It’s a question I often face. I’m apparently happy to criticise, often in gruesome detail, but slow to praise. What praise there is in the book is either anonymous or undermined: I suggested Mongolia was a good country for microfinance in general, although this has been challenged. Plus I have to avoid conflicts of interest. But I accept this criticism as a valid point. So, I’ve been on a quest to find a decent microfinance fund (MIV). Below I quickly scan Dutch MIV Triodos.

There are hundreds of MIVs out there, in the peak of the hype they were springing up like mushrooms in a damp forest. But which funds are any good? Obviously there was no point examining the “usual suspects” (BlueOrchard, Oxfam-Novib etc), but ask around and some candidates quickly emerge: Opportunity International, Oikocredit, Cordaid, Triodos. I don’t know any of these funds well, so no conflicts of interest. I’ve never worked for them, even as a consultant, although I have worked with some of the MFIs they’ve invested in.

I crossed Cordaid and Oikocredit off the list when I discovered they had invested in Tujijenge. This is not simply a “slightly” questionable MFI, in my opinion, but a deeply flawed one. Have a look at the Planet Rating social ratings – as far as I have been able to discover only one MFI ever has scored a lower rating for “social performance and ethical finance” than Tujijenge. The Mozambican MFI Socremo managed to score a staggering “zero plus”, the only notch possible below Tujijenge’s “one minus” (out of five). Extortionate interest rates, questionable practices… about the only positive thing one can say about Tujijenge is that it is sufficiently small that the damage is limited to under 20.000 clients or so, but still, this doesn’t bode well for Cordaid and Oikocredit (or for Kiva and MyC4, two P2Ps that pump money from the naive general public into this institution).

That Oxfam Novib had also supported Tujijenge comes as little surprise from an MIV that appears almost allergic to decent MFIs.

Admittedly the Planet Rating reports are out of date (2010), but the fact that Tujijenge hasn’t bothered to obtain a new (and hopefully improved) rating is concerning. Then again, Tujijenge last updated their MixMarket data in 2008. That such an obvious offender can slip through the net suggests either that Cordaid and Oikocredit tolerate such activities or their due diligence is so sloppy as to not detect such activities. Either way they aren’t getting a dollar from me.

I then had a look at Triodos. They put in a good performance in the KRO-Reporter documentary, so I thought I’d check them out in a little more detail. They publish their portfolio on their website, which is a good start, and I can’t remember ever hearing their name associated with any sordid activities. I did a quick scan, and if they passed that, then I’d look a little deeper in the quest for the good MIV. How to separate the wheat from the chaff? This is not a rigorous analysis and data is sparse, so I used some quick, subjective filters:

• First, the availability of data on the MixMarket and in rating reports is interesting.
• Then a quick scan at MFTransparency, to see how the MFI’s interest rates compare to its peers in that particular country – but not all MFIs and countries have yet been scanned, so this is sporadic.
• Failing decent APR data from MFTransparency I use the portfolio yield from the MixMarket. Although portfolio yield is flawed as discussed here, it serves some mild function as a broad proxy.
• Are any rating reports available? Some are by subscription only, but even these often publish the first page, with a broad summary.
• Finally I look at the stated return on equity. In Chuck Waterfield’s excellent discussion of extortion and profitability in microfinance he suggests that a return on equity (ROE) in excess of 25% should ring serious alarm bells. I personally think the alarm bells should be ringing far earlier, so I’ll use 20% as a threshold. Google’s ROE was 17.7% in July 2012, to put this in perspective.

Now, some may disagree with these metrics: I am not suggesting that all MFIs that charge reasonable interest rates and are only moderately profitable are somehow clean or contribute to the lives of their clients, I am simply using this as a first filter. Interest rates are easy to measure, and not exploiting clients is a pre-requisite for me, prior to other factors.

Triodos have done 91 investments in microfinance, and I did not analyse all of them. I began with general knowledge of many of these MFIs and a broad idea of which countries are generally problematic.

First, Triodos has done two investments in Mexico:

• Apoyo Integral, portfolio yield of 69.48%, ROE of 22.99%
• CrediTuyo, portfolio yield of 91.86%, ROE of 18.57%

This is a country specifically featured in Chuck Waterfield’s presentation, and note that portfolio yield is an under-estimate of the APR. MFTransparency have not reviewed the APRs of Mexico, so there is no means to work this out, but regardless of this, portfolio yields in excess of 60% to 70% are immediately on my red-list in a country with modest inflation. CrediTuyo’s yield of 91.86% could well be approaching an APR of 150% when VAT and the effects of forced savings are included, but I don’t have the information to verify this. Also, according to the Triodos website CrediTuyo offers business training, so assuming this is free, this ought be taken into account. There is no mention on the Triodos website of the interest rates charged by their MFIs. I would like to see this information, but no MIV publishes this data to the best of my knowledge.  Merely acknowledging who Triodos invested in is, sadly, a novel act of transparency.

