El Norte or Bust! Book Review

by Hugh Sinclair Posted on 25 February, 2013

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

by Hugh Sinclair Posted on 7 February, 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

by Hugh Sinclair Posted on 5 February, 2013

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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Promotion, Dismissal, Nationalization and Defection: Microfinance January 2013

by Hugh Sinclair Posted on 3 February, 2013

Rather than pick a single theme, I thought I’d write a summary of the first month of 2013 in the embattled sector.

Princess Maxima of Holland got a promotion from ambassador of microfinance to Queen of the Netherlands. Let’s hope her replacement takes a slightly more pro-active role in cleaning up the Dutch microfinance sector, and that she runs Holland slightly better than its microfinance sector. The eternally generous Dutch tax-payer will be the ultimate judge of this.

Meanwhile SNS Bank was nationalized, after a string of silly property investments. Shareholders forked out €17 per share in the IPO in 2006. They last traded at €0.84. What is less well-known is that SNS Bank owns ASN Bank, Holland’s inappropriately named “ethical bank” (with a squirrel logo to prove it), apparent pioneer of the commercial microfinance fund. The infamous ASN-Novib fund has faced criticism, largely from me, over the last year or so, for selecting an inept fund manager, doing unethical investments, covering-up mis-deeds and having minimal impact on poverty. It was featured in the KRO-Reporter documentary, not in an entirely positive light. How the nationalization will impact the microfinance fund remains to be seen, but perhaps now it in state hands the Dutch government will take a closer look at what this fund is actually up to.

ASN-Novib was not the only microfinance fund suffering. BlueOrchard fired yet another CEO. This could be the slow death of what was, at one point, the largest microfinance fund on Earth. Investors are withdrawing in droves, but the poor won’t notice much difference. No credible reasons were given, nor any credible evidence that the new joker is any better qualified than the last (few). Investors should think twice about investing in BlueOrchard in particular, and MFIs might not want to rely on re-financing loans from the ailing fund.

An interesting, obscure development with Kiva involved one of their main lending groups – Milepoint. They’ve lent nearly $4.5m on Kiva, and are the third biggest lender ever on Kiva. Now some of their members are defecting to the smaller P2P Zidisha. In an interesting blog post some Milepoint members discuss their reasoning (I select a mix):

“[Zidisha] is smaller, has minimal overhead (just one employee, the rest are volunteers), does peer to peer lending at costs to the borrower of between 5 and 20% and it allows me to earn interest to offset possible losses. The concept is interesting as no loans are pre-funded. Borrowers specify a maximum interest rate and want-to-be lenders bid, often at much lower rates… The direct process is far more involving than is the Kiva one, and the direct lending process is completely direct. So far I am impressed. I like the idea of fewer middle men and a lower overhead than Kiva.”

Wow, actual peer-to-peer lending at reasonable interest rates – this is a novelty. How long until the rest of the Kivans catch up?

The so-called Smart Campaign actually did something – breaking news for this body. They now offer awards to banks if they don’t screw poor people. Time will tell whether this is any more than window-dressing (Smart’s traditional niche). Whether their paymasters Accion will be applying for the certificate also remains to be seen. It would be interesting to see how Compartamos get rated on transparent and fair interest rates, or their latest acquisition CrediConfia who were lambasted by the Mexican media for charging up to 229% to poor taco-vendors. Albeit from an astonishingly low base, and after an inordinate amount of time-wasting, this is at least a step in the right direction.

Perhaps the most amusing thing to have occurred this month was a spat between Tom Heinemann and Yunus. It appears Yunus went to some quite extraordinary lengths to avoid meeting Heinemann, facing any tough questions, and coercing the Danish media into censoring the entire incident. I will blog about this later, when the truth emerges. But one has to wonder why a Nobel Peace Prize Winner is so apparently terrified of a single journalist in Denmark. I interviewed Heinemann recently and he seemed positively amiable.

Otherwise it’s pretty much “business as usual” in the microfinance sector. Hype for the concept continues unabated, without supporting evidence. No one has gone to prison, no one has cleaned up their act, no convincing evidence has emerged supporting the idea, but they’re still plugging the new name for the sector: “financial inclusion”. Even the microfinance sector is becoming embarrassed by the word “microfinance”.

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End of Year Microfinance Sector Wrap-up

by Hugh Sinclair Posted on 31 December, 2012

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Happy New Year.

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An Opportunity For The Poor?

by Hugh Sinclair Posted on 12 November, 2012

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

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

Country

Min. APR

Max. APR

Yield

ROE

Ghana

46.3%

161.4%

n.a.

n.a.

