Truelift – the Microfinance Wonderbra

What is “Truelift”? What pops into your mind? I initially thought it might be a rival to the Wonderbra; a new botox treatment; an elevator for the elderly or handicapped, perhaps?

In fact it is the latest effort to perk up the reputation of the microfinance sector. The inaptly named Smart Campaign was obviously flawed: funded, hosted and managed by vultures (Accion). So they decided to re-brand the idea, and actually make it marginally sillier in the process. The director is a gentleman named John Bergeron, formerly of Kiva and Accion – believe it or not. I am hard-pressed to think of two institutions less suitable for grooming someone to work in transparency and client welfare. Wolves guarding sheep springs to mind, as I’ve discussed before in the context of Smart. But look who else is behind this latest face-saving effort:

The steering committee boasts none other than Isabelle Barres, of Smart and Accion (pure coincidence). Alex Counts of Grameen Foundation USA got a seat for some reason, as well as the usual insiders: the Social Performance Taskforce, CGAP (of course), even Oikocredit joined. Asad Mahmood of Deutsche Bank got a seat despite the chequered history of the fund he manages. This was presumably unrelated to the $150.000 donation Deutsche made to Truelift (another coincidence). Interestingly two rating agencies, Planet Rating and Microfinanzas are involved, but MicroRate is not. It’s potentially a good deal for the rating agencies, as they charge a fee for handing out the certificates. Premal Shah of Kiva is an advisor, apparently. Given that Kiva are yet to work out how to calculate an interest rate one wonders what advice Kiva can offer. However, Kiva are superb at spin and marketing and having an ex-Kiva bod running Truelift will no doubt help Kiva somehow. Sam Daley-Harris, the former head of the MicroCredit Summit Campaign is also an advisor. He ran the MicroCredit Summit Campaign through the Nobel Peace Prize years right through most of the main crises, before handing the baton to Larry Reed. The CEO of the MixMarket – one of the least reliable sources of data of any sector on earth, also offers his advice to this learned body. I can’t help but wonder whether his time would be better spent tidying up the data quality issues on the MixMarket. I’ll blog on the reliability (or lack thereof) of MixMarket data another day.

I wasn’t surprised to see Larry Reed signed up, but expected (hoped) he would have pushed a little harder to make this a professional initiative. He’s the current head of the Summit Campaign and showed some positive signs of competence. Alas he seems to have diluted his initial enthusiasm and has joined a watered-down spin institution, which is sad. He actually had the ability to shake things up, but perhaps trying to induce good behaviour in the microfinance sector was too ambitious a task.

So, what is actually wrong with their latest wheeze? Apart from having a silly name and flawed management, it doesn’t actually do anything. But to understand quite how silly it is we need to look at some history.

First, the Compartamos IPO irritated a lot of people, from Yunus down, and people began to get a little nervous about profiteering from poor people. Accion, one of the main shareholders and beneficiaries of the IPO, was not complaining thanks to a $200m+ payout. But the sector needed to respond to the growing backlash, so Deutsche Bank made the first move to set up some sort of self-regulatory initiative – the Pocantico declaration, in 2008. This expressed some concern that there might be trouble brewing in the sector, particularly as the poor became chronically over-indebted with over-priced loans. Sure enough this was in fact the case, as various crises demonstrated. Deutsche didn’t actually do anything to avoid such crises, merely made a declaration about them, and were well invested in Nicaragua when crisis struck. Obviously the ineffectiveness of Pocantico was clearly demonstrated when the Andhra Pradesh scandal broke.

Pocantico morphed into the Smart Campaign, run by a veteran Accion employee Beth Rhyne. I have been fairly critical of Smart, most recently here. Beth doesn’t like me. The main problems with Smart are a) it is run by Accion, b) it has no teeth, c) it is “endorsement without enforcement” – all you need is an email address and a name to become a member, d) the so-called Client Protection Principles (CPPs) exclude the rights of children despite Smart claiming to be a fair-trade seal of approval for microfinance while all other fair-trade seals mention child labour as a key factor. The latest ILO research on child labour makes for uncomfortable reading for these guys, a blog post for another day.

So, Smart teamed up with Larry Reed to try to establish some form of certification. They came up with the Seal of Excellence, which is actually not very persuasive as it is as vague and nebulous as Smart. Key areas such as extortion of the poor and the legality of the enterprises funded are carefully ignored. There was some fanfare, but it didn’t really take-off, which was dangerous for Larry as he essentially bet his career on it. So, Truelift seems to be the re-vamped attempt.

But, before looking at what Truelift does, and doesn’t do, it’s worth pointing out one effective transparency/client-protection initiative which was ignored. Chuck Waterfield, a veteran microfinance expert, set up, an NGO that publishes the actual interest rates charged by MFIs. Alas this was not incorporated into TrueLift for some reason. One can only speculate why not, as this would have been a golden opportunity to oblige transparent pricing in microfinance. However, look at the people behind TrueLift – they don’t necessarily want transparent pricing at all. Poor old Kiva can’t even state the interest rates on the loans they apparently make to the poor. Would Deutsche Bank want their investors knowing the rates the poor are paying with their philanthropic funds? Accion are clearly not going to reveal the eye-watering rates they charge the poor. And even Larry Reed is probably a bit hesitant to reveal the interest rates he was charging as CEO of Opportunity International (161.4% in Ghana, I did a post specifically on Opportunity’s rather dubious interest rates, and also one on Kiva’s slight “errors” when describing the cost to the poor).

Truelift have reduced the 7 CPPs of Smart to three principles: “Purposeful Outreach to People Living in Poverty”; “Services that Meet the Needs of People Living in Poverty” and “Tracking Progress of People Living in Poverty”. There are no metrics. An MFI can use any measurements it likes, and as they work their way through the various levels, from aspirant to leader, they have to meet various requirements sufficiently vaguely worded as to be largely meaningless. “Sufficiently meets qualifying standards”, or “good performance and a minimum appropriate score”, etc. In one amusing twist, to reach the emerging status the MFI must meet only 4 of 6 categories, but 7 are listed just to make things a little easier. There’s a self-assessment tool, in case an MFI can’t be bothered to hire a rating agency to tell it whether it’s abusing poor people or not – but it’s not ready yet.

Of course the MFIs have to provide all data to the MixMarket (please do it accurately, it’s such a pain having to reject 50% of the Mix data because it’s flawed), and then get a social rating from one of the rating agencies (for an undisclosed fee), two of which conveniently are part of the management of Truelift. To get the maximum rating the MFI needs to also get a full Smart Certification, so Smart is not dead, yet, merely sidelined. It’s a long process, presumably quite expensive, and the actual certification is ill-defined. For example, there are no levels at which an interest rate might be considered exploitative, and the MFIs are allowed to lend to any manner of illegal enterprises – there is no requirement that the micro-enterprises are even legal, and they do not have to comply with ILO-approved local legislation on child labour, to single out just one element of legality these folk chose to delicately ignore while “protecting clients”. So, as far I can tell, lending to pimps and drug-dealers at 150% per year would not actually disqualify an MFI in the certification process.

For example, on the objective, measurable topic of interest rates, for which best practice calculations are widely available, the Smart criteria state only that rates be “market-based” and fees and penalties “not be excessive”. So, the famous 195% APR at Compartamos would not necessarily violate either of these, thanks to “excessive” remaining un-defined.

It would not be hard to dramatically improve the quality and integrity of Truelift. Many countries (such as Mexico and Ecuador) oblige MFIs to publish their APRs. The certification process could do likewise. The investment companies such as Deutsche Bank, BlueOrchard, Triple Jump etc. all claim to promote transparency, and thus they could publish their investments and the interest rates charged, and allow their own investors to decide whether these are reasonable or not. But the simple fact of the matter is that the vast majority of MFIs are ashamed of the interest rates they charge and would rather these be kept as quiet as possible. Chuck Waterfield is likely considered a nuisance by these people, and when I use his data to expose the actual interest rates charged by the likes of Kiva or Opportunity, I do not receive thanks from these folk despite their vocal approval of transparency. The sector is facing some serious reputational issues, and interest rates of even 50% (low by microfinance standards) will not earn much praise from the general public. Ever wonder why Mexicans pay through the nose for microfinance and US citizens borrowing through Kiva pay peanuts? It’s all to do with reputation.

Thus Truelift has to tread a fine line. It has to be sufficiently credible and well-supported to assuage the concerns of the public and perk up the reputation of the sector. It cannot be too transparent as to actually reveal the more sordid activities of the ailing sector as this would be counter-productive. It must be well-marketed and rely principally on spin and feel-good wording, without too much attention to actual details. In their webinar (complete with background noises, annoying beeps etc) they spend an inordinate amount of time on how they picked the name (no, it wasn’t inspired by Wonderbras), and very little time on what practices are actually deemed unacceptable. Above all, the profitability of the sector must be maintained at all costs.

The logo itself is slightly confusing – the yellow blob represents “the life-giving rising sun and the promise of a new tomorrow”, the purple dome represents “the sky under which all things are possible” (apparently), but the green bit “speaks to the earth, agriculture and growth. Its angled application brings to mind a path or way forwards towards progress”. It reminded me of the Aquafresh toothpaste logo for some reason. Regardless, this all looks pretty firmly like spin-language to me.


Alas Truelift is merely a PR exercise. It needn’t be. If the financing bodies actually demanded certain standards as a condition to obtain funding, effective microfinance could become the norm. But to do so would jeopardize profitability. Governments such as Ecuador actually have the balls to make sector-wide laws limiting exploitation; institutions such as calculate actual APRs with trivial ease; the ILO goes to lengths to identify and define child labour – none of this is rocket-science. The only excuse I can think of to explain why the sector fails to clean up its act is because they don’t want to. It doesn’t serve their interests. Deutsche Bank’s investors would likely be furious to discover how their funds are being used. Kiva genuinely has no idea of the interest rates their poor clients are paying (or the days of the week). Accion do not want to draw attention to the source of their profitability.

