which I replied that they were one of the better operators, I was hard pressed to think of a scandal involving them, but that I hadn’t had a thorough look. I would place Cordaid in the same category. Until now.

When a negative documentary about microfinance came out in Holland a few months ago (not the KRO-Reporter documentary based loosely around my book), Cordaid jumped to the defence, distinguishing themselves from such outrageous activities. They acknowledged that extortionate interest rates exist, but they avoid them like the plague apparently. They operate in the most challenging regions, often post-conflict. The interest rates their MFIs charge are typically 2% to 5% per month. This may sound reasonable, but in fact if these are flat rates and there are fees and forced savings, this can amount to well over 100% per year in APR terms, but let’s put that issue aside until more information is forthcoming. They expressly state that the alternatives faced by the poor they serve would be the famous evil moneylenders who may charge up to 10% per month. We’ve heard that argument before – we’re cheaper than the evil moneylender so therefore we’re ok. Anyway, they also perform a rigorous social impact assessment apparently, with their Social Performance Assessment Tool, which covers topics such as over-indebtedness, unfair debt collection practices, functional complaints procedures offering clients some form of protection etc. Naturally they endorsed SMART Campaign which specifically encourages reasonable and transparent interest rates. They’ve been in microfinance for 22 years and have seen that it works, despite the fact that most academics have somehow missed this, but that’s a story for another day. And they were one of the early funders of Chuck Waterfield’s magnificent MFTransparency initiative, which publishes the actual rates charged by MFIs.

So, they must have been a little disappointed when MFTransparency published the interest rate data on one of their partners in Tanzania – Tujijenge:

The black line in the graph shows the average APRs charged by MFIs in Tanzania (very small loans are generally more expensive than larger loans). The green bubbles are Tujijenge’s various rates charged, almost all of which are above the national average. Their most expensive loan, the Group Loan, is quoted as 36% per year, but in fact costs up to 97.7% a year – quite a margin of error. However, when the forced deposit is taken into account, the maximum rate rises to an impressive 150.6%. I’m not one to quibble about a few percentage points here and there, but if someone tells me an item costs $36 but it transpires that it actually costs a slither over $150, I may raise an eyebrow.

In a previous blog I discuss this questionable MFI at some length, but if I may repeat just one highlight from the social rating of Tujijenge:

“[1] Despite the fact that over-or cross indebtedness is high amongst the clientele, no specific measures are put in place to limit the risk; [2] Information given to client is not sufficient to guarantee transparency on pricing as clients are not given the effective cost of the loan and documentation of transaction is not given to all members of groups; [3] Current policies and procedures do not sufficiently prevent the occurrence of inappropriate collection practices, which have been noted in the recent past.”

Read the blog for a fuller description of quite how flawed this MFI is. It seems to refute most of Cordaid’s claims. Anyway, the bottom line is that I struggle to name a decent microfinance fund. It is facile to tear to pieces the likes of Triple Jump, Oxfam Novib, Grameen Foundation USA, Deutsche Bank, Citi, Standard Chartered, Calvert Foundation, Incofin, Blue Orchard, responsAbility etc. In fact, it is so easy to criticise these guys it is not even that interesting anymore (actually that’s not true, the forthcoming exposé on Citi will be eye-opening). Opportunity, Triodos, Oikocredit, Cordaid etc. are generally off the radar, but these latter two have recently emerged as somewhat hypocritical. Everyone makes mistakes, and I do not doubt that the majority of their investments are in fact to good, clean, ethical MFIs struggling to help the entrepreneurial poor with affordable credit.

But if their due diligence is so sloppy as to allow the likes of Tujijenge to slip through the net, how many other such cases are there? As long as one has the ability to read a rating, you can spot the flaws with such institutions without leaving your armchair, and Cordaid managed to miss it. Are there other such cases in their portfolios? Probably, yes – I’ve hardly had a look yet, but within minutes came up with one that has been openly accused inappropriate debt collection practices, encouraging over-indebtedness, a total lack of transparency over interest rates and charges some pretty eye-watering interest rates. I wasn’t even looking for trouble.

I went to the Planet Rating website to see if there was an MFI with an even worse rating for “client protection and ethical finance” than Tujijenge, and to my horror there was: Socremo in Mozambique. I don’t have access to all the ratings, and not all MFIs are rated, so this is not rigorous analysis, but it does look like Tujijenge is approaching the bottom of the barrel. Tujijenge’s full social and performance ratings are freely available on the Planet Rating website. Planet Rating publish all ratings 2 years after publication, which I consider to be a true act of transparency and applaud them for this.

Now, even more enlightening is to observe what these funds do when they are confronted with evidence of malpractice. I am still awaiting a response from MyC4 about Tujijenge, and will close my account at MyC4 at the end of this month if no credible response is given. Kiva’s founder and their CEO, Matt Flannery and Premal Shah asked me to have a chat when I pointed the facts about Tujijenge out to them, but then cancelled the call and failed to arrange another. Given the farcical nature of Kiva I cannot be bothered to pursue them – see my previous posts on this institution (or almost any intelligent comment on the institution). Let’s see if Oikocredit or Cordaid step up to the plate.

So, my conclusion remains that not all microfinance is bad. I know some decent individual MFIs. But when it comes to the microfinance funds, I still struggle to think of a good one. Even the ones I thought were clean appear a little dubious. So, is it much surprise that academics are increasingly challenging whether microfinance works at all as a poverty alleviation tool when we have these jesters in charge of the financing of the sector? I stated in my book that Mongolia seemed like quite a good country overall for microfinance, and then along came an EBRD paper on Mongolian microfinance stating the opposite. I quote excerpts from a summary:

“The results at least partially support the growing body of evidence that microfinance doesn’t make much of a dent in poverty, as incomes remained static in both loan groups. It might just be too early to observe significant change…. But more and more research suggests that micro-finance is no poverty slayer, contrary to early optimism…. As regards business creation and household well being (measured by food consumption), the group loans were more effective…. For individual loan recipients, no impact was observed. Much of the lending didn’t go towards small business creation. In fact, half of the money went to consumer items.”

It is really dangerous saying anyone is honest in this sector, or that any fund is good, or that any region has shown genuine progress, because you just risk being ridiculed. If anyone knows of a clean fund, please tell me, I am desperate to find one. I do not go to the extent of some critics of microfinance, who reject the entire concept as a joke. I have seen a few isolated cases to prevent me jumping to this conclusion. But when I look at the mainstream funds, listed above (and throw in the P2Ps as well), yes, I consider most of the sector to be a joke, but it is not necessarily because microfinance doesn’t work. It is because the institutions we entrust our funds to (who act as the gatekeepers between Joe Smith in Oregon with some spare cash, and Maria Gonzalez in remotest Paraguay who’s looking for a loan) are invariably dishonest. Please, prove me wrong. If you have a tip of a fund that you think is actually honest, leave a comment, and I will sniff around.

To date my advice to anyone considering investing or donating in a microfinance fund is simply: don’t. I hope to revise this at some point, if I stumble across a good one. Next on the list is Triodos, then Opportunity International. I finish with Damian von Stauffenberg’s legendary quote to the House or Representatives on the topic of the microfinance funds:

“… the microfinance funds on the whole, with some exceptions are not terribly transparent, if you go into their websites you will find beautiful pictures of what’s going on in Bangladesh or in a poor country but you will not get the kind of information that you would take for granted in any fund that you invest in here in the U.S., and that’s worrying, if people invest because its microfinance and microfinance is good and Muhammad Yunus is for it, that is sowing the seeds for trouble, and so I think yes, a lot more transparency is needed in the field of microfinance funds” (my emphasis)