Apoyo Integral publishes the interest rates on their website however. The highest stated annual rate (which I shall boldly assume is synonymous with the APR) is 133.2%, although it is not clear if this includes VAT. The lowest rate is 93.7%. In my opinion this is simply extortion. CrediTuyo’s website does not state the interest rates, perhaps not surprisingly.

Some may believe that interest rates approaching 150% are fine. First, we’ll have to agree to disagree on that. Second, my concern is not only with the APRs per se, but whether the MIV is being transparent about the APRs to its investors.

The ROEs of these Mexican MFIs are suspiciously high – both are more profitable than Google, to cite my arbitrary benchmark, for providing a simple, non-innovative product: money. These rates are not illegal, but they are of very serious moral concern to me, and I would ask Triodos to explain the level at which they consider an interest rate to be extortionate. MIVs have an incredible knack of avoiding this question, with an array of excuses. This is unacceptable. According to Chuck Waterfield’s traffic light system these MFIs are firmly in the yellow band.

If we compare CrediTuyo and Apoyo Integral with other Mexican MFIs in MFTransparency’s analysis of ROE and portfolio yields we observe the following:

Apoyo Integral (70%) appears roughly in the middle of the pack, CrediTuyo (92%) a little towards the upper-end but not the most expensive in the country. Isn’t that sad? And these are under-estimates of the actual cost of capital, and exclude the effect of forced savings and VAT.

[Source of both graphs: “Growth, Profit & Compensation in Microfinance: How much is too much?”]

In terms of ROE (19% and 23%), both MFIs are in the middle of the pack again. However, if we compare these ROEs to other countries they remain extremely high. In Cambodia, Peru, Ecuador, Bolivia etc. these would be amongst the highest in the country. The source of this return is simple: the poor. So, regarding Triodos’s investments in Mexico I have some concerns regarding exploitative interest rates. They are not the most exploitative MFIs in the country, but they push the boundary of “affordable credit” to the absolute limit, and these proxies are under-estimates of the total cost to the client. The combination of such rates with relatively high ROEs is enough to make me deeply concerned.

The argument that the high operating costs in Mexico require such high interest rates may be partially true in the case of portfolio yield, but not in the case of such high ROEs (ROE is net of expenses). Some clients may benefit from interest rates of 150%, as some national lottery winners are delighted with the return on their $1 investment. Such clients are cited all too frequently, while those whose businesses do not generate sufficient returns to benefit once such interest has been repaid are less widely cited. In my experience the losers vastly outweigh the winners, and I do not want my money being used for such practices.

The secondary question emerging from these MFIs is whether or not Triodos’s investors are informed of the APRs at which their funds are being lent to poor Mexicans. These rates are not published on the website. Who cares what I think of the rates, what do Triodos’s investors think?

In Tanzania the Triodos investment Finca charges interest rates well above the country average:

Why this institution charges such high rates even on quite large loan sizes is not clear. In my personal opinion this is bordering on extortion. Because “extortion” has not been defined by the microfinance community I cannot state this objectively, but this is my personal view of such rates. We fret in Europe when sovereign governments are expected to pay rates in excess of 7% (“Oh no, Spain will collapse at such rates”). Which Triodos client in Holland would buy a house with a mortgage rate of even a tenth of the rates the clients of Finca Tanzania are expected to repay? Kiva charge entrepreneurs in America 8.5% for a loan, but those south of the border pay 10x this – 85%. It’s okay to charge the poor these rates, apparently, but we would never pay such rates.

Nigeria is a country I am generally weary of after the dodgy experiences with LAPO, and Triodos did one investment here: Grooming Center. Alas Grooming publishes almost no information on the MixMarket (which is an alarm bell – no ROE, no portfolio yield, but 140% self sufficient). However, it has been rated by MicroRate. The Social Rating awards 3.5 stars out of 5: “High social performance, with clear commitment to the very poor. Relatively high prices. Monitoring of social performance to be improved”, so that is not so bad, perhaps a little pricey.

According to the Performance Rating the portfolio yield is 45.5%, but this may not include the effect of forced savings, so I would take this with a pinch of salt. It gets a B-rating overall, which is not bad. One slight concern is the phrase “Collection of deposits without being regulated” – that old trick once again. Triodos might want to find out if Grooming is in fact legal. But, overall, this may be an acceptable bank given the region. The social rating is better that SEAP (3 stars) and the same as DEC (3.5 stars but from 2008 report), the only other rated Nigerian MFIs.

