Following the publication of the book I have decided to begin a blog to update readers of more recent developments in the murky world of microfinance. Much news, particularly that which challenges the mantra of microfinance, receives very little airtime. I will attempt to present the untold side of the microfinance story, in my traditional, blunt and direct style. However, as with the book, I will attempt to present a balanced view of the sector: good microfinance can and does exist. It’s just extremely rare.

Ramesh Arunachalam, a well-known Indian blogger, has picked up on a number of topics raised in the book. One in particular seemed a worthy first entry for my blog.

Silence is not necessarily indicative of guilt. The right to remain silent is imbedded in the human rights of an ethical nation. In the context of my book the fact that an entire industry is remaining silent is unusual, indicative, even mysterious, but it does not necessarily constitute guilt. Kiva were asked to attend a radio interview at KALW which focussed on the peer-to-peer market and declined the offer. Two callers, who openly state their CEO positions at other MF operators, did call in and support the claims of the book (Zidisha and Opportunity Network).

However, with regards the claims of Deutsche Bank, there are at least two additional angles to consider, one of which was edited from the book for brevity, and one which has occurred subsequently:

1) Asad Mahmood asked to speak to my wife after the original call (pages 154-155) to plead with her to persuade me to back down. He had previously called her privately with the same goal. His desire to cover this up was clear and repeated. To what extent this was for genuine concern for my welfare, and to what extent this was to protect the interests of Deutsche Bank and the creditors to LAPO will never be able to be proved concisely. Intent is hard to prove. Facts speak for themselves.

2) Deutsche Bank has recently acquired 9.15% of the shares of Indian MFI SKS, which is a bank I question substantially in the book. It would be hard to defend any claim that Deutsche Bank were unaware of the claims about SKS given the adverse publicity the institution has received. Criticism involves the IPO process and personal enrichment of a few individuals and private investors; abusive debt-collection practices, leading to explicit mention in the SERP report regarding client suicides; and most recently, “massive problems” with their life insurance practices, amongst other criticisms. Deutsche presumably found such factors compatible with their ethical practices.

Therefore, I believe that there are genuine concerns about the role of Deutsche Bank in the battle to reduce poverty. I believe there are valid reasons to support the case that their due diligence is not as thorough as it could be. I believe there are fundamental contradictions between the claims made in the SMART Campaign (which Deutsche Bank endorse and support financially) and Deutsche Bank‘s subsequent actions. I believe that the MIVs are largely (not entirely) responsible for a significant part of the adverse activities of some of the less scrupulous MFIs globally, not simply in India, by providing fuel for the fire and turning convenient blind eyes when it suits them.

MIVs are caught between a rock and a hard place: if they admit they knew what was going on, they may be accused of acting unethically or in contradiction to their claims and assurances made to their own investors. If they did not know what was going on, they are simply incompetent and may be failing in the fiduciary duties to act in the best interests of their investors, the poor, and to obey the principles they claim to espouse. The allegations I make in my book amount to both.

Performing due diligence is a fundamental task of an MIV. Their most rational course of action given this tough decision is to remain silent. Innocent until proven guilty may be their only remaining defence, and silence is the ideal vehicle to maintain this favourable verdict.

I also await a formal response from Deutsche Bank in this regard, and I would like to hear Asad Mahmood’s defence of the claims made in this book, and his explanation of the recent SKS investment. I assumed they may be shaken into acting more ethically in response to the book, but in my personal opinion, the fact that they now invest in an institution such as SKS, and did so via a tax-efficient investing vehicle based in Mauritius, leads me to a personalconclusion:

There is little evidence of concern for the welfare of the poor; profit is the driving force (acquiring equity in SKS following a 90% fall in share price); and their actions are inconsistent either with the best wishes of the investors in their fund (assuming these wishes to be social impact rather than profit) or those of the poor. This is my personal opinion, others are free to disagree.