Truelift looks nice and wonderful at the surface, but is likely to be disappointing when you peel away the layers. In this regard alone some may argue there is some mild overlap with the Wonderbra after all.

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Terzi to the Rescue

I criticised this former Minister for Foreign Affairs in Italy for comments which, in my opinion, were foolish. He became irritated and is now trying to deny it in bite-sized chunks on Twitter (@GiulioTerzi).

In a nutshell, I question his wisdom in suggesting replacing unemployment benefit with unemployment loans. Read the exact, original quote below from his own website:

Microfinance is one of the instruments for “addressing inertia and social fragility, which is essential in safeguarding the quality of democracies” in order to prevent “material distress from encouraging populist deviation and citizen regression”. Minister Giulio Terzi thus explained the anti-crisis role of microcredit and microfinance, as he spoke at the second edition of the “Microfinance and European Union policies Forum” organized by the National Microcredit Agency.

[So, a fairly standard defence of microfinance and its (as yet unproved) miraculous properties. But here’s the second paragraph, I’ve put Terzi’s offending quotes in bold.]

People with ideas and projects they cannot realise as a result of not having access to credit need concrete answers; those who have lost their jobs and are having a hard time finding another; immigrants who risk social exclusion”, Terzi explained, underscoring how microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”. Moreover, it “can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.

Terzi’s mistakes arise mainly in this second paragraph, which is what he is now trying to deny. First, who are the people this newfound microfinance is aimed at? He clearly states it is the unemployed, amongst others.

Second mistake: he confidently states that microfinance “expands business opportunities” – where is the evidence for this? If this were the case, why have so few studies of microfinance found it has any impact on poverty reduction? He suggests microfinance will get the unemployed to participate in society once again. Lovely, this is what everyone wants to hear, particularly from a vote-seeking politician (before he quit).

So, I think it is fair to conclude, on the basis of logic alone, that Terzi is suggesting here that microfinance can help to get unemployed people back to work. So, now look at his final statement: “[microfinance] can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”

Now, this is likely the bit Terzi regrets most. Microfinance has an additional advantage beyond those listed (getting the vulnerable and entrepreneurial back into society) – it can reduce public spending, particularly that which rises in times of recession. Are there more entrepreneurs in times of recession, or more immigrants? There are certainly more unemployed people, and these drain public spending via their reliance upon the mother of social buffers – unemployment benefit. What other social buffer could be reduced by getting unemployed people back to work, albeit via microfinance, besides unemployment benefit?

In order to reduce the cost of social buffers, microfinance to unemployed people cannot be in addition to unemployment benefit, but instead of. Give money to the unemployed – sure, but make it a loan instead of a donation. This is where I most vehemently disagree with Terzi.

The beneficiary, as stated in this final statement, is the government, not the poor. That the poor benefit from microfinance is a de facto truth taken for granted by Terzi. But the government itself can benefit via reduced public spending. Less need to have social buffers. Less benefits. Less need to raise tax. Less need to borrow on the capital markets. More money for the government to spend on other things – Bunga Bunga parties perhaps?

That microfinance in Europe has a pretty poor track record is discussed in a separate blog. In a nutshell, it has been an unprecedented disaster managed by a handful of mostly ineffective MFIs barely capable of completing a survey, is grossly inefficient, suffers eye-watering default rates, has led to minimal job creation, is aimed mostly at people on welfare, much of it is used for consumption rather than any productive use, and offered to people who are not even necessarily excluded from the mainstream banking sector.

However, unemployment benefit is not a trivial expense to the beleaguered Italian government:

Terzi became Minister for Foreign Affairs in November 2011 (unemployment was 8.5%) and quit in March 2013 (by which point it had risen to 11.5%) following severe criticism for his handling of the shooting of two (presumably vulnerable) Indian fishermen at the hands of Italian soldiers. This latter point is worth exploring a little for an obscure similarity with Terzi’s current predicament, and to get a feel for whom we’re dealing with here:

The Enrica Lexie Incident occurred on 15 February 2012 when Italian soldiers belonging to a Vessel Protection Detachment (VPD) team deployed on a privately-owned oil tanker MT Enrica Lexie opened fire on a tuna fishing boat and killed two Indian fishermen…. The Italian Defence Ministry’s initial attempt to portray the incident as a successful anti-piracy operation and the continual refusals by the Italian Government to publicly acknowledge that the two Indian fishermen were shot by the Italian Navy VPD team on the Enrica Lexie, caused public outrage in India and extinguished any hope of a rapid and discrete diplomatic settlement with India…. Provocative press statements released to the Italian media and incessant tweeting on Twitter by the Italian Foreign Minister Giulio Terzi stoked controversies and became a major impediment to finding a quick solution…. Italian Foreign Minister Giulio Terzi faced severe criticism in the Italian media for his ineffective diplomacy…. Terzi announced that he was opposed to the return of the marines to New Delhi, contradicting his earlier statements which affirmed the decision to return of the marines to India was taken collectively by the Italian government…. Mario Monti also revealed that former Italian foreign minister Giulio Terzi repeatedly hampered efforts to settle the dispute with India in a quiet manner by perpetuating controversies through hawkish statements posted on Twitter.

Terzi India magazine

This incident cost Terzi his job, but it appears his fondness of using Twitter, not entirely appropriately, was partly responsible. Read the whole Wikipedia account for more details, but to put it mildly, he doesn’t come across favourably. And now he’s back on Twitter.

So, I reiterate my opening stance. Terzi is wrong in this regard. He speaks without the slightest shred of evidence to support his claims, whether this be with regard to Indian fisherman being shot, or unemployed Italians being offered loans. He has minimal knowledge of microfinance, but is an avid supporter. In fact, in this regard, he is fairly typical of most microfinance supporters. He is attempting to appease everyone by helping the vulnerable while reducing the cost to the government of helping the vulnerable. I am personally relieved he no longer has ministerial duties, I hope the Italians learn from his mistakes, and let’s hope that he avoids microfinance henceforth.

Microfinance is a potentially useful tool to a sub-set of poor and vulnerable people, if used wisely. It rarely is used wisely, and it certainly should not be considered a cost-saving alternative to welfare payments.

So, Terzi – you are denying saying these things, in bite-sized chunks on Twitter. I publicly challenge you. Let’s speak, on record, and we will publish the entire conversation on this blog. Your performance over the killing of innocent fishermen is public record, let’s now get your views of microfinance into the public domain.

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An Untimely Obituary

I should start with the good news. David Roodman is not dead. The bad news is that he’s left the Centre for Global Development and moved to Bill Gates’ team. I’m not 100% sure what he’s going to do there, but it’s not microfinance. I saw him in Norway at a conference recently, where he formally announced his resignation, and also slipped in a quick dig about my book. In fact some may be surprised to hear that I am so saddened by his departure, but truly I am. David criticized me on a number of occasions (always in good taste), we engaged in a number of fierce debates on his open blog, and whenever he had the chance to challenge me he usually would. The opening sentence in his review of my book was “I can’t recall feeling such an acute combination of fury and delight at a book before.” The review is fairly critical, but despite the digs, David praised it for raising an important area of discussion – the principal-agent problem and the disturbing role of the microfinance investment funds. It’s one of my favourite reviews.

We did an event together in NYC for my book tour, and he was one of the finest sounding boards for bouncing ideas off. On a number of occasions he compared me directly to Milford Bateman, whom David has sparred with on a number of occasions, and on the basis of the friend of my enemy etc. this would presumably place me firmly at odds with David. On the contrary.

David was one of the most intelligent commentators in a sector dominated by spin and unintelligent people. You had to read his posts carefully, and he would almost always take the time to respond to comments – good manners. Unsatisfied with superficial answers he would get under the skin of a question and pursue the answer where others might give up. His stance was generally ambiguous. He is well known for a quote in Time Magazine suggesting microfinance had no impact on poverty, “on average”. It was mis-quoted frequently, but here you had precisely a Roodman-subtlety – those two words, on average, were critical. He scoured the academic literature, and arrived at a very similar conclusion to the likes of Maren Duvendack – it’s generally not a very good poverty alleviation tool, but does that make it useless? Roodman thinks not.

I “met” David virtually, while commenting under a pen-name on his blog. I was still writing my own book so had to remain anonymous. Then we met in person at a conference in Montevideo where I discreetly mentioned I was the mystery blogger. I had provided David with some interesting information and an unusual direction in some of his blogs – an insider spilling the beans, and we occasionally bump into each other at conferences. His triumph was to straddle the practitioner-academic divide. Although highly academic (mathematics), and with relatively little field-experience, David was able to get academic concepts into the broad microfinance community, an extremely valuable service in a sector barely able to calculate an interest rate.

It would be unfair to omit reference to his on-going debate with Pitt & Khandker. These economists had published a paper in 1998 about how wonderful microfinance was, and David re-analysed the data and came up with a different conclusion: remove 16 outlying observations from the dataset of 5.218 observations and the miraculous impact of microfinance vanishes. Other economists joined the fray, and one day an entire book will no doubt be written about the exchanges. The debate includes some subtle econometrics, and I’m not qualified to declare a winner. David took on a couple of big economists in the process, as well as the broader religion of microfinance, and although he got his fingers burnt in the ensuing debate, respect for challenging the status quo. But to be fair I ought also mention that Pitt and Khanker’s 2012 response was severe: “[the] Roodman and Morduch claims are based on seriously flawed econometric methods and theory and a lack of due diligence in formulating models and interpreting output from packaged software…”. Ouch.