Kenya

49.5%

134.0%

35.14%

-65.84%

Malawi

35.9%

128.3%

41.78%

-39.8%

Mozambique

26.9%

152.7%

65.74%

-54.45%

Rwanda

22.2%

107.5%

52.42%

-3.79%

Tanzania

72.3%

109.0%

50.13%

-76.96%

Uganda

45.1%

105.1%

45.41%

-6.52%
  • With the exception of Tanzania, the minimum APRs are defendable. Likewise the portfolio yields are not extortionate, although Mozambique is on the high side.
  • The maximum APRs are, in my opinion, extortionate. Ghana and Mozambique have APRs in excess of 150%. I find this unacceptable. None of these countries suffer from hyper-inflation (Ghana’s inflation rate in 2012 is 9.4%).
  • The portfolio yield is clearly not a good estimate of the actual APRs paid by the clients. This is because it excludes various costs, taxes and the impact of forced savings. In both Kenya and Tanzania the yield is actually less than the minimum stated interest rates, which is strange. This could conceivably be due to data drawn from different periods. However, the message is clear: do not trust portfolio yields as a proxy for the actual interest rate paid by the poor.
  • Not a single one is profitable (as measured by Return on Equity – ROE).

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

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Questions for Opportunity International

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

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

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

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

Questions for the readers of this post

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

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

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

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

 

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Are There Any Decent Microfinance Investment Funds?

by Hugh Sinclair Posted on 7 November, 2012

It’s a question I often face. I’m apparently happy to criticise, often in gruesome detail, but slow to praise. What praise there is in the book is either anonymous or undermined: I suggested Mongolia was a good country for microfinance in general, although this has been challenged. Plus I have to avoid conflicts of interest. But I accept this criticism as a valid point. So, I’ve been on a quest to find a decent microfinance fund (MIV). Below I quickly scan Dutch MIV Triodos.

There are hundreds of MIVs out there, in the peak of the hype they were springing up like mushrooms in a damp forest. But which funds are any good? Obviously there was no point examining the “usual suspects” (BlueOrchard, Oxfam-Novib etc), but ask around and some candidates quickly emerge: Opportunity International, Oikocredit, Cordaid, Triodos. I don’t know any of these funds well, so no conflicts of interest. I’ve never worked for them, even as a consultant, although I have worked with some of the MFIs they’ve invested in.

I crossed Cordaid and Oikocredit off the list when I discovered they had invested in Tujijenge. This is not simply a “slightly” questionable MFI, in my opinion, but a deeply flawed one. Have a look at the Planet Rating social ratings – as far as I have been able to discover only one MFI ever has scored a lower rating for “social performance and ethical finance” than Tujijenge. The Mozambican MFI Socremo managed to score a staggering “zero plus”, the only notch possible below Tujijenge’s “one minus” (out of five). Extortionate interest rates, questionable practices… about the only positive thing one can say about Tujijenge is that it is sufficiently small that the damage is limited to under 20.000 clients or so, but still, this doesn’t bode well for Cordaid and Oikocredit (or for Kiva and MyC4, two P2Ps that pump money from the naive general public into this institution).

That Oxfam Novib had also supported Tujijenge comes as little surprise from an MIV that appears almost allergic to decent MFIs.

Admittedly the Planet Rating reports are out of date (2010), but the fact that Tujijenge hasn’t bothered to obtain a new (and hopefully improved) rating is concerning. Then again, Tujijenge last updated their MixMarket data in 2008. That such an obvious offender can slip through the net suggests either that Cordaid and Oikocredit tolerate such activities or their due diligence is so sloppy as to not detect such activities. Either way they aren’t getting a dollar from me.

I then had a look at Triodos. They put in a good performance in the KRO-Reporter documentary, so I thought I’d check them out in a little more detail. They publish their portfolio on their website, which is a good start, and I can’t remember ever hearing their name associated with any sordid activities. I did a quick scan, and if they passed that, then I’d look a little deeper in the quest for the good MIV. How to separate the wheat from the chaff? This is not a rigorous analysis and data is sparse, so I used some quick, subjective filters:

  • First, the availability of data on the MixMarket and in rating reports is interesting.
  • Then a quick scan at MFTransparency, to see how the MFI’s interest rates compare to its peers in that particular country – but not all MFIs and countries have yet been scanned, so this is sporadic.
  • Failing decent APR data from MFTransparency I use the portfolio yield from the MixMarket. Although portfolio yield is flawed as discussed here, it serves some mild function as a broad proxy.
  • Are any rating reports available? Some are by subscription only, but even these often publish the first page, with a broad summary.
  • Finally I look at the stated return on equity. In Chuck Waterfield’s excellent discussion of extortion and profitability in microfinance he suggests that a return on equity (ROE) in excess of 25% should ring serious alarm bells. I personally think the alarm bells should be ringing far earlier, so I’ll use 20% as a threshold. Google’s ROE was 17.7% in July 2012, to put this in perspective.

