End of Year Microfinance Sector Wrap-up

Another few million clients, new banks emerging daily, relentless spin without much evidence of poverty reduction: I thought I’d provide a light-hearted summary of what’s happened this year in the embattled microfinance sector.

The best news is that the microfinance suicides in Andhra Pradesh appear to have abated, thanks to stern regulation by the government. The IFC invested in LAPO (a dodgy and exploitative Nigerian bank), which was amusing and concerning in joint measure. The IFC earned phenomenal returns with their investment in Compartamos, Mexico’s infamous bank charging 195% a year to the poor to apprently get out of poverty, so they figured they would repeat the trick in Africa. They clearly knew what was going on at LAPO because they contacted me months before they invested. Spare a thought for the poor Nigerians coughing up 144% per year. At least the IFC appears to have finally dropped any pretence of being remotely ethical.

Accion, the other large profiteer behind Compartamos, saw an opportunity to earn even higher interest rates than usual, and acquired CrediConfia, who charge a whopping 229% to the poor. Even the Mexican equivalent of The Economist openly wondered how on Earth businesses or low-income families could generate wealth at such rates. It’s simple – they can’t.

BlueOrchard, the largest microfinance on Earth until recently, and one of the most questionable, replaced a string of senior management and saw their own investors flee in droves. Dan Rozas published an excellent obituary. Their returns are now so low that even a manipulated LIBOR rate might be a better bet. Two other funds were acquired, presumably under some distress, and the ethical status for retail Dutch microfinance investment was removed. India tightened regulations in their microfinance sector after 54 poor Indians had preferred death over loan repayment (never a good sign), and the SKS stock price slid accordingly, although it managed a rebound later in the year. Deutsche Bank, hardly known for its ethics in (micro)finance managed to make a healthy profit out of this rebound in the stock price, via a subsidiary in Mauritius. This is their social arm – the mind boggles as to what the rest is like. Perhaps not surprisingly the Managing Director, Asad Mahmood, has refused to speak to me for a while after I aired some fairly dirty laundry of his publicly.

The Zimbabwe government finally started complaining about microfinance banks illegally capturing savings from the poor and charging them extortionate interest rates of nearly 500% for loans even though inflation is now under control. Ring any bells? And the Bank of Zambia suggested that microfinance seemed to have very little to do with building up the famous micro-businesses we are told about, and that 90% was simply directed towards current consumption. Welcome to the realities of overpriced consumer lending in poor countries. Meanwhile another African CEO openly admitted that the secret to growth lies in encouraging the poor to consume rather than invest in these largely fictitious micro-enterprises. Full marks for honesty, microfinance is increasingly about encouraging non-productive consumption at high interest rates.

Triple Jump continued business as usual, although a leaked document rather embarrassingly revealed that one of their microfinance investments was siphoning money off to entirely unrelated activities. In the grand scheme of the criticism against Triple Jump this is a minor detail in a country increasingly leading the world in incompetent microfinance fund management.

Opportunity International, the Christian microfinance network, was caught with its trousers down charging interest rates of over 160% to poor Ghanaians, in the name of Jesus apparently. Their Mozambican clients are comparatively happy, paying only 150%. My blog post on this ironic twist generated some fascinating additional information on Opportunity, and Ben Cooper published a book entitled “The Ethics of Usury”, which will leave some Christian funds feeling decidedly uncomfortable. Meanwhile Oikocredit and Cordaid, usually clean operators, financed Tujijenge in Tanzania, turning a convenient blind eye to rates of 150%, and these are the good guys supposedly. However, Tujijenge offers free blood, yes, blood, to its clients, so this was presumably acceptable. There is no mention on the website of where this blood originates. Kiva also continues pumping money to Tujijenge, oblivious of their actual operations until recently, when I pointed out to them that this dodgy bank had the second lowest social rating in social rating history. Nevermind – this was carefully swept under the carpet. The average Kiva lender spends so little time investigating how their money is used that there would be no danger if Kiva lent to the worst drug-cartel on the planet. Shove a picture of a poor narco standing beside a goat on the front page and the money flows in. Having said that, they haven’t done any cock-fighting loans for a while.