His book, Due Diligence (a term many in the microfinance investment community are disappointingly unfamiliar with) is superb, up to a point. It flows well, he constructs the arguments with a healthy balance of fact, logic, common sense and personal reflection. His history of microfinance is concise, informative and readable. The book is far more critical than I initially expected, indeed possibly more critical than even mine in some ways. And yet David managed to not alienate too many people, and still get invited to conferences despite raising some uncomfortable questions. He became the “household” name for tolerable microfinance criticism, whereas other critics, myself included, tended to polarize people. Fair enough. Working at a Washington think-tank possibly obliged him to act more prudently than us heretics, but I think it was mainly a wise combination of deliberate ambiguity and clever politics which afforded him this role. By not taking aim too squarely at individual institutions or people, many probably assumed the criticism was aimed at others, and let it slide. He is so clearly more intelligent than those still labouring under the illusion that microfinance is a miracle cure that they probably realised it was foolish to pick a fight with him, as long as they weren’t named explicitly.

Then, a few months ago, he went quiet. A few of us wondered what was going on. No replies to skype messages even – the ultimate insult. Then, out of the blue, he emerged with one of the more fierce debates: Four Arguments Against the Elimination of Child Labour. Call me a radical, but I am one of the few (alas) in the microfinance sector who actually disapproves of child labour, particularly the variety which is a) illegal and b) displaces education. So David’s critique of this was strange, and dare I say it, not as well argued as normal. Was the writing on the wall? A lengthy debate ensued, with comments flying around, it was all rather exciting, then petered out like such posts do, and the kids are still working in their micro sweat-shops blissfully unaware of the debate. Then more silence from David.

So, did it come as s surprise that he quit microfinance? Not entirely, but I will miss him. Who is there to debate now? Many of the academics are ludicrously specialised and don’t blog much. David had a broad audience which led to healthy debates. Who will replace him? Almost everyone I can think of is less ambiguous (i.e. more polarized) than David, which doesn’t bode well for healthy debate. We need ambiguity and intelligence combined. But he set out with a mission, published a fairly good book, answered some key questions, prompted healthy discussion, and had some fun in the process. But when you spend that much time investigating something which ultimately doesn’t work that well it is often wise to abandon a sinking boat.

The obvious replacement candidates are the Governance Across Borders blog, or Dan Rozas’s website, both of which possess some of the characteristics of Roodman, albeit with smaller audiences. Time will tell.

But reverting to David’s book, there is a mystery surrounding the last chapter, and perhaps this will remain the final unanswered question of the Roodman-era in microfinance. The chapter just doesn’t flow so well. It seems out of place. It is not argued so rigorously. It is inconsistent with the meticulous detail and logic applied in the rest of the book, which as I mentioned, is pretty critical of the sector. Suddenly, out of the hat, Roodman conjures up his “industry building” argument. In a nutshell, the fact that microfinance doesn’t appear to work doesn’t matter, because we’ve built an industry in the process. I liken it to a town without a hospital. Some do-gooders donate a hospital, and ten years later return to the town to discover the health of the locals is unchanged. “But at least we’ve got a hospital now” one retorts. Is that a satisfactory answer? Sure, it might provide employment, have some spill-over effects, but can we defend hospitals without reference to health? And shouldn’t we aim a little higher? It just doesn’t seem to be a rigorous answer, and sits uncomfortably as the final chapter of an otherwise excellent book. In this regard (alone) I would compare David’s book to Stephen King’s “It” – a definitive book if you remove the final chapter.

To quote David’s arch-rival, Milford Bateman’s comment on the book was “The book is…less a product of genuine research and more a bought-and-paid-for, but yet sophisticated and subtle, piece of propaganda.” I don’t know if I agree with Bateman here, or understand entirely his point, but I was left with this feeling that despite 200+ pages of critique: the positive conclusion was flawed. An attempt to appease the fanatics perhaps? To not alienate friends met along the way who are utterly convinced they were about to solve world poverty once and for all? Some gentle pressure from the book sponsors MasterCard Foundation and CGAP perhaps? We’ll likely never know the truth about the final chapter.

A final topic that is largely ignored by the microfinance community is that David is a mad keen on Morris dancing. Search for images of Roodman in Google and it’s surprising what comes up. So I shall end my untimely obituary with some photographic highlights. And no, these are not real quotes.

“Grab the camera: I found a microfinance client who got out of poverty”

“Our microfinance training program includes poverty-alleviating folk dancing classes”

“Milford wrote a book too, but he’s rubbish at Morris dancing”

So, there we have it. David Roodman, thank you, it was fun, you made me think, sometimes laugh, I thoroughly enjoyed our debates and shall miss them. I wish you the best of luck with Gates and his gang, and if I need some advice on microfinance or Morris dancing, I’ll drop you an email.

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The European Microfinance Swindle

Despite the endless awards granted within the microfinance sector, there is not yet one for the silliest publication of the year. Were such a prestigious honour exist, I would propose the recent “Overview of the Microcredit Sector in the European Union 2010-2011” as a serious contender. I cannot recall the last time I ploughed through a 100-page document so brimming with gibberish. It’s mildly amusing though, if you are on a long flight and you’ve seen the decent movies and are sitting next to a particularly dull person. I asked an awkward question at a recent microfinance conference in Norway regarding the wisdom of so-called Italian minister Giulio Terzi’s suggestion to replace unemployment benefit with unemployment loans, explored in this post, and was handed this farcical document. Fortunately Terzi subsequently quit and is no longer making a mockery of the last semblances of the Italian welfare state.

The document is silly on so many counts it is hard to know where to begin. It is badly written, long-winded, and fails to address the key issue – is microfinance in Europe actually working? The premise is that microcredit is not just for poor folk in poor countries, but useful for employment creation in Europe. But there is not one single shred of evidence presented of a single job being created. Despite the endless trivial graphs, there is not a single statistic of “xxxx jobs created”. It’s the same trick the mainstream microfinance sector makes – we made loans therefore people have benefitted. Not necessarily.

That the document was funded at all is surprising, but I enjoyed the opening disclaimer: “The information [] does not necessarily reflect the position or opinion of the European Commission”. Phew, at least one person in the EU must have read this before publication. Even the table of contents is worrying, with a mere 2 pages (of the 100) dedicated to “Social performance”.

Despite employment creation being the stated (albeit un-demonstrated) goal, apparently ethnic minorities and clients below the poverty line were “targeted”, although much of the capital was spent on consumption, as usual. I suppose buying a new TV does generate employment, in China. The usual focus on women was plugged, with the fairer sex mopping up 38% of all loans, up from 27% last year apparently. In an enlightening moment in the introductory waffle the authors clarify: “Social inclusion lending… focuses on lending to self-employed individuals that are excluded from banking services, due to the socio-economic status of being socially excluded…” So, not only are they already self-employed (i.e. hardly job creation), but in order to qualify as a socially excluded person you have to be, er, socially excluded. Thanks for clearing that up.

In the key findings the authors frankly admit that “the availability of data for clients’ outreach and social performance is still limited among the MFIs covered in Europe…. the emphasis of the MFIs mission statements is on job creation… is followed to a lesser extent in the sector.” Confused?

A recurring theme in the paper is that no one actually knows what is going on, including the MFIs interviewed. One of my favourite aspects was on the interview response rate and the so-called Code of Conduct. Only 154 of the 376 MFIs contacted even bothered responding to the survey, and of those that bothered, only 72% knew there was a Code of Conduct. In an astonishing confession found in the appendix (tables 17 & 18), one third of Albanian MFIs and 100% of those in Austria were aware of the Code, and yet 100% of both countries said they were NOT intending to follow it! Likewise, in Belgium and Croatia, half of all respondents said they would NOT be following it. Compare this to the Smart Campaign in vanilla microfinance, where everyone and their dog signs up, and then does nothing about it. I possibly have more respect for an MFI that flatly refuses to adopt a silly code than one that signs-up for pure window-dressing. Obviously it would be better to have a sensible code, but such a code might jeopardise profit and offer genuine protection to the poor – unacceptable in the beloved sector.

This recent survey was a little more representative than previous surveys, as they decided, wisely, to include Europe’s largest MF country – Bosnia, which was ignored entirely in previous surveys. Spain generally comes second, on account of the country barely existing economically – ideal breeding ground for microcredit. The European total broke through the €1bn mark in 2011, alas. This was marginally over 200.000 loans. When they bother to filter out for business-specific loans, perhaps not surprisingly, Germany rises to the top of the pile. Trust the Germans to actually do something productive.

The authors also managed to “forget” the rather awkward fact that microfinance in Bosnia is an unprecedented disaster and one of the main crises to have blighted the sector, right up there with Andhra Pradesh and Nicaragua. See OFSE Working Paper 36, entitled: “The contribution of the microfinance model to Bosnia’s post-war reconstruction and development: how to destroy an economy and society without really trying”. Needless to say this article is a little less optimistic about the impact of microfinance on poor Bosnians.

The average interest rates charged in Europe range from 4% in France to 35% in Serbia, with an average of 11%. Spare a thought for the Latinos and Africans coughing up interest rates perhaps 10x, or even 50x such European rates in the name of poverty reduction. As with Kiva loans in the US – micro-entrepreneurs in rich countries pay a fraction of what the poor in developing countries are expected to pay. Why? Because lending to unemployed gringos and French people at 200% is politically dangerous, but to Mexicans it’s acceptable? Perhaps the PAR (bad loans) of these European MFIs is astonishingly low, enabling the MFIs to charge lower rates? Er, the average PAR30 is 12%, and 6% was simply written-off in the year. This would be considered a total emergency in any “normal” MFI, tinkering on bankruptcy. In the EU it’s fine.