However, I would like to add that in the grand scheme of the questionable activities of MIVs, I do not find Deutsche Bank to be the worst offenders. Similarly penetrating questions need to be asked to Triple Jump, ASN Bank, Oxfam Novib, Blue Orchard, Citi, responsAbility, Incofin, Calvert Foundation, Grameen Foundation USA and Kiva, amongst others. I eagerly look forward to any denials or rebuttals they may have about the book, but none have been forthcoming. We cannot help but wonder why. Naturally they do not wish to draw more attention to the claims against them.

To examine a comparable case in slightly more detail, Citi were well aware of the underlying situation at LAPO prior to the appearance of Robert Annibale (CEO) in front of the House of Representatives, a hearing I discuss in some detail (pages 164-166). This raises some uncomfortable questions that one might expect Citi to respond to. But they haven’t. Kiva clearly knew about the situation at LAPO some years prior to their eventual withdrawal of the MFI from their website, and yet have failed to comment on why it took so long to respond, and only did they do so when the NYT finally published their name openly (Kiva having taken $5m of funds from the predominantly US general public and lent these, interest-free, to LAPO). Calvert Foundation defended their investment in LAPO repeatedly, and steadfastly stuck to their decision to invest in LAPO, and yet withdrew LAPO some weeks later when the NYT contacted them – why only then? BlueOrchard invested in LAPO after all information was clearly in the public domain and corroborated by two separated rating reports and the NYT, and then issued a press release defending their investment that appeared contradictory to known facts – why? There is little scope for BlueOrchard to claim ignorance, as not only was most information publicly available by the time of their investment, but a former staff member of Deutsche Bank microfinance (Chuck Olson) who was closely involved with LAPO had recently moved to BlueOrchard. The CEO of Blue Orchard was recently replaced without explanation, and some have speculated that this may have been as a consequence of the book. And, perhaps the key question of all, is how do Grameen Foundation USA reconcile the interest rates charged by LAPO (whom they invested in and guaranteed the loans of Citi and Standard Chartered) with the traditional rhetoric of their board director Mohammad Yunus regarding exploitative interest rates? The questions abound – and these only concern one single investment. How many more such cases are there? Is it any surprise these folk are hesitant to open this can of worms?

In the book I discuss the principal-agent problem. The vast majority of investors in the US and Europe have no means to directly invest in microfinance, and thus are obliged to invest via an intermediary: the P2Ps or the MIVs. There is an implicit assumption that these P2Ps and MIVs act in the joint best interests of their own investors and those of the poor. However, economically speaking, there is no a priori reason to assume that this is the case – they will act in their OWN best interests. They largely control the flow of information from the field to their investors, and are unregulated in practice. Therefore it should come as no surprise that such atrocities occur. The principal-agent problem is a well-known problem in Economics, and yet ignored in the MF sector, including in the case where an MIV invests in debt and equity (where conflicts of interest are rampant). In developed countries, where the citizens of those same countries may suffer, this is dealt with by strict regulation (albeit not entirely effectively, so-called Chinese Walls). In the microfinance sector such regulation is absent. Therefore my joint hope in writing the book is a) to restore the interests of the poor to the centre of the equation, and b) to regulate those that facilitate such atrocities.

However, a word of warning: while the call for regulation of this sector may appear sensible to the vast majority of readers, it will be fiercely resisted by those who stand to lose the most were genuine scrutiny applied to their actions, the MFIs and the MIVs. They will attempt to fob the public off with claims of “self-regulation” (i.e. regulation by loyal insiders – see Indian promises of self-regulation after the first, 2006, suicide wave, or the SMART Campaign for a superb example of this; SMART’s main funders: Deutsche Bank and Accion), and issue statements along the lines of “we take the interests of clients very seriously and are striving towards a world without poverty”. Do not be so easily fooled by such spin.

So, a simple message to the P2Ps and MIVs mentioned in the book: have the courage to defend yourselves: we are waiting for you with sturdy, verified evidence and more up our sleeves. Although silence does not prove guilt, the longer you wait the more questions are raised about your true motives and actions. Mine are clearly published for all to read. Now let’s see yours.