Alas MyC4, an otherwise decent peer-to-peer that dwarfs Kiva in terms of transparency, also channels funds to the poor via Tujijenge, the main difference being that you can see the APRs charged. They often approach 100%, and when I pointed this out to MyC4 they didn’t care, so I pulled out my modest funds from this platform in protest at the obvious extortion.

Although Kiva continued to pump millions of dollars to poor people with goats and sewing machines who may or may not exist, their naive users remain satisfied that Kiva is unable to even provide the interest rates charged, as long as the stream of nice stories and colourful pictures pop up on the website. The fact that this company even exists refutes any claims of financial sector regulation in the US, but if Kivans are happy in their belief that they are helping the poor, who cares if it’s true or not? Kiva’s other pioneering development was to start lending to Americans in America, at rates of 8.5% per year. Mexicans south of the border pay 85% per year through Kiva, while Mexican default rates are substantially lower than in the US microfinance sector. Pure spin to improve the image of the ailing sector? Meanwhile Kiva’s slush fund (users’ funds that never left California) reached $67 million, and no prizes for guessing who earns the interest on this (page 46 of the 2011 990 form).

However, Zidisha has grown in importance, a peer-to-peer vaguely comparable to Kiva which doesn’t rely on corrupt microfinance banks to channel funds, and actually lends to the person you see on the website at reasonable and stated interest rates – notable improvements over Kiva. Kiva is desperately attempting to replicate the Zidisha model. This is perhaps prompted by the fact that their microfinance partners are abandoning Kiva, preferring to pay a regular investor a reasonable interest rate rather than engage in a laborious scam for the sake of some interest-free capital.

Norway pulled out of microfinance. As usual, a step ahead of the rest of the planet.

Lance Armstrong was stripped of his various medals in a doping scandal that had disturbing parallels with the microfinance sector.

Mohammed Yunus got fired by a dodgy government for political reasons, but poor Bangladeshis remain unaffected. Tom Heinemann did a second, shorter documentary on microfinance, uncovering a $2m remuneration package to Maria Otero, former head of Accion, now in the White House. I interviewed Heinemann for the publication microDINERO and found him a positively charming guy, a tad eccentric perhaps. Friends of Grameen, the farcical entity set up to refute Heinemann have remained rather silent over the last year, presumably nursing their wounds. Their master spin doctors Burson Marsteller have done nothing to defend them, abandoning the insurmountable task of cleaning up the tarnished image of microfinance. Meanwhile, worthy institutions such as Chuck Waterfield’s MFTransparency have continued publishing the actual interest rates charged by the vulture MFIs, presumably annoying many of their investors in the process, who rather liked the fact that no one really knew what they were charging the poor. I used this to expose some dodgy investments of Opportunity, Oikocredit, Triodos, Cordaid etc.

The Smart Campaign continues to not live up to its name, and continues promoting fair interest rates while funded by none other than Accion – shareholders and major beneficiaries of the Compartamos exploitation. Repeated calls to add the rights of children in their so-called Client Protection Principles have fallen on deaf ears. Why? Because we all know that microfinance is a major source of child labour, and the topic cannot be discussed openly as this would attract yet more criticism to the embattled sector. Think of nails in a coffin. Only Oikocredit and Vision Fund International have policies on child labour. One commentator suggested Smart should change their name to Crafty, and in the same review referred to Triple Jump simply as “criminal”. It’s a fun review. The head of Smart, Beth Rhyne, got rather upset when I dared to criticise her baby in public, offering a feeble defence. Not wishing to be left out regarding utter incompetence in the self-regulatory/transparency field the Africa Microfinance Transparency folk continued to endorse some of Africa’s least ethical institutions.