Average loans sizes (deflated by GDP per head) are highest in Lithuania for some reason, and lowest in the UK. But beyond such modest metrics, the report produces reams of utterly useless tables and statistics, like the number of MFIs that only offer credit, per country, or when they were incorporated, or the share of full-time loan officers. I’m not sure who would be remotely interested in such statistics. There are no cross-tabulations, and explanations are generally trivial, so it really is hard to understand why they bothered presenting such data other than to justify two years of work gathering such useless data and producing a report to hand out for free at conferences (to promptly be recycled, one hopes, to at least prevent the erosion of Europe’s few remaining forests).

The social performance chapter (if that is the right word – it’s basically two pages) suggests 72% of respondents thought job creation was critical for their mission. And yet the survey people forgot to ask such penetrating questions as “how many jobs did you create?”. The reason for the modest coverage of this topic is stated in section 5.2: “to analyse [impact] in a reliable way, the clients have to be asked directly for such information, or specific methods, like randomized evaluations, have to be used [but were not]… Therefore, this survey edition has not included any self-assessment questions about the social impact of the MFIs activities” (emphasis added). Great – they ignored impact deliberately.

Indeed, page 44 ends with another astonishing confession: “47% of the business microloans were issued to bankable customers” – i.e. they weren’t even financially excluded. So why bother?

22% of loans were disbursed to people already on welfare, although the report doesn’t discuss to which extent loans are replacing welfare, presumably a critical point. However, the ratio rises in Belgium, where 100% of microfinance recipients are on welfare, 83% in France, and 56% in Spain.

The financial performance section gets off to a dubious start. Astonishingly, of the sub-set that bothered to reply to the survey, over a quarter were unable to report their non-performing portfolio rate – possibly the single most scrutinized microfinance statistic. For those that did manage to calculate this fiendishly tricky statistic, Moldova led the pack with a PAR30 of only 2%, while Ireland reached an impressive 35%, i.e. more than 1 in 3 loans were in default. France boasts 28% and the UK was 27%. In “normal” microfinance any number over 5% is considered worrying, and over 10% is a crisis threatening the future of the institution and rendering funding almost impossible. In Europe this is not a factor, to the extent that 27% of respondents didn’t even bother tracking the ratio. One MFI had written off 34% of its portfolio, but the report doesn’t say which.

“Only around every fifth MFI surveyed provided information regarding their amount of refinancing loans”, i.e. 80% of those who bothered answering the survey had no idea or didn’t want to disclose it.

I wondered why the financial performance section was so much bigger than the social performance section, and the answer is provided on page 49: “this [survey] was the first to include requests for basic financial performance data”. The mind boggles as to how utterly redundant the previous surveys must have been. Only 1 in 3 respondents had any idea of their portfolio yield, i.e. the gross operating margin, but the good news is that the highest gross margin category is growing rapidly! Good for the MFIs, that is, not so great if you’re the unemployed Spaniard coughing up the interest. 1 in 4 of those surveyed knew their debt to equity ratio. 3 in 4 presumably had never considered such a complex calculation. A mere 30% knew their operating expense ratio, so there’s clearly scope for improvement here.

Is it not humiliating, as a manager of an MFI, to be asked such basic questions and simply tick the box “I have no idea how to answer this question”?

Then we have another particularly silly chapter – “Trends in the Sector” (a whopping 2 pages). It bangs on about job creation to begin with, then discusses the Code of Superior Operations or whatever it’s called, which most seem pretty indifferent about, but then there is some optimism:

“At the level of the demand for microfinance the rising number of unemployed people, especially in the Southern European countries, should allow MFIs to grow their operations”. Always look on the bright side:

more unemployment + less welfare = more microfinance

This section goes on to state “the general public support for microfinance provision is expected to decline in the coming years, due to budget restriction and high deficits at national and regional levels”. Er, I can think of some other reasons why public support might wane – it’s a stupid idea that has demonstrated absolutely zero positive impact and there is a global backlash against indebting poor vulnerable people regardless of whether they are from Senegal or Spain. Do the authors read the newspapers?

The report then presents some extremely light country summaries, and doesn’t bother with a conclusion at all, presumably because it is pretty blatantly obvious what the conclusion is for the 1% or readers of the report that make it to page 84. However, don’t stop here – the appendix is quite funny.


This is a nonsense report. Microfinance in Europe is clearly operated by utter incompetents incapable or unwilling to fill out a simple survey. The mild insights regarding performance and results suggest the vast majority of European microfinance institutions are chronically inefficient, have extremely poor quality portfolios, are not lending to the stated target groups, are entirely bankrupt and kept alive by subsidies from asinine governments or donors who still retain some glimmer of hope in microfinance. But let’s not forget the harrowing words of the former Italian minister for foreign affairs, Giulio Terzi di Sant’Agata:

“[Microfinance] can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.

This is not merely a silly idea, it is an explicit effort to replace welfare with debt to vulnerable people in order to reduce government budgets bursting at the seams following years of crappy economic management. As with the rest of microfinance, and many aspects of European policy in general, whether a policy actually works or not is simply not relevant. It’s a nice idea that some people cling to. If you can make a buck out of it, or slash your welfare costs to free up money for other activities, all the better. Rather than laugh at such jesters, we should be deeply worried – these people are so removed from reality, and yet wield power. Fear them.

According to Wikipedia “Terzi resigned from office on 26 March 2013 in the wake of severe criticism in Italy for his handling of the diplomatic dispute between Italy and India over the 2012 Italian shooting in the Arabian sea.”

Phew. That’s one less to worry about. Let’s hope he leaves the microfinance sector entirely, he is clearly not qualified in this regard.

So, European poor folk unite! Don’t take out silly loans from quasi bank institutions apparently to start up a business but invariably to spent in a bar. Demand governments actually create jobs and engage in a sensible industrial policy rather that littering the streets of Madrid and Milan with immigrants selling trinkets on street corners and re-labelled “micro-entrepreneurs”. In a well functioning economy with well functioning banks microfinance shouldn’t be necessary. It was invented to fill the gaps of such market failures. If the likes of Terzi could focus their attention on fixing their financial sectors and generating growth rather than attempting to replicate a Bangladeshi model (that doesn’t work that well either) in their countries the European experiment would likely be in slightly better shape. The only glimmer of hope is that the EU recognizes the ridicule of these people and ceases all funding to such bodies. But I still have one niggling question for them:

Why do European MFIs charge such staggeringly lower interest rates to the European poor compared to the poor in developing countries? This is nothing more than a massive PR exercise to give the appearance that some governments are doing something remotely useful to help stimulate their economies, generate jobs and target vulnerable groups. But it’s a failure, no one is convinced, and the sooner they stop this nonsense the better.

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MIBs: Microfinance Investment Barbarians

Private capital to microfinance is mostly channelled through gatekeepers (microfinance investment vehicles – MIVs). Some public capital also flows through these vehicles. On the micro scale the P2Ps (Kiva, MyC4 etc) act as more trivial gatekeepers for those wishing to obtain the feel-good factor of having a photo accompany their $25 investment. MIVs are often located in tax-havens to “minimize” tax and disclosure rules. They are opaque creatures – visit the website of any MIV and you will be surprised how little information is provided.

Academics focus on the effectiveness, or lack thereof, of microfinance in the field, but my focus has been rather on these gatekeepers – funds, or Barbarians as they were referred to in the classic 1990 book. This is not because I feel the question of whether microfinance actually works or not to be unimportant, but rather that this prior-stage of the overall investment chain is often overlooked.

The P2Ps are in a dangerous race to the bottom, and furiously trying to reinvent themselves. In the case of Kiva the benefit of interest-free capital for the microfinance institution (MFI), but with the headache of inventing little stories and sending photos to California, is only attractive to MFIs unable to tap reasonably priced capital from the MIVs. Why would they be unable to attract funding from MIVs who can barely invest their funds under management? Because such banks are trivially small, mediocre, or questionable to be deemed attractive by those on the real Wall Street of microfinance – the MIVs.

But the MIVs are bleeding currently. Dan Rozas’s article on BlueOrchard did the rounds. Once the big swinging dicks of the MIV sector, BlueOrchard has lost about half its funds under management and is also trying to reinvent itself. Good luck to them – this can only be an improvement. SNS Bank invests in microfinance via Developing World Markets (DWM – “los tiburones”, or “the sharks”) of the sector, and via Triple Jump. SNS collapsed and was nationalized by the Dutch government at vast expense to the taxpayer. Another one bites the dust. Alas SNS owned ASN Bank – another embattled fund managed by Triple Jump, alongside Oxfam Novib, who appear to be withdrawing from microfinance discreetly. Bailouts and collapses, euphemistically referred to as “mergers” or “acquisitions” took out another couple of funds.

Recent regulatory changes hampered the attractiveness of such funds to retail investors, particularly in Holland. Microfinance is no longer considered an “ethical investment” for tax purposes, removing one key reason to invest in such funds. Investors in such funds were exempt from wealth tax on account of doing something “ethical” with their savings. Since January 2013 this exemption has vanished. This could be due to the Dutch government deciding microfinance is not in fact worthy of tax-exemption on the grounds of being ethical, or it could simply be a way for the government to increase tax revenues. Either way it doesn’t send a particularly encouraging signal to potential microfinance investors.

I called DWM recently in what transpired to be one of the most pointless conversations in recent memory. Everything is confidential. They have no opinion. They cannot tell you what day of the week it is. They refuse to disclose any information. I do not know why they bother having an email address and telephone on their website at all. The information on their website and in the few documents available is negligible and useless. In fact, when the information content of a website approaches zero one must also wonder why they bother having a website at all. A totally private club. Endorsing all the usual transparency initiatives of course! I shan’t waste more text on DWM.