Now, some may disagree with these metrics: I am not suggesting that all MFIs that charge reasonable interest rates and are only moderately profitable are somehow clean or contribute to the lives of their clients, I am simply using this as a first filter. Interest rates are easy to measure, and not exploiting clients is a pre-requisite for me, prior to other factors.

Triodos have done 91 investments in microfinance, and I did not analyse all of them. I began with general knowledge of many of these MFIs and a broad idea of which countries are generally problematic.

First, Triodos has done two investments in Mexico:

  • Apoyo Integral, portfolio yield of 69.48%, ROE of 22.99%
  • CrediTuyo, portfolio yield of 91.86%, ROE of 18.57%

This is a country specifically featured in Chuck Waterfield’s presentation, and note that portfolio yield is an under-estimate of the APR. MFTransparency have not reviewed the APRs of Mexico, so there is no means to work this out, but regardless of this, portfolio yields in excess of 60% to 70% are immediately on my red-list in a country with modest inflation. CrediTuyo’s yield of 91.86% could well be approaching an APR of 150% when VAT and the effects of forced savings are included, but I don’t have the information to verify this. Also, according to the Triodos website CrediTuyo offers business training, so assuming this is free, this ought be taken into account. There is no mention on the Triodos website of the interest rates charged by their MFIs. I would like to see this information, but no MIV publishes this data to the best of my knowledge.  Merely acknowledging who Triodos invested in is, sadly, a novel act of transparency.

Apoyo Integral publishes the interest rates on their website however. The highest stated annual rate (which I shall boldly assume is synonymous with the APR) is 133.2%, although it is not clear if this includes VAT. The lowest rate is 93.7%. In my opinion this is simply extortion. CrediTuyo’s website does not state the interest rates, perhaps not surprisingly.

Some may believe that interest rates approaching 150% are fine. First, we’ll have to agree to disagree on that. Second, my concern is not only with the APRs per se, but whether the MIV is being transparent about the APRs to its investors.

The ROEs of these Mexican MFIs are suspiciously high – both are more profitable than Google, to cite my arbitrary benchmark, for providing a simple, non-innovative product: money. These rates are not illegal, but they are of very serious moral concern to me, and I would ask Triodos to explain the level at which they consider an interest rate to be extortionate. MIVs have an incredible knack of avoiding this question, with an array of excuses. This is unacceptable. According to Chuck Waterfield’s traffic light system these MFIs are firmly in the yellow band.

If we compare CrediTuyo and Apoyo Integral with other Mexican MFIs in MFTransparency’s analysis of ROE and portfolio yields we observe the following:

Apoyo Integral (70%) appears roughly in the middle of the pack, CrediTuyo (92%) a little towards the upper-end but not the most expensive in the country. Isn’t that sad? And these are under-estimates of the actual cost of capital, and exclude the effect of forced savings and VAT.

[Source of both graphs: “Growth, Profit & Compensation in Microfinance: How much is too much?”]

In terms of ROE (19% and 23%), both MFIs are in the middle of the pack again. However, if we compare these ROEs to other countries they remain extremely high. In Cambodia, Peru, Ecuador, Bolivia etc. these would be amongst the highest in the country. The source of this return is simple: the poor. So, regarding Triodos’s investments in Mexico I have some concerns regarding exploitative interest rates. They are not the most exploitative MFIs in the country, but they push the boundary of “affordable credit” to the absolute limit, and these proxies are under-estimates of the total cost to the client. The combination of such rates with relatively high ROEs is enough to make me deeply concerned.

The argument that the high operating costs in Mexico require such high interest rates may be partially true in the case of portfolio yield, but not in the case of such high ROEs (ROE is net of expenses). Some clients may benefit from interest rates of 150%, as some national lottery winners are delighted with the return on their $1 investment. Such clients are cited all too frequently, while those whose businesses do not generate sufficient returns to benefit once such interest has been repaid are less widely cited. In my experience the losers vastly outweigh the winners, and I do not want my money being used for such practices.

The secondary question emerging from these MFIs is whether or not Triodos’s investors are informed of the APRs at which their funds are being lent to poor Mexicans. These rates are not published on the website. Who cares what I think of the rates, what do Triodos’s investors think?