The academics have continued a barrage of criticism of the sector throughout the year, most of which is carefully ignored by the insiders, who remain convinced that 150% per year loans are the only way to get the poor out of poverty and make a fat return in the process from their air-conditioned offices in DC, Geneva and Amsterdam. The fact that empirical evidence refutes this is irrelevant, especially when your salary depends on it.

Mexico’s over-indebtedness bubble continues growing. Loans with dubious prices now compete with tacos with dubious ingredients on almost every street corner in the country. Everyone knows this, Mexican credit bureaus confirm it, but the regulators decline to take action and investors still seem enamoured with the place. A repeat of the Nicaragua crisis looms perhaps? Meanwhile Peru and Bolivia earned the number one spots in terms of the saturation of microfinance, and also for the prevalence of child labour. President Ollanta claimed he would eradicate the latter, it will be interesting to see the impact of such policies on the former. Clamp down on the informal sector employing all these kids and the microfinance sector loses its clients. Ecuador continues to tightly regulate its sector, interest rates hover around 25%, and the main players are all coping, shedding doubt on quite why Mexican banks need to charge 200% to “cover high operating costs”. Colombia raised the interest rate ceiling by 20% to 53.45%, and perhaps not surprisingly, all the banks in the country started charging the poor 20% more. No one ever explained the logic of this move to me.

The annual Microfinance Oscars ceremonies showered awards on the usual suspects. The judges were mostly the same people who won the awards. Who else would award someone for exploiting poor people? Meanwhile, as microfinance became a dirty word, the sector decided to rename itself as “financial inclusion”. But it still remains incapable of defining exploitation, which is slightly ironic in the circumstances. France objected to taxing the super-rich at rates of 75%, while we think nothing of charging 150% in interest to the super-poor.

Grameen Foundation bought a slice of Musoni, which was a pity, as this was an otherwise pretty decent institution. The hype around internet, dot coms, mobile phones and anything modern and novel continues, but is largely a distraction for carrying out business as usual without too much scrutiny. Grameen Foundation’s CEO, Alex Counts, managed to win the award for “silliest book review of the year”. At least they can do something well.

The microfinance IT sector has made important in-roads into cloud-based solutions for banks, which could genuinely improve transparency. The question remains – does the sector want transparency? God forbid someone would know what these jesters are actually up to. I’ll believe the sector is embracing transparency when Chuck Waterfield gets invited to expose the Mexican interest rates. Or when Accion invent a flying pig.

Triple Jump continues to manage part of the Calvert Foundation fund despite having obviously deceived Calvert over at least one investment (are there others?). But now they have taken on a new fund – MicroBuild. The fund was set up by Habitat for Humanity, who presumably did a “very thorough due diligence” before selecting Triple Jump. But the fund is co-financed by OPIC – US public sector funding, so is potentially dangerous if anything suspect happens here. Watch this space.

On a personal note the book has done very well. Six months after publication not a single one of the implicated players has dared issue a denial or attempt to sue me. There are pretty serious accusations against mainstream, household names (Citi, Deutsche, Standard Chartered, Grameen, ASN Bank, Calvert Foundation etc), and none have uttered a word. This is perhaps explained by the fact that a) my accusations are correct and extremely well backed-up, and b) they all know I have even more dirt on them if they want to play that game. Their strategy has been simple: “no comment”.

Media coverage of the book has been great, and even some pretty senior folk in the sector had the balls to stand up and defend it. Larry Reed, head of the MicroCredit Summit Campaign wrote a surprisingly positive review, and seemed genuinely keen to improve the activities in his beloved sector, prompted perhaps by the historic incompetence of the Campaign. However, funded mainly by the worst offenders it is unclear what he can actually do. Results.org.uk did a cool review, and work closely with the UK regulator, so this is an encouraging sign, even though the UK doesn’t invest much in microfinance and much of the academic annihilation of the microfinance sector has originated from the UK. Press coverage has stretched from Business Week to the Buddhist Peace Fellowship, from India to Colombia, and the book is coming out in a few new languages shortly.

