Readers of this blog will have noticed that I have veiled respect for Larry Reed. He’s the head of the MicroCredit Summit Campaign, a spin organisation that one would expect to dwarf even Grameen Foundation USA in terms of mindless promotion of the ailing sector. In fact he doesn’t. He is frank, bold, open, prepared to admit failures in the sector, and search for solutions. Plus he wrote a nice review of my book! So, when he published the recent “State of the MicroCredit Summit Campaign 2013” I actually read it. Here’s a brief review.
First, in terms of conflicts of interest, the only obvious one is the link to Citibank, who sponsor the Summit Campaign. This even earned Robert Annibale the privilege of being referred to as a microfinance expert on the website (he talks about telephones). We all have paymasters. So, there may have been some minor censorship, but I doubt Larry would kowtow even to Annibale too much. Grameen and Kashf are on the council of practitioners, but I doubt they had much influence either, although Alex Counts got a few mentions and a text box that the reader can safely skip without interrupting the flow of the document.
The report begins with the usual banter of a success story. Oh no, I thought, not another string of goat stories! Not at all: even on the first page Reed openly states “Not all microfinance clients achieve the same level of success as Conchita”. Wow, such an admission on page one. Judging from most industry websites every single microfinance client will shortly be retiring to a Caribbean island with the benefits accrued from the $100 loan. So far so good, I made a fresh cup of tea.
The bottom line of the report: microfinance clients are in decline. The total fell from 205 million to 195 million (5%), and those in the poorest category fell from 138 million to 125 (nearly 10%). This is actually quick shocking. It’s the first time this has ever happened, and bear in mind this is 2011 data. 2012 wasn’t the best year for the sector either. The decline is largely accounted for by Bangladesh and India, but slowed in most regions, the notable exception being sub-Saharan Africa.
It looks like Yunus might be stalling his “poverty-museum” a while.
I assume these 10 million former clients who no longer have loans are now so ludicrously wealthy that they don’t need credit? Or are they suffering in the slums in despair at the absence of a bank? There is no mention of the fate of these clients who seem to have quit the debt-game.
The reasons cited for this decline are reasonable: financial crisis, slowing remittances, slowdown of donations and investments, crises, dodgy data etc. However, two are worth exploring in more detail:
Misaligned incentives: perhaps Larry slipped this in following my book, as it’s a central theme of my concerns: many MFIs are rewarded for NOT serving the poor. That it’s taken 30 years to realise that the age-old principal agent problem also occurs in developing countries is sad, but it seems to be firmly on the table now. Chuck Waterfield described this even more succinctly in the KRO-Reporter documentary: “We see a transfer of wealth from the bottom of the pyramid up to the very very top 1% of the pyramid. The rich getting richer off the very poorest in the world.” At least the cat is out of the bag on this one. When you pump money into the microfinance funds or peer-to-peer platforms, ask what their incentives are, not just yours or those of the poor.
But Larry’s second confession should send a serious shiver down our spines: “For many years, the indicators used to measure microfinance performance have focused on numbers of clients and the sustainability or profitability of the institutions that reach them. These indicators tell us little about whether we are achieving the real aim of microfinance”. Bingo. They’ve got it, at long last! Getting a loan and repaying it does not constitute development. Anyone with a credit card can sympathise.
So, when you look at Kiva, Opportunity International, Deutsche Bank, Calvert, Triple Jump, BlueOrchard etc., all the usual suspects basically, and they proudly announce how many billions of clients they “serve” and how they are “growing” each year, here’s the bottom line from the horse’s mouth – it’s meaningless. It has nothing to do with poverty alleviation. Milford Bateman has been making this point for a decade, to deaf ears. He may sneak a sip of champagne at this long overdue acknowledgement, particularly from an established industry insider.
Indeed, when discussing the poor quality data Larry mentions that when MFIs start measuring actual poverty reduction they “often find that the number of the poorest that they are serving is less than they originally estimated”. Or, to put it another way, they demonstrate that the spin they used to raise all that financing over the years was in fact bull****. Larry concludes the section with a frank acknowledgement that the Summit Campaign is no longer on track to achieve its 2015 goals. Respect.
There’s then a digression into mobile phones, as is fashionable nowadays. Annibale goes off on some rant about it, courtesy of sponsoring the document, but Larry sums it up concisely: “So far, though, digital technology has provided more promises than results”.
The next section deals with the psychology of scarcity, and is a fine read. It’s a concise introduction to some of the game-theory/behavioural economics that has been applied to microfinance, and although it doesn’t really explain the current mess of the microfinance sector, it’s well written and informative. Even the break-out boxes are informative. But it seems out of place until one gets to the next chapter on developing actual products, which is dominated by two success stories, each with 98% of clients being catapulted out of poverty. Interviews are with the people who run the programs, so perhaps not surprising. However, Larry does slip in some reassuring comments about microfinance having a positive impact from Esther Duflo, a respected academic: “These are very, very good results… I don’t think you could have expected anything much better”. As ever, don’t throw the baby out with the bathwater.
Then again, one would need to see the context of this quote. If you expected microfinance to be 95% useless and demonstrated that it was in fact only 90% useless this quote might still apply. She was examining BRAC-style graduation programs which combine microfinance with food support, training etc. This is supportive of “Microfinance plus” – combining a loan with actual tangible additional benefits, rather than a stand-alone credit card. Another positive step in the right direction.
