It’s not every day I read a post or article on microfinance that nearly knocks me off my chair. This article is one of them. Read it. It’s short and surprisingly frank. The opening reference to Yunus is tangential. The article is mainly about an investment fund that pulled out of the sector: Futuregrowth Asset Management. If I may just quote three particularly poingnant comments:
“The industry seems to be pumping debt down peoples’ throats. It is no longer socially responsible and does not belong in developmental funds.”
“The fundamentals are blown and the business model is unsustainable; 70% to 80% of ‘new business’ is to existing clients. So the trick is to keep them on an indefinite treadmill, always reoffering them a new loan, or reschedule but by lengthening the term to reduce the instalment”
Prof Yunus, who spoke at the Gordon Institute of Business Science, said: “We don’t lend money for consumption. Your consumption should come from income. When you create a consumption loan, there’s no end to it.” Instead, Grameen focused on lending money to people who would use it to generate income.
The poor on treadmills? The image that occurred to me was of a hamster happily spinning round his wheel, hooked up to a mini-generator to provide a drip-feed of electricity to the owner!
And once again that awkward mention of consumption lending – sooner or later people might realise that they are mostly not financing entrepreneurial activities at all, but new TV purchases.
This is dangerous for the microfinance sector for at least three reasons. Firstly, the article makes reference to yet another microfinance bubble, and it is questionable how the sector would survive such a scandal, still reeling from the Andhra Pradesh crisis, with Mexico and Peru suffering chronic over-indebtedness. Bad news from the microfinance sector of Ghana is an almost daily event. Secondly, this is another departure of an investment fund from the sector, and these are the jokers who provide the fuel for the fire. Take them away and the fire might go out. Sure, there are other ways capital enters the sector (governments, P2Ps etc), but this doesn’t bode well. The die-hard microfinance funds will continue assuring us that this is the miracle cure for poverty if only we’d hand over our dollars to them to invest on our behalf and take a nice management fee in the process, but when this class of investor starts pulling out, images of decks of cards spring to mind. If the funds don’t refinance the MFIs, the MFIs can’t refinance the clients. If clients don’t expect to be able to get additional loans from an MFI, there is a strong(er) incentive to not repay the current loan. If default rates rise and more investors are scared away, this can become a self-fulfilling prophecy.
Thirdly, the microfinance sector is furiously trying to re-brand itself, and launch all manner of initiatives to perk up its ailing reputation (largely window-dressing, see Truelift). If such measures fail to persuade the professional investment funds, for how long will the general public remain convinced? Sure, this is not a large, global microfinance fund, but watch this space.
Meanwhile Blue Orchard continues to decline. From $268m in January the August report suggests the fund is now hovering at just below $253m.
I never heard of Futuregrowth Asset Management and their management team has no microfinance people. Probably better that they got out, no?
Some of what you say about the industry being hijacked by profit-seeking financiers makes sense. But relying on ‘rigorous’ academic research to make the claim that microfinance provides no social good ignores the flaws inherent in academic research. Do you worry that your scathing blanket statements about the industry make it harder for the good MFIs to do their work? Or am I missing the point?
These are valid points. However, I do not state that all microfinance is destructive. I suggest some is destructive, and I cite David Roodman’s legendary quote that the impact on poverty reduction is, on average, “zero”, i.e. there is some good, some bad, some neutral, and the overall impact is negligible. If you read the work of academics such as Duvendack it is hard to challenge the conclusion, and this is certainly rigorous. But your point about my blanket statements damaging the good MFIs is valid. I actually beleive there are good MFIs out there. I continue working in the sector to this day. In this regard I have two main concerns, the first of which you rightly point out: profit-seeking financiers. However, perhaps the primary point in my book is that the sector is plagued with a serious principal-agent problem. Put simply, we ought not automatically assume that the intermediaries that we entrust to invest in microfinance will always act in the best interests of either their own investors, or those of the poor. They will act in THEIR best interests. Thanks to asymmetric information such players are able to present knowingly flawed, incomplete and often outright incorrect data to their investors immune to the dangers of regulatory oversight, or that their investors will have any practical means to verify whether the data they receive is in fact accurate. Selective photos of poor women with goats on websites. Avoiding the topics of over-indebtedness (i.e. and excess of microfinance). Suggesting that 99% repayment rates imply benefit to the clients. The portion of microfinance that is directed to consumption rather than to the oft-claimed productive enterprise. Etc. etc. What interested me in this case is that one of these same intermediaries appears to have come out of the closet. Since I wrote this post another fund, MicroPlace (part of eBay), closed entirely, stating: “While proud of our results, they haven’t scaled to the widespread social impact we aspire to achieve through all our business efforts” (https://www.microplace.com/). Expect more such statements.
I am actually working on a couple of posts currently to examine some more positive aspects of the microfinance sector, which I hope to publish shortly. I acknowledge that this blog has focussed somewhat on the “dark side”. However, my motivation is simply that much of the media coverage focuses on the ludicrous claims of the sector, and that any criticism is largely stifled in the mainstream media. I attempt to address this imbalance. For example, I was deeply concerned by the Fitch downgrade of Grupo ACP in Peru late last year. Of course, the mainstream media, and the focussed microfinance media, entirely failed to pick up on this huge event. I plugged the gap. Some months later Grupo ACP was forced to sell off its prize asset, MiBanco, in perhaps the largest firesale disposal in microfinance history, to avoid the parent company (and main shareholder of MiBanco) collapsing. Read the recent Peru posts for more information. Peru’s problems are not yet over, but don’t expect to see much discussion of these from the institutions that stand to gain the most from keeping this brushed neatly under the carpet.
I am sorry that such a gap exists, but this is the sector we live with – quick to make noble claims, slow to address reality. Plugging this gap is the only means to improve transparency, and until we acknowledge the problems, how can we solve them? And fortunately I am not alone in taking on this task, and mainstream media is catching up. But it would be nice to look at some of the positive developments taking place, and while they are few and far between, I am looking forward to writing about them. Watch this space. Thanks, Hugh
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You have to love this comment! I am not sure if this is a joke or not, but it’s worth publishing. That Mrs James is so delighted with such utter recklessness by this apparent bank demonstrates the fundamental asymmetry inherent in the motivations of the two sides of a loan. See if anyone else can obtain a loan!