We didn’t receive any more threats, which was a welcome development, and the reviews of the book have been overwhelmingly positive. KRO-Reporter, something akin to the Dutch equivalent of 60 Minutes did a documentary about the book, revealing more frauds and failures in the Dutch microfinance sector. Oxfam Novib and the chairman of Triple Jump were both interviewed and made utter fools of themselves, which is mildly amusing but hardly surprising. The documentary was thorough, they interviewed David Roodman, Chuck Waterfield (who comments wonderfully on microfinance redistributing wealth from the poor to the rich), and the head of the Dutch pension funds, who explains why they never bothered investing in microfinance.

Interestingly Princess Maxima of Holland never commented on the book despite being the ambassador of the Dutch microfinance sector, although she clearly read it. Like many in the sector she is in an impossible position. To admit knowledge of these activities is to condone them. To deny knowledge of them is to admit she had no idea of what was going on under her nose. To attempt to deny them is to refute hard evidence. To remain silent is about the only option, and she is not alone in selecting this strategy.

C-Span videoed an event hosted by the author of “The Corporate Whistleblower’s Survival Guide”, which was great fun, and I did events at Google in San Francisco and Mexico City.

Meanwhile so-called “alumni of LAPO” (the dodgy Nigerian bank I discuss in the book) attempted to defend their alma mater in a comical exchange, demonstrating that even the activities mentioned in the book only scratch the surface of this institution that so successfully duped funding from almost all the funds in the entire sector, oblivious as to what was going on in Nigeria.

Ramesh Arunachalam, an Indian microfinance expert whom I’ve never met, read the book, panicked and started writing about all manner of exploitations he had previously not considered (and his coverage of frauds is pretty extensive). His critiques of the microfinance investment funds are wonderful to read, particularly why so many of them originate in Luxembourg for some bizarre reason. He also wrote the definitive text on the sorry state of the Indian microfinance sector. And more recently David Stoll wrote a book called “El Norte or Bust”, which I have recently started, examining how microfinance would be used to fuel the migration of Central Americans to America. Alas David Roodman has not written much biting critique of the sector recently, but Ha-Joon Chang caused a stir with a great video interview in the Guardian. Milford Bateman, never one to let us down with some scathing commentary on the sector, has continued to astonish, most recently uncovering chronic over-indebtedness amongst South African salaried miners, as the distinction between exploitative payday lending and microfinance erodes yet further.

Overall 2012 was a challenging year with the book publication, but it was certainly great fun, and the truth is now out there for an increasing number of people to read. For those of you who have not read it yet, just take extreme caution in selecting a trusted fund manager to channel your hard-earned money to the poor. It rarely works. Give it to a poor person on the street, at least you’ll know it got to the right person. I laid out some guiding principles on how to invest sensibly in the sector, but the astute reader will see that this excludes the vast majority of intermediaries. Perhaps it is easier to simply throw money out of the back of an airplane somewhere over Africa?

So, looking forwards to 2013, I doubt much will improve for the poor. There is little sign of meaningful regulation in most countries that act as gatekeepers for capital flows to the sector, and even less so in the developed countries. Local regulators may be slowly waking up to the fact that Swiss, Dutch and American investment firms are impoverishing their citizens to make a quick buck, but don’t expect them to act too quickly. To limit the wonderful neo-liberal free-market capitalist system risks being branded a populist communist, so most will turn a blind eye. The farcical self-regulators will produce endless new seals of approval and certificates of excellence, but none will actually address the fact that their darling institutions are screwing poor people by the million and indirectly whipping kids out of schools to stack shelves in sweaty markets. It’s like asking the NRA to regulate gun crime in America: “more guns will reduce gun crime”, or “more over-priced credit to vulnerable poor people will reduce poverty”.