Progressive governments such as Ecuador slapped on taxes on all capital obtained from foreign MIVs in an effort to prompt microfinance institutions to source local funding, particularly by encouraging, or forcing MFIs to become regulated and capture savings locally for lack of a reasonably priced alternative. If the MIV is located in a tax haven there is yet another tax. Taking capital at 9% from a Luxembourg-based MIV while operating under an interest rate cap of 30% is an unattractive option for an MFI. Expect other countries are likely to follow, particularly those with left-of-centre governments (Bolivia, Peru perhaps). In countries where microfinance over-saturation is a risk this is a convenient way for governments to simultaneously raise tax, calm the MF sector, oblige more players to become regulated and start offering the poor savings-services, which are actually rather useful. However, overtly populist measures can harm genuine MFIs in the process – it’s a delicate balancing act and one that Rafael Correa in Ecuador appears to have performed rather well.

Add to all this the mounting wave of criticism of microfinance in general and the MIVs face a serious challenge. How to continue growing in a sector being hammered on all sides? There are a few who simply deny the problem (Grameen Foundation and that ilk of pseudo investment vehicle that remain convinced that world poverty is about to vanish if only more credit cards could be issued). Such players appear to ignore academic research, deny all charges against them and their sector, refuse to comment on anything remotely negative about microfinance, and rely on pure spin aimed at the lowest layer of unsophisticated, well-meaning but chronically unaware and naive investors. Frankly, with such utter stupidity so obviously visible at these spin-masters, it is hard to sympathise with them or their investors.

Kiva’s mere existence demonstrates the urgent need for financial literacy training in the developed countries as well as in remote corners of Africa. But what of the vaguely sensible funds, such as BlueOrchard, Incofin, Triple Jump, Deutshe Bank etc?

As far as I can see they face only a few key options – and this is nothing novel, merely the natural path that any investment fad follows.

Plan A – diversify: this is probably the most obvious choice – microcredit became a household name and then a dirty word, microfinance replaced it, now it’s terms like “financial inclusion”, “missing-middle”, “social enterprise”, “responsible investing”, “impact investing” and “SMEs”. A pig with lipstick is still a pig. Triple Jump recently ranted about precisely this novel direction – apparently this is the future of poverty alleviation, as declared by the same jesters who previously thought microfinance to be the miracle cure some years ago. But there is some truth in this line of reasoning – it is likely that wisely financing the tier above cigarette vendors and the 100th tomato vendor in the village might produce greater impact than traditional microfinance. It could even generate employment – that would be a perk. My main concern is that it is being performed by the same folk who messed up microfinance. But Bateman’s argument that we are doing little more than trivializing, or infantilizing the productive economies of these countries remains valid. In true Bateman style his latest piece was subtly entitled “destroying Latin American Economies from the bottom up”.

Can any of this work? That’s a question for another day.

Plan B – merge or acquire: I suspect we will see consolidation in the MIV sector. Margins are low, competition is fierce, scrutiny is tightening, MFIs are becoming more sophisticated, and investors in MIVs are becoming more discerning. Combining forces to exploit economies of scale and more rapidly reap the benefits of diversification is a sensible strategy. OFI recently bought a slice of BlueOrchard. MicroVest acquired Minlam.

As banks downscale into the microfinance sector and have sources of funding independent of the MIVs this will further crowd out the need for MIV funding. The second biggest MFI in Peru is CrediScotia – part of the massive global Canadian bank, and well able to raise capital cheaply on capital markets without having to rely on MIV funding. Likewise MFIs are transforming into banks and able to obtain funding locally or on capital markets, no longer requiring MIV capital so extensively. Consolidation is inevitable.

Plan C – become a niche player: MIVs not wishing to acquire or be acquired will target both niche MFIs and niche investors, and become “boutiques”, competing with the big boys neither to invest nor to attract capital. Faith-based funds have exploited this avenue for years. Expect to see more “energy/green/education/healthcare/education/one-legged women” etc. funds.

Plan D – move into the periphery: this is possibly one of the more exciting possible outcomes. Microfinance is arguably not as profitable as it once was, and yet all MFIs spend fortunes on mediocre software packages to supposedly manage their operations – someone is making a ton of money providing this software. Investing in such companies could be a wise idea. Kizoo recently invested in Mambu.

Or why not start offering acquisition finance to MFIs as this layer also consolidates? There’s not much competition in this niche, so margins will likely be higher. What about the media outlets reporting on the sector? As cloud-based IT solutions emerge the data-mining potential is huge, and potentially profitable. MFIs are increasingly encouraged, or obliged, to consult and report to credit bureaus, who manage a large database, get the data for free and charge the MFIs for each consultation. They are also natural monopolies, which would make most investors salivate. Any possibilities to invest in these?

There are obviously huge conflicts of interest for an MIV wishing to invest in a rating agency, but such conflicts have not prevented the sector to date. Planet Finance offers technical assistance to MFIs (in the process obtaining hard-to-obtain information), does Greenfield investments, advises investors and funds, has a rating agency, and no one complains about such glaring potential conflicts of interest. On Wall Street you’d risk a prison sentence. But investing in a rating agency could be a juicy investment, and it’s a quasi-monopoly with a few players. Alas they are not very profitable, but some strategic consolidation in this sector could enable some price increases.

And none of this is particularly new. FINCA obtained the MIS company SIEM a decade ago. Danish private equity fund Sophia nearly invested in US MIS company Kredits in 2011, but withdrew at the 11th hour. To date these have been strategic investments, and somewhat ad hoc. It is only a matter of time until one of the MIVs decides to set up a dedicated fund to invest specifically in such peripheral activities. Would it benefit the poor? Probably not, but that won’t keep the fund awake at night. But as soon as an MIV launches such an ethical, pro-poor fund investing in such activities I’ll apply for sure.


Transparency and regulation are the keys. The MIVs avoid both like the plague. If you hold the faintest glimmer of doubt about this, ask any MIV for a list of its investments and the APRs they charge. Even such glaringly obvious data has evaded each and every MIV. Triodos and a few others list their investments, no more. That’s it. DWM has a lovely map with dots on all the countries they’ve invested in, but clicking on the dot just says “Pakistan – 2 investments”. Transparency is for everyone apart from those who control the financing. For as long as this situation remains I cannot claim to lose much sleep over the demise of the MIVs. This is the most opaque part of a pretty murky sector, and as they slip down one or a combination of the paths listed above, I’ll watch with morbid curiosity.

But there is the fifth option:

Plan E – clean up the MIV sector: dream on.

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Microfinance, Gender and an Interesting Potential Confrontation

There’s a fascinating, if not slightly obscure conference coming up in Boston shortly. Ominously referred to as “Extreme Inclusion”, it is hosted by the Fletcher School, Tufts University. What intrigues me about this conference is two of the women speaking at it. One is cool. The other less so.

Kim Wilson wrote a scathing summary of Catholic Relief Service’s microfinance activities for Malcolm Harper’s book “What Wrong with Microfinance” (not to be confused with Bateman’s “Why Microfinance Doesn’t Work”, or the ever growing number of books with titles suggesting the entire microfinance experiment was largely a farce). I read this chapter in London some years ago, and nearly fell of my chair. It was one of my early encounters with serious criticism of the miracle cure for poverty. It felt like a slap in the face at the time, until I gradually began to see that the author was merely ahead of her time.

Anyway, I had no idea who this woman was until shy mysteriously wrote a review of my book. It’s one of my favourite reviews, and not entirely positive I might add. But what was fascinating about her stance was the gender angle. My wife is a women’s rights activist, so this was really interesting for us to read. See what she wrote towards the end of the review:

“There is another implicit warning in Confessions: it has to do with women. Females don’t come across well, though the author makes various attempts to give examples of helpful women, but frankly, we don’t look very helpful or very strong, or much like leaders. We look like wimps, gutless. And maybe that is because we have been gutless. We did not strike at the lies of the Microcredit Summit when we knew they were lies, or at the small fibs perpetuated by MFIs. We did not chip away at the menacing accretions that slowly layered in around the cause (remember all those ratios?) which in fact diverted us from the cause, one purportedly about women. Nor did we unite when we heard first hand from female borrowers who had been humiliated by loan collectors, their cows taken, their roofs ripped off, their children lent to the landlord. For decades we have gyrated dumbly inside the spin machine… while each woman in each place might be doing her bit to affect change in front of her, each is isolated and allowing a microfinance machismo to dictate the trajectory of services to women. It is happening today, now. We can just stand by, ask meekly that we have social performance indicators, or we really can do something about it.”

Pretty powerful stuff. Actually I am all in favour of getting more women into positions of authority where possible in the largely male-dominated microfinance sector. We bang on about female clients, but look who’s running the sector in the commercial banks, funds, P2Ps etc. Sure, there are exceptions – Zidisha is a cool P2P run by a cool woman. Marilou van Goldstein is a very effective leader of the mostly decent Triodos fund.  Maria Otero is not my favourite microfinance celebrity following her $2m reward for exploiting poor women in Mexico before shuffling into the White House, but Tom Heinemann swiftly dealt with her.

But one of the most intriguing women in the entire sector is also participating in this conference, not surprisingly defending microfinance – Beth Rhyne. This is the woman whom I spar with occasionally on blogs. She doesn’t usually speak in public, so this is a golden opportunity to grill her. And she is the brains, or perhaps just brain, behind the inappropriately named Smart Campaign. They actually prefer to use capital letters for SMART but I think this grossly exaggerates the intelligence behind the concept. One review suggested they should be renamed CRAFTY. Anyway, there is some interesting background to this woman.

First of all, check out what Smart actually is. It appears to be some sort of independent body, but in fact it is fully owned by Accion. Smart has no separate accounts, it has no 990 form, it is physically based in the Accion building, in fact it is a mere department, not even a subsidiary of Accion. They state on their website “The Smart Campaign is housed at Accion’s Center for Financial Inclusion, which is managed by well‐known microfinance expert and author Elisabeth Rhyne”. Housed in this sense means owned, fully controlled by, and part of the larger Accion family.

