Having had a brief look at some of the apparently ethical MIVs, I had a quick sniff around Opportunity International (OI). I briefly commented on their ability to generate astonishing levels of hype and spin, but this is a slightly more analytical examination.

These are owner-operated MFIs, i.e. OI doesn’t simply invest in a selection of MFIs, like a traditional MIV, but actually runs them. This makes it substantially easier to implement the mission from the top down. They have a good reputation, and along with Triodos (a pure MIV), I would probably award them the joint prize of “least evil MIVs in the sector” so far. Most of their MFIs are in Africa, and I couldn’t find much data on the non-African ones. Here are seven of their African MFIs for which reasonable data is readily available (MFTransparency and MixMarket data):

• With the exception of Tanzania, the minimum APRs are defendable. Likewise the portfolio yields are not extortionate, although Mozambique is on the high side.
• The maximum APRs are, in my opinion, extortionate. Ghana and Mozambique have APRs in excess of 150%. I find this unacceptable. None of these countries suffer from hyper-inflation (Ghana’s inflation rate in 2012 is 9.4%).
• The portfolio yield is clearly not a good estimate of the actual APRs paid by the clients. This is because it excludes various costs, taxes and the impact of forced savings. In both Kenya and Tanzania the yield is actually less than the minimum stated interest rates, which is strange. This could conceivably be due to data drawn from different periods. However, the message is clear: do not trust portfolio yields as a proxy for the actual interest rate paid by the poor.
• Not a single one is profitable (as measured by Return on Equity – ROE).

How do these interest rates compare with their peers in the same country? We need to have a benchmark to evaluate each MFI against, and rates vary quite dramatically from country to country. Once again using the graphs from MFTransparency we can compare each OI MFI to its peers. The black line reflects the country average, the various dots are the MFI loan product interest rates for different loan sizes offered:

So, it appears that for the vast majority of loan products of OI’s 7 MFIs listed here charge rates higher than the national averages in their countries of operation. This could be partly justified by the training that Opportunity bundles with its loans, the cost of which is passed to the clients via elevated interest rates. I wondered if their website would provide any insights regarding the rates charged, and indeed, under the FAQ section I discovered the following:

“Like nearly all microfinance organizations, Opportunity International charges interest in order to cover its costs and achieve operational sustainability. As the Consultative Group to Assist the Poor (CGAP) explains, “Administrative costs are inevitably higher for tiny microlending than for normal bank lending. For instance, lending $100,000 in 1,000 loans of $100 each will obviously require a lot more in staff salaries than making a single loan of $100,000.” Interest rates vary greatly around the world and reflect a variety of factors, such as prevailing inflation rates and the local costs of borrowing.”

So, while this offers a standard defence for high interest rates (operating costs), apparently citing a worthy source on the subject (CGAP), not a single interest rate is actually cited. Nor is a range. Nor is a ceiling. Nor, to be fair, are the obviously misleading portfolio yields, which I simply reproduced from the MixMarket. However, personally I do not find this transparent. Nor do I find it compatible with the claims of the Smart Campaign (reasonable interest rates, transparent pricing, blah blah), although Smart refer mainly to transparent pricing information for the microfinance clients, not the donors and investors in OI.

Most of Opportunity’s MFIs are not rated, so I couldn’t dig any deeper by reviewing rating reports.

Do these apparently high interest rates suggest OI is profiteering? Well, to be honest, the ROE statistics are pretty poor. Ghana does not post an ROE or portfolio yield figure, but of the six that do, the ROEs range from a modest -4% (Rwanda, yes, that is a negative sign), to an eye-watering -77% in Tanzania. So, we can certainly not conclude that fat cats are raking in millions investing in these MFIs, as we’ll see in a moment. How can an MFI be so consistently loss-making at such high interest rates, above the averages charged in each country? Four possible reasons spring to mind:

1. Operating costs are so astronomically high in these countries that their peers are doing even worse
2. They are small start-ups
3. They are poorly run, inefficient MFIs with low productivity
4. There are countless additional services (training etc) bundled in and increasing the cost that this is essentially a subsidy model with no intention of being profitable

(1) and (2) are not valid: these MFIs range from medium to good maturity, and other MFIs in these countries are making higher returns, so I suspect a combination of reasons (3) and (4): low productivity and substantial additional services such as training.