Expect a slowdown in funding from the microfinance sector, but not a collapse. Those that actually care about the welfare of the poor represent a small percentage of the sector, and even if they leave en masse, the likes of the IFC will step in to ensure business as usual. “Financialization” of the poor is underway, and nothing will stop it until the very last poor person in the remotest corner of Africa has a wallet full of over-priced credit cards, is beholden to an array of banks, is monitored via cellphone and unable to engage in the simplest of activities without a decent credit history, and risks having his or her modest collateral legally confiscated for missing a loan repayment. Debt is the name of the game, equity is the way to profit from it, and global personal indebtedness is the objective. They messed up the developed world, now it’s time for the next few billion to join the party.

What can you do about this? Well, not a lot. Frankly much of the money comes from tax-payers who have no idea or say over the development budgets of their governments. Another major chunk comes from investors who have every intention of screwing the poor to the greatest extent possible and applaud eye-watering interest rates and confiscation of collateral from the poor. Obviously you might want to reconsider holding your savings in the banks active in this sector. Don’t donate funds to incompetent NGOs (the vast majority). Don’t be fooled by vague promises on websites supported by pictures of women with goats. Demand to know the interest rates charged to the poor to two decimal places and refuse to invest if the information is not forthcoming. Ask about actual client protection, and don’t accept a simple endorsement of the Smart Campaign. A well-trained ape can endorse Smart (the ape would need to be able to write a simple name and an email address with the relatively complex “@” symbol – I am not sure how long it would take to train such an ape, but they can do some pretty impressive things).

As a general rule, unless you have very good inside information to the contrary, backed up with solid first-hand evidence, assume the intermediaries active in this sector are incompetent, occasionally criminal fraudsters. You will be right in 99% of cases. If you find a good one, tell everyone you know about it (and me), but keep your eye on them – lots of money has a tendency to spoil a good idea. But also seriously consider investing or donating to an entirely different sector, or simply pay off your own debts and try not to owe anyone anything. Indebtedness is almost always less preferable to this.

But, not wanting to be vague, players to be very cautious about include: BlueOrchard (dying anyway); responsAbility (their spelling); Grameen Foundation (obviously); Triple Jump (the so-called “criminals”); ASN Bank and Oxfam Novib (they hire the “criminals”); Kiva (don’t know how to spell “criminal”, if you’re reading this you’re probably sufficiently intelligent to have already ignored Kiva); Standard Chartered and Deutsche Bank (vultures); Incofin (they’re from Belgium, a small country somewhere in Europe), Opportunity, Oikocredit & Cordaid (sporadically exploitative); Calvert Foundation (inept); Accion (moneylenders disguised as…. moneylenders); Developing World Markets (the vulture that other vultures fear); pretty well anyone from Luxembourg (tax-dodgers at best, BlueOrchard at worst); and, of course, last and certainly not least, Citibank (hardly surprising).

The backlash against microfinance is well underway, and I am often criticised for being overly negative. It’s a valid point. With my blog posts on Opportunity, Oikocredit, Triodos, Cordaid etc. I initially set out to demonstrate that there are good players out there. I had to change the posts as I bean sniffing around. I would love to write about a great fund, an effective peer-to-peer, or a really great bank – they’re just very hard to find. They all claim to be saving the world, but they’re all up to the same tricks. As I dig into the conflicts of interest I see no way out. Citibank is behind the IPOs of the vulture MFIs, and also finances the transparency initiatives and so-called research papers. The unethical staff from one fund move to the next in a huge corporate merry-go-round. Good, ethical, poverty-focussed and competent people quit the microfinance sector in disgust each day. What is left? Almost everything positive written about the sector is paid for or written by an insider with skin in the game. Ludicrous hype continues, but you can’t even leave comments on their websites. The New York Microfinance Club held a meeting with Deutsche Bank and BlueOrchard as speakers and they insisted on (unusually) turning off the video camera for fear of tricky questions from the audience. The truth about microfinance absolutely has to be restricted from entering the public domain wherever possible. The sad thing is, the few good players are tainted with the same brush, making their lives impossible. At some point even they will shuffle out of the sector I fear, and then we really will have lost our soul, as Tim Harford memorably wrote in 2008.