Naturally their main sponsor is (take a wild guess)…. Accion, followed by Deutsche Bank, Credit Suisse, IFC etc. – all the usual suspects with a vested interest in controlling the self-proclaimed self-regulator of the sector. None of these jesters want actual scrutiny of their activities, or, God forbid, actual regulation, so this is the spin organisation they placidly erected. Everyone and their dog endorsed the Smart Campaign, of course, including many of the worst offending MFIs on the planet (“endorsement without enforcement”). Sponsoring generally gets you a board seat on the steering committee, which reads like a who’s who of those with vested interests in maintaining the microfinance myth. Our friend Asad Mahmood is on the list, of course, despite a string of questionable microfinance investments to Deutsche’s name. IFC, Oiko, Fonkoze, Finca, SEEP, the UN, CGAP, IADB – they certainly got the main players involved. And Beth Rhyne is also on the steering committee, of course. Larry Reed is about the only genuinely interesting person on the list – he’s the head of the MicroCredit Summit Campaign, who also did a surprisingly positive review of my book, and recently published a very frank assessment of the state of the sector. He’s a good guy, thoughtful, seems pretty honest, former head of Opportunity International, and genuinely concerned for the welfare of the poor, i.e. a lone voice on the steering committee – a black sheep.

Anyway, to launch into a critique of Smart is not the purpose of this blog. Anyone capable of reading can do that. It’s the gender angle that Kim Wilson of the Fletcher School that intrigues me. She talks about important women in the sector who stood-by, turned a blind-eye to abuses, who lacked leadership, or the courage of their convictions, who perpetuated the spin. And now there’s a conference where precisely the woman she describes is leading the pro-microfinance camp – Rhyne herself. I would love to go to the conference were I not having to do an assignment half way up a mountain in northern Peru at the time. They’d probably not let me through the door, or Rhyne would panic and pull out. The New York Microfinance Club refused to record one of their meetings because I had threatened to plant a question to the Deutsche Bank/BlueOrchard boys (which I had, to be fair). Don’t worry Beth – I’m not going – you can speak freely about your pretend initiative without fear of genuine scrutiny.

Anyway, what do we know about Rhyne and her little campaign? First of all, she’s a veteran at Accion, joining in 2000; previously at USAID, Harvard PhD etc. – firmly established in the upper echelons of the US microfinance establishment. According to the 2011 990 form of Accion she pocketed $242.202 + a bonus of $13.750 for a 35-hour working week. Nearly a quarter of a million bucks, approaching $150 per hour. Who is paying this? Well, obviously Accion has a war-chest from the IPO of Compartamos, by far their largest investment, so basically poor women stumping up extortionate interest rates pay her salary. But the donors to Smart presumably are also subsidizing her activities, directly or indirectly. They, and Accion, have every interest in getting someone subservient to their goals, even if it costs them $0.25m a year, in order to enable them to continue their nefarious activities largely involving exploiting poor people for financial gain, to summarise it concisely if not slightly simplistically.

So, for all this money what do we get? An apparent self-regulator that is entirely ineffective, a well-trained ape could conceivably become an endorser of Smart, and a set of client-protection policies that neither protect clients, their children, nor are sufficiently well defined to actually mean anything. Oh, she picked up $210.311 in 2010 according to the 2010 990 form and the 2012 isn’t available yet. The 990 forms are useful resources, and the means by which Heinemann detected the Maria Otero salaries. They are publicly available, and contain a wealth of information.

Was Beth Rhyne the woman Kim Wilson was writing about in my book review? She matches the description entirely. And the two of them are going head-to-head in this conference. What a day for the women’s movement, no? Needless to say they will dance around and pretend that everything is fine, ask polite questions to one another and avoid the really important questions. We know Kim Wilson has had the courage to stick her neck out in the past, her CRS piece is fairly brutal and probably got her in trouble – criticism inside a cult usually does. But will the “Extreme Inclusion” conference really get to the heart of the problem?

Some tough questions for Kim might include “who are these gyrating women you referred to in your review of Hugh’s book?”, or more simply, “Beth Rhyne appears to match perfectly your description of women who sit back and do nothing while millions of Mexican women get exploited in order to pay her massive salary, what do you think of that?”. Of course no one will dare ask such a question. But to Beth there are all sorts of intriguing questions:

  1. Do you think there might possibly be a conflict of interest, if not a massive irony, of Smart being housed, hosted, financed and owned by one of the largest vultures in the entire development sector?
  2. Smart has a policy on fair interest rates. What do you think about the extortionate interest rates charged by Compartmos, the main asset of Accion? Or the reported 229% charged by their latest acquisition CrediConfia in Mexico – are these a little on the high side, or are they “fair”?
  3. Why do all your client protection principles talk about vague, nebulous terms such as “fair” pricing, and “appropriate” product design?
  4. Smart bangs on about prevention of over-indebtedness, and yet Mexico, where Accion’s treasure chest is based, is possibly the worst case on the planet for this right now – what does Smart think about the main player fuelling this bubble in Mexico – Compartamos?
  5. How do you justify a $0.25m annual salary while failing to protect poor people who will likely not earn even a tenth of this over their entire lives?
  6. Why have you refused to add the rights of children to the client protection principles, while a number of MIVs, P2Ps and networks have such policies?

This last point is the one that most annoys me about Ms. Rhyne. That she takes blood money is up to her, I personally like to know the source of my salary. That she works for a vulture is also her decision, albeit in the one department of Accion that is superficially disguised as doing something “useful”. That she turns a convenient blind-eye to the profiteering of Compartmos at the expense of mainly women clients in Mexico is shameful in my opinion. But why doesn’t she at least spare a thought for their kids? That is weird to me. If I may be so bold as to generalise about an entire gender, women tend to fairly reliably care for kids – the whole maternal instinct thing. Someone from such an established Accion pedigree can hardly be expected to have much of a conscience (they would have been filtered out over the years in a Darwinian process – presumably how little sparrows eventually evolved into vultures, although I’m no biologist), but the idea that Rhyne can explicitly refuse to include the rights of children in her otherwise farcical client protection principles is a genuine mystery to me. It would cost her nothing, she is ideally suited to do so, she has the only real tool to implement such an improvement in best practice in her hand, and she declines to do so. She herself bangs on about being the fair-trade label of the microfinance sector, and almost every fair trade label holds prevention of child labour as one of their principal policies. Vision Fund, Oikocredit, Opportunity, HOPE, MyC4, Zidisha and ProCredit all have explicit policies to prevent harmful child labour. Even Deutsche, BlueOrchard and responsAbility (their spelling) have such policies. But the self-proclaimed self-regulator, now dishing out Seals of Brilliance to MFIs that meet their mild criteria, fails to consider this rather obvious danger of microfinance.

So, with this in mind, and referring back to Kim Wilson’s comment quoted earlier, I have two further questions to ask Rhyne in this forthcoming conference:

  • Do you have children?
  • Are you gutless and weak, and turn a blind-eye to abuses of women when we all know these are taking place under our noses? Are you gyrating dumbly inside the spin machine? Are you meekly pretending to do something about social performance of just creating a facade?

Needless to say no one will dare ask these questions, unless we can get some heckler into the conference. Who are these Boston microfinance club members? Forward this blog to them. If you care about the poor, about their children, or simply wish to improve the sorry state of the microfinance sector, sign up for the conference here, it’s free, ask some tough questions, and record them. I’ll post them here, anonymously if you like.

Kim Wilson – keep up the good work whoever you are, I love your writing, don’t back down, keep up the pressure, and forward this to the club members if you dare. And Beth – be careful, sooner or later someone will catch you out in a conference unless you get your act together and join the “real microfinance revolution”, not the harmful, damaging, destructive microfinance revolution that another speaker in the conference, Marguerite Robinson, espouses.

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Income Smoothening – a possible solution to a genuine problem

The poor lack the array of options we take for granted in wealthy nations, and are more vulnerable to shocks. Their incomes and expenses may be more volatile. Insurance services are limited, and a comparatively minor medical emergency, or such interruption to their lives, can have a major adverse impact. We are familiar with the arguments. Financial services can offer protection against this volatility.

A recent article by Chris Dunford suggested distinguishing between microfinance which alleviates poverty by providing income smoothening services; and that which reduces poverty by enabling the poor client to build an astonishingly profitable enterprise and be miraculously catapulted out of poverty. The latter is euphemistically described as “the minority”.

This is a valid point, and not the first time this has been made. The book Portfolios of the Poor revolves around such principles; Dan Rozas has written eloquently on the topic; chapter 2 of Roodman’s Due Diligence is a must-read.

I wish to discuss how we can easily offer the poor what they want. In fact we already have the product and technology well developed. I will then suggest reasons why we have failed to do this to date.

The ideal product is simply an instant-access savings account with an overdraft facility. This is the standard banking product of the developed world. It pays a paltry interest rate on savings, perhaps enough to cover inflation. I can deposit as much as I want, whenever I want, and when I need funds I have instant access. When I need additional funds, perhaps because of higher than expected expenses, lower than expected income, or to pounce on some investment opportunity, I have an overdraft facility that I can dip into. This limit is set periodically depending on an analysis of my capacity to repay, credit history, income and wealth etc., similar in concept to the analysis performed by MFIs.