But, Grooming’s ROE is a whopping 51.1% according to the rating report, far exceeding MFTransparency’s alarm bell of 25%, and very similar to that of Compartamos. So, I’m afraid to say, my personal opinion is that this is excessive, and I do not have much faith that this portfolio yield includes the full costs to the client. So, I would be very concerned to discover my savings were used to invest in such an institution and would question Triodos very closely about this.

Peru: MiBanco has been criticised, and is part of the Acción cult, who are not my favourites since their Compartmos IPO, but MiBanco has an ROE of 20.47%, just within my red zone and in the upper-end of MFTransparency’s yellow zone. The portfolio yield of 25% appears reasonable, and it has a PAR30 of 7.21%, which is a little high. MiBanco is not rated, presumably because it’s so huge it doesn’t need a rating. Extortion doesn’t seem to be a charge one can levy against MiBanco, although its profitability is pretty high and it could certainly afford to reduce interest rates should it wish to improve its impact on the poor. But then it would be less profitable.

The December 2011 Copeme report (hard-copy only, page 47) lists the interest rates of all the main Peruvian players, and MiBanco’s average rates fell from 40.93% to 36.55% from December 2010 to October 2011, making it one of the cheaper MFIs in Peru. Eyeballing the average rates it appears the majority are in the low-40s (raising the obvious question: why do Mexican MFIs charge such dramatically higher rates?) But, overall, of these 5 MFIs detected in a quick scan based on publicly available information, MiBanco seems the least questionable.

Conclusion

In general the Triodos portfolio appears to be one of the better ones out there, and although this analysis is quick, incomplete and focuses only on extortionate interest rates combined with high ROEs, there seem to be relatively few problematic MFIs. However, in my personal opinion some of these APRs and ROEs have crossed the red line. I would not personally invest in Triodos because I believe that APRs over 100% do more harm than good to the poor, particularly when offered by highly profitable MFIs. I do not doubt that some poor clients may benefit for short periods with such loans, but as a scalable poverty reduction tool I find such rates preposterous. Even if Triodos did not invest in such MFIs, this would not encourage me to immediately write them a cheque. I would merely move to the next level of analysis.

But it is not my personal opinion that matters, but those of Triodos investors. They are likely oblivious of these facts. Therefore I would ask Triodos to simply publish the ROEs and APRs of all their investments transparently and openly, and the Triodos investors can decide for themselves whether this is consistent with their views of extortion. If the Dutch public find APRs of over 100% acceptable, then Triodos has nothing to fear. Triodos are rare in that they publish their list of investments – try finding that on the Triple Jump website. And this data is not hard to obtain – they presumably discover the APRs and ROEs as part of their due diligence procedures, so why not publish them, if they’re not secretly ashamed of them? That would be real transparency. Chuck Waterfield publishes his interest rate calculator on his website freely, so I see no obstacle to publishing these rates. It might take 20 minutes or so, but I am sure investors in MIVs would appreciate this.

I would also like to see a firm statement from Triodos placing a limit on the APRs they are willing to tolerate. Even if they set the hurdle high – “we will not invest in MFIs that charge APRs in excess of 200%”, at least a limit is set. And at such a rate they could still manage to invest in Compartamos, just about!

This information presented here is all publicly available already. Why not collate this on the Triodos website in an act of true transparency? Defining the “best” MIV in the world is a subjective opinion, but defining who is the “most transparent” is more objective. Transparency hurts those with something to hide, and Triodos appears to have little to hide, so why not place their head above the parapet and be the “most transparent”? This would shine an interesting light on the other MIVs, and in the current climate of suspicion of MIVs, could well attract business away from the opaque MIVs to Triodos – an opportunity waiting to be seized perhaps? The fact that some investors select the ASN Novib fund when the Triodos fund operates in the same country has always been a mystery to me.

None of the serious microfinance offenders appear to be on the Triodos list of investments; the vast majority of their MFIs seem to be fine, given this “light” analysis; and it wouldn’t take much effort for Triodos to improve its transparency.

But the strangest finding of all is that these MIVs bang on incessantly about transparency, endorsing the various window-dressing initiatives and lecturing us in annual reports and conferences on the subject, but there seems to be rather little transparency applied to their own activities. The information is out there if you know where to look, but most don’t, or can’t be bothered.

So far I am yet to find a single MIV that I would invest in, with Triodos the current front-runner. I will analyse Opportunity International shortly. I will end this blog with a favourite quote from Damian von Stauffenberg, a man I respect enormously:

“…. 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 US, 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”

(Testimony to the Subcommittee on International Monetary Policy and Trade of the House Financial Services Committee, January 2010, my emphasis)