But, look on the bright side, the world didn’t end on December 21st. If you’re reading this it’s probably because you’re not poor and will never truly appreciate the pain of being on the receiving end of most of these loans. Some are driven to suicide. Others go bankrupt. The vast majority remain poor. We can do better. If we want.

Happy New Year.

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9 Responses to End of Year Microfinance Sector Wrap-up

  1. Chance Agent says:

    Great blog! You may find it tough to shame these folks into changing if they are really making a million bucks and then getting a job from the President of the United States, or feel like God called them to do the opposite of what is in the Holy Book. If you see that the profit based spinoffs from the groups you mention really started by misappropriating donor or government monies it might get donors or authorities to enforce some change.

    • Hi Chance Agent, thanks for the comment. It’s uphill work changing a whole sector, but we can all do our little bit. You probably know loads of people using Kiva, or putting some of their pension into Calvert Foundation. A few simple questions, like “ever wonder why Kiva don’t tell you the interest rate they charge?”, or “ever ask why Calvert invested in LAPO when everyone knew it was a scam?”, and word gets around. We need to start at the bottom, a grassroots rebellion. There are only two things that scare these folk: bad reputation, and loss of money. Do not underestimate what an individual can do. Complacency is our worst enemy. Churches are big donors to microfinance, but often too trusting of the intermediaries that they use to channel the money. Speak out!

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  3. hannah says:

    After a friend told me a bout Kiva I wanted to give a gift card to my mum for mothers day, it sounded good. As a person who has taken out “pay day loans” when I was poorer, I understand that although the money can be useful in the first place – ie prevent eviction, the interest rates were appalling on some short term loans .

    I decided to research first (googled stuff ) which turned me off Kiva and I settled on Zidisha, gave my mum a gift card and put 10 in myself. They seem genuine, and keeping it small so that issues are fixed before they take hold. Do you know much more about them. Have there been any major issues, do you know if any of the players have conflict of interest?.

    One development I noticed was that they are now using facebook accounts to verify borrowers, and that some of their technical staff also worked for facebook, but thats as far as I got in conflict of interest, and not sure that it is a conflict, since they do not want to engage corrupt local groups and they have to verify somehow, and their model is based around interaction between borrowers and lenders via the internet.

    • Hi Hannah,

      Interesting you mention Zidisha over Kiva. Some people at Milepoint, one of the big lending groups on Kiva, announced likewise. I actually “met” the CEO, called Julia, on a radio show in the US a year ago. They tried to get Kiva to join me, but they flatly refused, but Zidisha agreed, and in fact I was genuinely impressed with them also. They seem to address some of the fundamental flaws on Kiva, and as you mention, by keeping it small it has not deviated from its core mission. I also put some money on, and am waiting to see a full cycle before I comment on it formally. It’s one thing to look at an idea on a website and comment, it’s another to put your own money on it, wait and see what happens, and then comment on it! The bottom line, as far as I can see so far, is that this is significantly better than Kiva. First of all, the money goes where they say it goes, rather than into the amorphous MFI pot. It is genuinely peer-to-peer, not peer-to-MFI and then get a photo in exchange. Secondly, they are far more transparent, especially regarding interest rates, which Kiva don’t even bother to report. In this regard they are comparable to MyC4, but I am personally uncomfortable with the interest rates MyC4 charge: transparency is one thing, charging 90% is not acceptable just because it is transparent. Zidisha is far more reasonable. Also, I trust the stories more than those on Kiva. But, Zidisha’s massive weakness is that they don’t have millions of dollars to go on TV and advertise and get celebrity endorsements, so Kiva steals the limelight, even though the Kiva model, in my opinion, makes a complete mockery of the entire US financial services sector and is an embarrassment to microfinance in general.