Of course there is then a plug for the Seal of Excellence, Larry’s baby that will hopefully separate the wheat from the chaff in the microfinance sector. I am yet to be convinced that the Smart Campaign is capable of achieving any improvement in microfinance under its current structure, and its ongoing refusal to acknowledge the rights of children of microfinance client irks me. They cannot accept the idea that developing countries do actually have laws on child labour which MFIs ought to adhere to. Turning a blind eye is natural when the practice is rampant and sufficiently emotive as to cause a huge problem, but this will come back to haunt them. My views of Smart Campaign have been discussed elsewhere, I shan’t repeat them here, but come on Larry – put the kids’ rights on the list! Exploiting their parents is one thing, but give the kids a fighting chance. Smart depend on your endorsement, they are dead in the water without you, use some negotiating power to force this onto their list. Sure, their paymasters Accion will resist it, but stand firm!
Interestingly there was even a decent plug for SME funding – the tier above microfinance, i.e. not just the trinket-vendors. This is the direction quite a few investors are edging towards now, the so-called “gazelles” of business that actually generate employment, transfer skills, pay tax and stand a chance of leading to the actual industrial development that the entire developed world relied on since the Industrial Revolution. Bring it on.
So, overall, a decent paper, albeit littered with marketing. Long gone are the days of naive optimism. There are a few confessions, acknowledgements that things have gone wrong or could be done better, and only mild reliance upon heart-warming stories and nice photos. Not a single goat or sewing machine is mentioned – always a good sign.
But it falls short in a number of regards. First, Larry fails to address the issues of extortionate interest rates, as well as the frauds and deceptions at the microfinance investment funds. His only solution to deal with the latter is that investors “should request information on client level outcomes”. Rubbish. These funds need to be formally regulated like any other investment fund – their entire structures and motivations are geared to achieve sub-optimal or harmful results for the poor and the serve principally themselves. They stand accused of some pretty heinous crimes that none have denied, none have commented on, none have demonstrated that they have made the slightest efforts to correct. There remains an utter lack of transparency in the vehicles most investors entrust as intermediaries to reach the poor (Deutsche Bank, Citi, Deutsche, Kiva, Triple Jump, ASN – recently nationalized, Oxfam Novib, Calvert Foundation, Incofin, BlueOrchard etc). Until this part of the sector is overhauled improvements will be minimal. Admittedly it appears BlueOrchard is going down the tubes currently, so that might be one less to worry about soon.
It’s interesting to note that in Larry’s review of my book he acknowledges precisely these problems, but they earn no mention in this publication, sponsored of course by one of the worst offenders.
The other elephants in the room that evaded the report are mass exploitation of the poor, perhaps because the world leader in this regard, Banco Compartamos, is the baby of Accion who finance Smart and would rather avoid too much discussion of charging poor people rates exceeding even 200% in some cases. The child labour issue remains firmly brushed under the table. There is not much discussion on (improved) regulation, nor any tangible suggestions of how transparency could be actually improved, just mild lip-service to the concept. No pressure on Kiva to declare the actual interest rates the poor pay, no pressure on MIVs to declare who they invested in or how their investments treat their clients – this was a missed opportunity. But sponsored by Citi, reviewed by GFUSA, wedded to Smart and written by the former head of Opportunity International, actually I had lower expectations, so am comparatively pleased.
But, for a summary of the state of the sector, it fails to explain one of the principal reasons why microfinance is in decline: we entrusted the management of the capital flows to a bunch of amateurs and crooks. This surely deserved a mention?
It’s worth a read, but don’t think this is going to resolve the real underlying problems. Greed, conflicts of interest, a lack of transparency, sloppy data and deliberate ignorance of key issues lead me to conclude that things will get worse before they get better.
But what’s the alternative? Larry’s treading a fine line here, and frankly I don’t know how he could better play his cards without pissing off enough people to seriously jeopardise his position. It isn’t perfect, but it’s a step in the right direction. I would personally take a firmer stance, and I wouldn’t take a dime of the known culprits. But I would probably find myself lynched by the Wall Street folk.
Put this into the broader picture for a moment. MIVs are feeling the pressure right now. BlueOrchard just hired their 5th CEO in 20 months, and look like a dead duck lingering in the water. The media backlash against microfinance has been fairly brutal. The general public are increasingly sceptical. Regulatory pressure is mounting. Norway pulled out of microfinance entirely. Dutch retail microfinance funds are no longer classified as “ethical” for tax purposes. Criticism of microfinance is now acknowledged. When folk like Larry Reed are willing to stand back and admit mistakes, I am reminded of the narcissistic idolatry of microfinance promoted by his predecessor, Sam Daley-Harris. We’ve moved on since those days. Yunus isn’t banging on about poverty museums much anymore, and is clearly deeply concerned to face the media. He’s also been conspicuously quiet on the topic of extortionate interest rates since the LAPO scandal broke.
Microfinance has fallen from its pedestal as the miracle cure for poverty, and acknowledgement of failure is the first step to finding a solution, so in this regard this document represents a step forwards. There will be fierce resistance to maintain the status quo by those who benefit most from it (they mostly sit in Washington, Geneva, New York and Amsterdam, not in Haiti or Burkina Faso), so we cannot expect this sluggish, evangelical sector to change its stripes overnight. Improvements are possible, if we chose to react constructively.
So, Larry, well done. We know your hands are a somewhat tied, but turn up the temperature a little higher, watch these guys squirm. Only when they squirm or go silent are you really making an impact. And spare a thought for the kids at least.