When I need funds I first use my own funds, depleting savings. This is my cheapest source of capital – it merely costs me the interest foregone on my savings. When I need additional funds I use the overdraft facility, and I pay only for the money I borrow, for the days I borrow. As soon as I have available excess cash I begin repaying the overdraft, reducing my interest expense immediately, and eventually I start accumulating savings once again. If my savings ever reach a sufficiently high level (disappointingly rarely) I can take a proportion to a fixed-term savings product where I forego instant access in exchange for an elevated interest rate. If I require a longer-term loan, or a loan that exceeds my overdraft facility, I apply for precisely such a loan, if and when I need it (also rare, thankfully).

This is an extremely useful product for me, and appears to well meet the income smoothening needs of the poor. It is possibly one of the simplest retail banking products in the entire developed world, but denied to the poor. It is not perfect, clients in cash-based commercial businesses will likely keep much of their float outside a bank simply to avoid endless trips to the bank to deposit and withdraw funds, but it is merely one of an array of products we need to offer the poor, but currently do not.

MFIs in fact offer the precise opposite to such an account. They prefer locking clients into longer-term, fixed repayment loans. If income smoothening is the problem we need to solve, why oblige a client to take out a 6-month loan if they only need the money for a short-period? Sure, if the loan is to be used for a longer-term investment then a microfinance loan may be wiser, but as noted above, the majority of microfinance is not used for such investments. Indeed, most MFIs charge penalties for early-repayment of loans – precisely the opposite of a current account. Some do offer instant access savings accounts, which I applaud, but the majority of MFIs are not regulated to take deposits from the public, and if they do, tend to offer savings that are not instant-access, and may in fact be impossible to withdraw during the life of the loan – forced savings for example, or savings used as a “guarantee”. Again, this is the precise opposite of a reasonable current account that many of us use each day.

Indeed, if a client needs financing for a week or two, it may be rational and preferable for the client to go to an illegal moneylender and pay an APR of 200% p.a. for a fortnight rather than go to an MFI for a 6-month loan at an APR of 100%. Moneylenders still operate abundantly in microfinance zones, and a current account product could actually be a more viable tool for eliminating such predatory lending.

Given the prevalence of the savings account with an overdraft facility across the developed world, why could this product have been so slow to arrive in the hands of the poor? The technology and know-how clearly exists. There are 4 key reasons:

  1. Longer-term, fixed repayment loans generate more interest income for the MFI than an overdraft facility, and are therefore more profitable. When clients suffer a short-term crisis necessitating additional liquidity the ability to dip into their own savings is a missed opportunity to the bank, who could otherwise have offered a nice 6-month fixed rate loan to cover the one week or one month dip, and given that this may be the only source of quick credit available, the poor have little choice. It’s perhaps not surprising that the evil moneylenders still exist, in part to plug this precise gap in the market.
  2. MFIs prefer fixed term savings as they are less volatile for the MFI, who can on-lend these funds at high interest rates. Instant access savings accounts require the bank to maintain a larger cash buffer to cope with unexpected withdrawals by clients. Thus adding flexibility to the clients reduces flexibility to the MFI. Instant access savings are less profitable for the MFI.
  3. Instant, or near-instant access to savings is a direct expense to the MFI, depending on the method of access: passbooks require a branch visit, ATM withdrawals require investing in cards and cash machines, or paying fees to use an existing network. Mobile technology can potentially reduce this cost further, as M-Pesa has demonstrated, but while this reduces the cost to the MFI to offer such access, the other reasons cited prevent the MFI from leaping at these products. They are not as profitable for the MFI.
  4. Offering such a product requires the MFI to be regulated in most countries. This is an expensive process to undergo, incurs increased ongoing operating expenses, and applies additional scrutiny to the bank from the regulator. MFIs, and indeed most players in the entire microfinance sector, are weary of regulators. Thus the fascination of self-regulation – formal regulation is a hassle and may limit profitability.

The astute reader will note these four points are actually identical: offering such a product to the poor may better meet their actual needs, but it is less profitable to the MFI.

A fifth reason, less related to the MFIs or product per se: banks that mobilize substantial local savings are less dependent upon external funding from microfinance investment funds (MIVs), and it may be in the interests of the MIVs to not push such activities, as they reduce their own income streams in the process. Isn’t it strange that Banco Compartamos, one of the most profitable (and vulture-like) MFIs on Earth, with such massive ROE as to be able to launch almost any product it wishes, does not offer a single savings product at all?

The poor with savings become ever so slightly more autonomous. Those with loans become enslaved.

Look at the evolution of almost every developed country financial sector – they generally began with savings and loan co-ops. Roodman’s third chapter is an excellent summary of the historical origins of the financial sectors of such countries. Savings were integral in the evolution of many European, American, British and Canadian banking sectors and structured as co-ops. We now seem to believe that savings are barely necessary: credit-only institutions (many of which are privately owned and for-profit) still dominate the entire microfinance sector. Is this what Ha-Joon Chang would refer to as Kicking Away the Ladder?

Indeed, it is likely that those best suited to offer such a loan product, who may in fact already offer such a product to their wealthier clients, are the commercial retail banks. They have the regulatory structure and technology/back-office in place to manage such a product. A principal justification of microfinance, if I recall correctly, was a consequence of the hesitance of precisely these banks to lend to the poor, forcing them into the arms of the evil moneylender. If the commercial banks could further downscale their operations into the microfinance segments this problem may be solved, and this is precisely what we observe in some countries currently. Look at Banco Guayaquil and Banco Pichincha in Ecuador, CrediScotia in Peru etc.

We know microfinance did not eliminate the evil moneylender, but perhaps these commercial banks downscaling and offering suitable products (which already exist) to the poor could eliminate the evil MFI? Wouldn’t that be a huge success? Good products offered to the poor at fair rates by commercial, regulated banks? Indeed, surely the goal of the microfinance community is to make itself redundant?

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El Norte or Bust! Book Review

This review was originally published on Microfinance Focus, and subsequently on microDINERO.

David Stoll’s new book, “El Norte or Bust!” is a magnificent read. Rarely have I learned so much, in such a wide range of topics, from such an accessible book in so short a period. I fear it may not reach the audience due to the subject matter, caught somewhere between the topics of migration, microfinance, historic narrative and critique of development. This would be a pity as it is an important work.

Stoll is an anthropologist. This is apparent in both his personal style of writing, his deep knowledge of the region of Guatemala where much of the book is based, and the notable absence of graphs and econometrics. The reader is provided with a concise history of Guatemala since the conquest, the civil war, the influx of aid agencies, the waves of mostly illegal migration north, and the recent financial crisis. Rather than a dull list of past events, this filled many gaps in my understanding of Central American history. Stoll manages to piece this together in a broad overview of the social, economic and political situation of the Guatemalan highlands, and is careful to explain the impact upon the region. The legacy of the civil war; the arrival of evangelical Christianity to the region; the ancient customs practiced by the indigenous population; the role of the CIA in the overthrow of Arbenz; quite why volcanoes retain a magical place in the beliefs of the people; and the on-going role of Mayan shamans – it’s all there. He explores the obsession of NGOs and aid agencies with this region of Guatemala, and in a witty summary of this influx Stoll writes, “The meek have yet to inherit the earth, but it is pretty clear who has inherited Nebaj”.

The book examines three main areas: (illegal) migration to the United States; the role of microfinance institutions (MFIs) in the communities; and the impact upon the people of Nebaj. Spanning two decades of experience in the region, Stoll writes with convincing authority. While the accounts are largely anecdotal rather than statistical, the picture clearly emerges:

“It is a fateful convergence between immigrants attracted to American consumption levels, employers hungry for cheap labor, and visionaries who argue that bankers can help the poor by giving them credit”.

I am no expert on the intricacies of illegal migration, and Stoll explains the complexities and ironies of the migration decision process eloquently. The coyotes who smuggle desperate migrants across borders and desserts are usually portrayed as unpleasant characters, but Stoll explains in detail how and why they offer this service. Some are clearly guilty of appalling treatment of their clients, but by examining the complex web of people-smugglers, the ways they work together, and their often heroic status in the communities, the reader is left less certain that these apparent vultures are not in fact valuable service-providers. He explains the risks faced by the coyotes, how they finance their operations, and how they compete amongst one another to develop their own variety of branding.

Through extensive interviews, Stoll describes the rationality, or rather the lack of any obvious alternative that leads so many people, predominantly men, to pack their bags and head north. Rather than stop with the overly simplistic conclusion that it is for “money”, he explains the vicious circles the poor find themselves in. Parents with “armfuls” of children are unable to survive on the paltry wages available locally while simultaneously servicing the loans they used to send their first child north. So they send their second, and third, in constant fear of the bank re-possessing the roof over their head. Neither does Stoll romanticize the plight of the poor illegal migrant. While some are indeed heroes, providing valuable remittances to their families in the south, he describes the often negative impact they have in the United States, including towards one another. Men abandon wives and children stuck in Guatemala. Established migrants are often the worst exploiters of new arrivals. The United States policies of immigration are discussed in a non-partisan manner, and the reader is left bewildered as to quite what the correct policy of the United States should be – a fair conclusion given the complexity of the topic, and one which advocates at both extremes of the migration debate should pay close attention to. The good/bad dichotomy is unclear, the only relevant calibration is shades of desperation. While the author offers no simple solutions, his account opened my eyes to the complexity of the debate.

Of particular interest to me was the role of the MFIs (helpfully listed on pages 53-54). With over a decade working in microfinance, including just across the Mexican border from where much of the book is set, I had not fully appreciated the symbiotic relationship between microfinance and illegal migration. By explaining the specific mechanisms of migration in such detail Stoll is able to delve into the financial transactions that underpin the process. “Debt is the subtext of every conversation about going north”.