      But perhaps the best endorsement of Zidisha is that Kiva themselves are desperately trying to replicate it, with their so-called Kiva Zip. We shall see if they manage, I somehow doubt it, and my fear is that they will mess it up sufficiently to shed doubt on the good work that Zidisha is actually accomplishing. Anyway, only time will tell, but I am also watching Zidisha carefully. Without a doubt, in my opinion, you made a wise choice chosing them over Kiva – the repayment rates are comparable, but Kiva’s are false. Kiva reports higher repayment rates than the MFIs they use, i.e. the MFIs cover the losses in order to secure their flow of interest-free capital – this is mentioned in various places. Zidisha also has credible people advising them. Kiva “staff” are generally high-school volunteers or idealistic hype-driven Silicon Valley types out to save the world but with zero genuine field experience. I’ve met a few – nice people, but naive and generally doing the job for CV points or because there’s no other job out there and they want to go travelling. Fine, but not when managing my money!

      Overall, to summarise brutally, Zidisha seems to be the “real thing”, Kiva is a farce.

      I will analyse Zidisha more thoroughly at a later date, when I have some good data. Cheers, Hugh

  4. Kirsten Shute says:

    [Administrator note: this comment is in response to Hugh’s reply to Hannah, not to the overall blog post)

    I haven’t yet read your book, but I’ve looked at many of your blog posts. It’s encouraging for me to read that you approve of Zidisha, at least in comparison with Kiva and other microfinance institutions, given the extent of your criticisms.

    I’m a recent university graduate (in a field light years away from finance) and when I heard of Kiva, it seemed like a way I could support international development even on a small salary. But through that respected academic website, Wikipedia, I found that more of the capital Zidisha raises goes directly to borrowers, without the high interest rates Kiva’s partners charge. I did some research and was glad to see that donations to the company and loans to the borrowers are clearly separated, although the website does fill in a “voluntary” donation amount whenever you bid on a loan, so you have to notice and remove that amount if you don’t want to donate right then. Anyway, I opened a Zidisha account last fall.

    Besides my own selfish feeling of justification, I’m interested to hear about your experience with Zidisha (I have no stake in the company besides being a lender), so I hope you will post a review when your first loan is returned. I’m also curious about what you think of the Facebook requirement for new lenders in Kenya and Senegal; it seems Julia Kurnia and the volunteer staff are trying to strike a fairly difficult balance between accessibility and fraud prevention, but I’m a little worried that it might keep away too many potential lenders who can benefit. At any rate, I wish you all the best with your research and writing,


    • Hi Kirsten,

      Thanks for the comment. I criticize Kiva fairly extensively in the book, and interestingly, a year later, they haven’t denied, or even commented on, a single claim. The evidence against Kiva is so overwhelming, but you summarised the phenomenon well: “when I heard of Kiva, it seemed like a way I could support international development” – it is such a nice idea, and so well-marketed, and so seamlessly takes your money and apparently sends it to catapult yet another person out of poverty. It was on Oprah and celebrities like it so it must be ok. Almost too good to be true. Alas, as you explore a little deeper, you will discover it is a deeply flawed model. I discuss the lack of actual interest rates cited at Kiva in detail, in part because I object to the rates the poor are expected to stump up for a loan. But perhaps more importantly in the context of Kiva, it is because their inability to cite the actual interest rate charged is the very core of the problem with their flawed business model. Kiva is a spin organisation, a well-designed mechanism to siphon money from people such as you and in exchange for a photograph and a heart-warming story, you think you’ve helped the poor. Dream on. Even if you don’t bother to read the book, just look at three key details, on the Kiva website:

      1) Look at how many partner MFIs have dropped out of Kiva. Why?
      2) Why do they quote the portfolio yield, a known underestimate and incorrect assessment of the actual cost to the poor. I blogged about their insistence upon using portfolio yield in a previous post. It disguises the true cost of capital the poor pay. Kiva cite it knowing that this is the case. It’s not that they are hiding the real interest rate – they have no idea. They can get all these nice photos and little stories half way across the planet, with the main loan details (amount, purpose, term etc), but the interest rate evades them. Why?
      3) Kiva maintain a little “buffer”, the amount of money that generous souls have uploaded but for one reason or another have not yet “lent”. Guess who earns the interest on this account? But more worrying, guess how big it is? Kiva have loaned about $400 million since inception, and yet the buffer keeps growing, and as of the end of 2011 – the last formal reporting they had to file, it was an impressive $67 million. Now, to have that sloshing around in a bank account when all they’ve ever loaned (to the end of 2011) is only perhaps 5x more is pretty alarming to me.