I thought it would be interesting to have a look at the recent 990 Forms (a legal filing for all US tax-exempt NGOs). OI publish this on their website, which is a good sign of transparency. I use these forms for three main reasons – to detect any suspiciously high salaries; to get a feel of the financial performance of the company; and to look for unusual transactions.

First, the CEO and President, Bill Morgenstern, earned $190.791 with $20.263 in bonuses in 2010, making him the highest paid person in the company and one of only two people earning in excess of $200.000. Senior VP Dennis Ripley took home $171.992 + $29.792 that year. A few others earned in the $150-$200k bracket. Not bad salaries, but not competing with Maria Otero’s $2 million over two years in the wake of the Compartamos IPO while she was CEO of Acción.

The financials are interesting. Total revenue fell (2009 to 2010, latest data available) from $102.3m to $79.3m – that’s a decline of almost a quarter in a single year. Meanwhile total expenses rose from $101.2m to $110.9, about 10%. The other interesting income statement entry was that OI spent $6.4m in fund-raising, which is probably reasonable for the amount raised.

Total assets fell from $98.8m to $87.8m. That’s a decline of almost $1m per month. Meanwhile liabilities rose from $28.5m to $36.5m, about a third. The overall impact of all this is that the net assets of Opportunity fell from $70.3m to $51.4m in a single year. Yes, the NGO equivalent of “equity” declined by over a quarter in a single year, $19m. There are no obvious explanations of why this may have occurred presented in the 990 Form.

However, in the transactions section of the 990 Form a partial explanation may be that Opportunity International donated/transferred/invested (not clear which) $9.346.082 to Opportunity Transformation Investments, whose net assets rose over the same period from $58.5m to $71.1m (an increase of $12.6m). So, it appears that approximately half of Opportunity International’s decline in net asset value was in fact a transfer from one entity to another. But really, I have no more information than that presented in the 990s. I should conclude by saying that Charity Navigator award Opportunity 4 out of 5 stars for transparency, which is not bad.

So, the bottom line: would I invest in Opportunity? Well, while I am a critic of profiteering MFIs, they need to make at least some efforts at return on equity to be sustainable. This appears to be a model heavily dependent on donations, and the fact that these appear to have fallen precipitously over this period is cause for concern. I am not impressed with the interest rates, and no amount of training is an excuse for APRs reaching as high as 161.4% (Ghana) in my opinion. Each and every MFI studied here thinks nothing of maximum APRs in the triple digits, and that makes me rather uncomfortable. If the clients can get some free training and just take out a loan of $1, perhaps that’s okay – it would certainly explain low productivity.

As a pure subsidy model, perhaps this is okay – we certainly cannot compare Opportunity to the likes of loan-shark MIVs BlueOrchard, even though our Swiss friends are listed as strategic partners of Opportunity. This likely means they make a few donations. The other funders listed include all the usual suspects – Oikocredit and Cordaid are similarly Christian and socially-focused entities, but also Oxfam Novib have coughed-up some Dutch tax-payer funding (perhaps not surprisingly to the Ghanaian operation, the most expensive in the Opportunity network, although Oxfam will deny this despite also funding MFTransparency who published the figures). Triodos funded the Malawian bank. Kiva have thrown $2.1m at Rwanda, and used to fund the Kenya MFI but the relationship ended. Perhaps Opportunity realised they could get funds either more cheaply through their own donor-driven sources, or simply for less hassle than Kiva from the likes of Cordaid?

But I can’t say I am overly impressed, and this is before we even discuss the issue of impact on the poor. What I will say, however, is that these guys do not display the signs of overt profiteering, which distinguishes them from other MIVs. So, if you absolutely have to give your money to an MIV, then perhaps this is one to consider, if you believe that poor vulnerable African women are oblivious to interest rates often closer to 200% than 20% per year. Any donation appears to be evaporating in some massive subsidy black hole, which is perhaps not a bad thing (it beats vanishing into Swiss bank accounts), but it is at the other end of the spectrum to the sustainable, reasonably priced, moderately profitable MFI. I personally have not, and will not, invest in Opportunity International anytime soon.