The over-arching irony is that microfinance may, in part, be fuelling the illegal migration to the United States. Many of his conclusions are familiar to anyone aware of the pitfalls of microfinance – over-indebtedness, confiscation of assets, extortionate interest rates. On page 63 the reader sees the first warning signs that the miracle cure for poverty may have some unintended consequences:

“Factories across Central America are struggling against low-wage competition from China. As for retail commerce, every category has multiplied to the point of saturation. So has motor transport – the streets are clogged with vehicles whose owners are barely making their loan payments. Certain kinds of artisan production such as furniture and textiles provide employment, but not of the kind that satisfies aspiring consumers. Nor can these endeavors absorb the tens of thousands of Ixil youth without enough land to farm. So Nebaj’s most important produce, its principal export, continues to be surplus labor.”

The futility of many micro-enterprises emerges early in the book. Guatemalans are left with only one real choice, to quote The Clash: “Should I stay or should I go?” In a devastatingly concise conclusion Stoll suggests, “Pumping large amounts of credit into a crowded mountain environment with little potential was, in retrospect, not such a good idea”. If only such humility were applied more broadly across the development community.

He describes with alarming statistics the flow of remittances to Guatemala. Banks quickly caught onto this revenue stream, and facilitated such transfers. Soon regular remittances flows could be used as collateral for a loan, to send the next eager local up north. MFIs would refinance the over-priced coyote loans as soon as the remittances began trickling in, not asking too many questions about the ultimate loan purpose. One microfinance client with a single pig paid a small “commission” to the helpful loan officer to be upgraded to “pig-raising enterprise” in order to secure a larger loan. Loan officers were overly keen to lend – indeed incentivized to do so. In Andhra Pradesh this led to suicides, in Guatemala the damage was equally devastating. Inevitably chronic over-indebtedness ensued and crisis was not long to emerge, as anyone familiar with Nicaragua will find of little surprise. “And so microcredit quickly evolved into debts that were no longer micro, because of the ease with which borrowers could pay off initial loans by taking out more loans, and pay off these loans by taking our still more, until the banks stopped handing out money in 2008”.

Stoll persuasively argues that this entire façade began to take on uncanny similarities to a pyramid scheme, but thanks to his explanations of the driving forces behind what may appear superficially to be an irrational decision, he describes how such vicious circles emerged. Desperate to reap the benefits of illegal migration, families were pushed further and further into debt, with MFIs all too willing to provide the fuel.

Perhaps the most sobering aspect of the book is the impact this merry-go-round had on the local community. There are countless tales of families losing their houses or land as loans went sour and their collateral was at stake, pushing them further into poverty. The influx of remittances led to rapid inflation making it nigh on impossible for the youth to acquire increasingly scarce land or a roof over their head without also heading north to the Promised Land. Wealth disparities actually widened in many villages between those with remittance flows and those without. The few returning migrants flush with cash were unwilling to work for local salaries, and merely served to persuade others to take the journey north, often before they themselves chose to return to their dish-washing jobs paying 10 times their Guatemalan earning potential.

Paradoxically this led to an increase in the legendary “evil moneylenders”, the great boogie-man of the microfinance sector. Those with spare cash, or access to comparatively cheaper microfinance loans, would lend to those without access to credit at rates of 10% per month. Indeed, lending to migrants preparing to depart northwards may have been about the only productive micro-enterprise possible in Nabaj, largely devoid of alternative viable business opportunities. The microfinance community usually presents itself as a replacement to the moneylender. Stoll demonstrates the relationship between microfinance and moneylenders may in fact be symbiotic. And just as I thought the situation could get no worse the reader is presented with harrowing accounts of suicides and kidnappings triggered by remittances or the halo of deprivation surrounding them.

The hopelessness of the situation is perhaps nowhere better described than in an interview the author did in 2004, anticipating the inevitable impact with haunting accuracy:

“… the bulk of the poor in Ixil country (that is, below-subsistence farmers) are so unlikely to mount productive enterprises, of the kind that can pay back loans, that they would be better off with food security strategy.”

The warning signs were perhaps visible even at this early stage, just as the development community was ramping up its love affair with microfinance, and Nobel Prizes were being prepared. How did we miss this?

To conclude, this is worth reading on many levels, and should appeal to a wide range of audiences. I would urge microfinance practitioners to study this carefully – the warning signs that Stoll describes are worryingly visible in a number of countries currently. Migration experts may not fully appreciate the link to microfinance in their studies, and will find this sobering. Broader development experts will appreciate the meticulous manner in which Stoll describes the inter-connectedness of the various players, and how seemingly bright ideas can have tragic consequences. We need to think very carefully before wading into these communities with the latest fad in development thinking. And anthropologists will find the style accessible, engaging and holistic in approach.

I am pressed to think of shortcomings of the book, but the relentless reliance upon anecdotal evidence did sometimes leave me wondering how hard statistics would support the claims. The focus upon one region of one country is on-going, and there is little description of other areas of Guatemala, let alone the rest of Latin America. The book offers few solutions to the mess, and in a dramatic moment Stoll appears to suggest that it may be wise to actually ban remittances (page 222), which raised an eyebrow. At times it is heavy reading, and the array of characters in the book is extensive to the point of confusion. A glossary of the players as an appendix would be helpful. I fear the book had insufficient detail on the individual MFIs to generate the attention it deserves within the microfinance community, who will be sorely tempted to dismiss this as “non-empirical”.

But, critique aside, this was a superb and informative read. It is well written, sobering and yet amusing in places. It is written by a man of obvious passion for his subject-matter, and this passion is contagious. Well done, Mr. Stoll.

Hardcover: 296 pages
Publisher: Rowman & Littlefield Publishers (December 2012)
Language: English
ISBN-10: 1442220686
ISBN-13: 978-1442220683

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Coming Out of the Closet – a Review of the State of the Campaign Report 2013

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.

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Giulio Terzi on Microfinance: The Mind Boggles

Just read this utter nonsense emerging from the European Union:

Microfinance is one of the instruments for “addressing inertia and social fragility, which is essential in safeguarding the quality of democracies” in order to prevent “material distress from encouraging populist deviation and citizen regression”. Minister Giulio Terzi thus explained the anti-crisis role of microcredit and microfinance, as he spoke at the second edition of the “Microfinance and European Union policies Forum” organized by the National Microcredit Agency.

“People with ideas and projects they cannot realise as a result of not having access to credit need concrete answers; those who have lost their jobs and are having a hard time finding another; immigrants who risk social exclusion”, Terzi explained, underscoring how microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”. Moreover, it “can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.

Italy is one of three EU countries, along with France and Romania, that have adopted microcredit and microfinance laws”, while the foreign ministry and the national microcredit agency have developed synergies at international level to promote microfinance through “public and private partnerships” and are also watching the youth of the Arab Spring countries, where microcredit “can play a role that generates preventive diplomacy and support for fragile democratic transitions”, Terzi concluded.

I have no idea what planet this guy is on. If I was producing a comical piece of deliberate gibberish I would have been hard-pressed to generate quite as much nonsense in so short a space. Microfinance generating business opportunities? Sure, this is what the electorate wants to hear. Particularly in the case of immigration, the electorate may be a little more forgiving if these folk are going to arrive and set up the next Apple on the back of a $100 loan, work hard, generate jobs, pay taxes and help restore Italy to the dizzying heights of the Roman Empire. What’s the evidence from 30 years of microfinance in the developing world? The vast majority of microfinance is spent on consumption and there is no impact on poverty. A point that Terzi has managed to entirely overlook. The fact that those few microfinance clients that do actually invest in some income-generating business tend to be trinket vendors, as Bateman so concisely puts it, is another detail that Terzi has ignored. Do we want millions of unemployed people across Europe squatting on street corners selling tomatoes?

Presumably Terzi has become enamoured with the romanticized images of colourfully dressed African women perched behind sewing machines or indigenous Bolivian women leading goats along mountain paths. Now we are to have herders clogging the streets of Paris as a solution to unemployment? Micro sweat-shops will spring up in the slums of Naples to compete head on with the Asian textile industry.

As for “safeguarding the quality of democracies”, Terzi is presumably entirely unaware of the microfinance crises that have had catastrophic impact upon countries such as Pakistan, Nicaragua, Morocco, India, Bolivia and Bosnia. The latter, at least, Mr. Terzi may have heard of given it’s proximity to Italy.

Here we are in 2013 with the Minister of Foreign Affairs, of Italy of all countries, telling us that what we need to get out of the current mess is more debt to more people. I initially thought this was a joke, but in fact this jester is completely serious, despite the inane grin on his own Facebook Page. Of course he’s laughing – how can you say this nonsense with a straight face? No doubt he wants the tax-payer to stump up funds for his ridiculous plans. But then, in what must be a rare moment of clarity for Mr. Terzi, he reveals the real answer: this would mean the Italian government could cut back on public spending and welfare (he politely phrases this as “contain public spending by contributing to the reduction of social buffers”). Of course, Italy is totally bankrupt thanks to chronic over-indebtedness and an incompetent government. Terzi is clearly within the latter category, and clearly stuck for answers on how to address the former.

I know, he must have thought, given that no conscious human being on the planet would lend to the Italian government, why not try and dupe these microfinance morons into lending directly to the poor people? That way we don’t have to bother satisfying even the most rudimentary functions of a government, and leave the entire thing to the microfinance sector, and when these poor people default, who cares, it’s not us that have to pick up the tab or face another ratings downgrade. Call it a public-private partnership and the electorate will lap it up.

Or was the thought that rushed through his little mind even simpler: Why not simply replace “unemployment benefit” with “unemployment loans”?

Just as one may consider that Terzi could reduce his intellectual integrity no further, he strikes on another genius idea. Maybe microfinance could facilitate “fragile democratic transitions”. This is urgently needed in Italy. Perhaps they could transition from a joke government to an actual functioning government. Bunga Bunga parties is not government, Mr. Terzi, and over-indebting your poor citizens is not development. Do some research next time you open your mouth in public.

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