      http://cms.kiva.org.s3.amazonaws.com/kiva_form_990_-_2011_0.pdf (see page 46)

      So, is Zidisha the cure for poverty? I don’t know, but right now it looks a whole load better than Kiva, and gets my modest funds any day over Kiva. I was also put off MyC4 as they charge extortionate interest rates, but at least they publish them! I have had some loans returned on Zidisha already, but my analysis needs to go further. I need to examine the client selection process, how the cash transfers are done in practice, default procedures (in practice, not just stated), other costs to the clients that may not be visible (application forms, repayment charges etc), speak to a couple of clients, examine the data presented on the website and the mechanism to ensure this is accurate, etc etc. So far Zidisha have been very open with me and answered all my questions, and I am genuinely impressed. But I’ve been impressed in the past about microfinance only to be subsequently disappointed, so I remain sceptical. There are thousands of players out there apparently eradicating poverty by the million if only you will give them your money, and yet poverty and inequality remain. My experience in this sector (over a decade) is that there are a few good players out there, but you need to know exactly what you are looking for, have extensive access to information, go on-site, look into the details, and so far I can name them on two hands and still have some fingers spare. So, you are right to be careful, and I am not going to say “Zidisha is cool, give them your money” quite yet.

      But, to complicate matters even further, we have to stand back and ask whether even “good” microfinance is a blessing. You can vaccinate a lot of kids with the same amount of money. Many countries are suffering not a shortage of microfinance but an excess. Entire sectors have collapsed (I discuss Nicaragua in some detail in the book) because of too much microfinance, when everyone and their dog has multiple loans. Do we need MORE microfinance? It’s a valid question. Even if we identify there is a need, is it feasible that the poor person will actually benefit given the interest rates they pay? And even if they do, to what extent is one successful tomato-vendor simply driving another vendor into bankrupcy – how many tomato-vendors do we actually need? Microfinance celebrates the winners, not the losers. And those who never take out a loan and are simply driven out of business because the woman in the next door stall got a loan and now sells tomatoes marginally more cheaply (for a while) are ignored altogether. These are all topics that do not make it to the fancy websites of these players, they are carefully brushed under the carpet. So when you see academics report that microfinance is having no impact on poverty reduction, do not be too surprised. But Kiva isn’t going to tell you this! They have 500 volunteers (page 44) who are utterly convinced this is the solution to world poverty and fly around at their own expense apparently proving it. Their website is ingenius. Their marketing is world-class. Their PR is massive. Nearly 1 million Kiva users have lent money to poor people and feel good about themselves. They’ve cleverly created a Silicon Valley style buzz around the name. Is any of this working? Well, the Kiva website doesn’t present much rigorous information to demonstrate this, there’s $67m sitting in a bank account that Kiva users can’t even be bothered to lend, the MFIs are dropping Kiva almost daily, and no credible academic has come up with any supporting evidence even remotely supporting the claims of Kiva and its fanatics.

      But, perhaps the best evidence that Zidisha is better than Kiva comes from Kiva themselves: they’re furiously trying to replicate Zidisha!

  5. SwissBanker says:

    I used to working in banking and was thinking about a change into microfinance since I have changed my values over the years. Well, basically I just became more adult and aware of what’s happening in the world and what they don’t teach you in school. Anyway, your articles made me rethink my choice. :-(

    Can you tell us more about responsAbility?


    A shocked reader that just stumbled upon your blog

  6. Pingback: BRAC Blog » 6 questions for microfinance’s biggest ‘haters': Why it’s time for the sector to shake off its critics

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