Also, let’s not forget, Larry Reed used to run this outfit, and is now head of the MicroCredit Summit Campaign, so these guys are not without influence, and Larry rather liked my book, perhaps begrudgingly. So we might not be on entirely separate pages here. I have more confidence in an ex-Opportunity person running the campaign than one of the vultures. But if the MicroCredit guys ever take a stance on extortionate interest rates they may irritate their friends at OI in the process. I’m not holding my breath.

But, this brings me to another thorny issue: these folk are overtly Christian. I generally admire the Christians (although I heavily criticize World Relief in my book), but I have never been able to reconcile what limited understanding I have of biblical teachings on interest rates with practices such as those described here. So, I would like to end with a few questions for Opportunity International, and a question for the reader:

Questions for Opportunity International

1) I was unable to find a policy regarding the prevention of child labour on your website. Do you have such a policy? Children being taken out of school to work in micro-enterprises is a growing phenomenon, do you monitor such activities?

2) Could you reconcile the APRs listed here with the following Bible verses? My emphasis added, but are you sure God approves of APRs of 161.4%?

• Exodus 22:25 “If you lend money to one of my people among you who is needy, do not treat it like a business deal; charge no interest.”
• Leviticus 25:37 “You must not lend them money at interest or sell them food at a profit.”
• Psalm 15:5 “who lends money to the poor without interest; who does not accept a bribe against the innocent. Whoever does these things will never be shaken.”
• Ezekiel 18:13 “He lends at interest and takes a profit. Will such a man live? He will not! Because he has done all these detestable things, he is to be put to death; his blood will be on his own head.”
• Ezekiel 22:12 “In you are people who accept bribes to shed blood; you take interest and make a profit from the poor. You extort unjust gain from your neighbours. And you have forgotten me, declares the Sovereign LORD.”

I just feel that some invisible line may have been crossed here. Charging interest is one thing, and I was unable to find a defined interest rate cap in the Bible, but these verses leave little to interpretation, and I wonder if rates over 100% are really acceptable. What about 500%? Is the simple fact that there is no cut-off defined in the Bible an excuse to charge whatever you want? And if you are sure that these rates are Biblical, why not post them on your website? Chuck Waterfield has managed to do so, and this research took me under an hour. It’s not hard. Or would that alarm some of your donors, perhaps?

Questions for the readers of this post

1) Can you tell me what you think of these interest rates? At what point do you become alarmed? I don’t want to enter into a huge debate about the morality of interest rates or the precise cut-off between reasonable and extortionate, just a gut-feel of where you start to feel uncomfortable. I am particularly interest to hear the opinions of Christians. Comment below or email: microfinanceheretic@gmail.com

2) I’m looking for MFIs that meet the following criteria, if you know of any, please tell me:

• They charge reasonable interest rates, nothing over a real APR of 50% absolute maximum.
• They publish their interest rates clearly on their website and explain them to clients who may be unable to read.
• They monitor over-indebtedness.
• They don’t lend to people to re-finance loans at other MFIs.
• They don’t do consumer lending, but only finance actual entrepreneurs doing something meaningful, i.e. not just endless inventory finance.
• They check their clients are not using child labour in their micro-enterprises.
• They treat their staff fairly, and pay a fair wage.
• They are firm with delinquent clients, but don’t torture them.
• They’ve got a reasonable rating (say a B or above) from a sensible rating agency, and score at least a 3 out of 5 in a social rating.
• Their ROE is positive, but under 10%.
• They have good client retention rates.
• They have a sensible range of loan sizes, starting at a level suitable for the bottom quintile of the population, but reaching high enough to actually build a genuine small business.
• They are funded neither by loan-shark MIVs nor inept NGOs.
• They are growing at a healthy rate, perhaps 10% per year, but certainly above zero, and not exponentially.
• They have a clear social mission, but also make a modest return for their investors in excess of inflation and commensurate for the risk assumed.
• They can actually provide evidence of poor people being lifted out of poverty, but without simply plunging an incumbent tomato vendor further into poverty.

I’ve been looking for MFIs like this for a decade, and have a very small sample to date. Alas Opportunity doesn’t seem to have many either. Nor do the other MIVs I’ve briefly looked at. All suggestions welcome.