In Tanzania the Triodos investment Finca charges interest rates well above the country average:

Why this institution charges such high rates even on quite large loan sizes is not clear. In my personal opinion this is bordering on extortion. Because “extortion” has not been defined by the microfinance community I cannot state this objectively, but this is my personal view of such rates. We fret in Europe when sovereign governments are expected to pay rates in excess of 7% (“Oh no, Spain will collapse at such rates”). Which Triodos client in Holland would buy a house with a mortgage rate of even a tenth of the rates the clients of Finca Tanzania are expected to repay? Kiva charge entrepreneurs in America 8.5% for a loan, but those south of the border pay 10x this – 85%. It’s okay to charge the poor these rates, apparently, but we would never pay such rates.

Nigeria is a country I am generally weary of after the dodgy experiences with LAPO, and Triodos did one investment here: Grooming Center. Alas Grooming publishes almost no information on the MixMarket (which is an alarm bell – no ROE, no portfolio yield, but 140% self sufficient). However, it has been rated by MicroRate. The Social Rating awards 3.5 stars out of 5: “High social performance, with clear commitment to the very poor. Relatively high prices. Monitoring of social performance to be improved”, so that is not so bad, perhaps a little pricey.

According to the Performance Rating the portfolio yield is 45.5%, but this may not include the effect of forced savings, so I would take this with a pinch of salt. It gets a B-rating overall, which is not bad. One slight concern is the phrase “Collection of deposits without being regulated” – that old trick once again. Triodos might want to find out if Grooming is in fact legal. But, overall, this may be an acceptable bank given the region. The social rating is better that SEAP (3 stars) and the same as DEC (3.5 stars but from 2008 report), the only other rated Nigerian MFIs.

But, Grooming’s ROE is a whopping 51.1% according to the rating report, far exceeding MFTransparency’s alarm bell of 25%, and very similar to that of Compartamos. So, I’m afraid to say, my personal opinion is that this is excessive, and I do not have much faith that this portfolio yield includes the full costs to the client. So, I would be very concerned to discover my savings were used to invest in such an institution and would question Triodos very closely about this.

Peru: MiBanco has been criticised, and is part of the Acción cult, who are not my favourites since their Compartmos IPO, but MiBanco has an ROE of 20.47%, just within my red zone and in the upper-end of MFTransparency’s yellow zone. The portfolio yield of 25% appears reasonable, and it has a PAR30 of 7.21%, which is a little high. MiBanco is not rated, presumably because it’s so huge it doesn’t need a rating. Extortion doesn’t seem to be a charge one can levy against MiBanco, although its profitability is pretty high and it could certainly afford to reduce interest rates should it wish to improve its impact on the poor. But then it would be less profitable.

The December 2011 Copeme report (hard-copy only, page 47) lists the interest rates of all the main Peruvian players, and MiBanco’s average rates fell from 40.93% to 36.55% from December 2010 to October 2011, making it one of the cheaper MFIs in Peru. Eyeballing the average rates it appears the majority are in the low-40s (raising the obvious question: why do Mexican MFIs charge such dramatically higher rates?) But, overall, of these 5 MFIs detected in a quick scan based on publicly available information, MiBanco seems the least questionable.

Conclusion

In general the Triodos portfolio appears to be one of the better ones out there, and although this analysis is quick, incomplete and focuses only on extortionate interest rates combined with high ROEs, there seem to be relatively few problematic MFIs. However, in my personal opinion some of these APRs and ROEs have crossed the red line. I would not personally invest in Triodos because I believe that APRs over 100% do more harm than good to the poor, particularly when offered by highly profitable MFIs. I do not doubt that some poor clients may benefit for short periods with such loans, but as a scalable poverty reduction tool I find such rates preposterous. Even if Triodos did not invest in such MFIs, this would not encourage me to immediately write them a cheque. I would merely move to the next level of analysis.

But it is not my personal opinion that matters, but those of Triodos investors. They are likely oblivious of these facts. Therefore I would ask Triodos to simply publish the ROEs and APRs of all their investments transparently and openly, and the Triodos investors can decide for themselves whether this is consistent with their views of extortion. If the Dutch public find APRs of over 100% acceptable, then Triodos has nothing to fear. Triodos are rare in that they publish their list of investments – try finding that on the Triple Jump website. And this data is not hard to obtain – they presumably discover the APRs and ROEs as part of their due diligence procedures, so why not publish them, if they’re not secretly ashamed of them? That would be real transparency. Chuck Waterfield publishes his interest rate calculator on his website freely, so I see no obstacle to publishing these rates. It might take 20 minutes or so, but I am sure investors in MIVs would appreciate this.

I would also like to see a firm statement from Triodos placing a limit on the APRs they are willing to tolerate. Even if they set the hurdle high – “we will not invest in MFIs that charge APRs in excess of 200%”, at least a limit is set. And at such a rate they could still manage to invest in Compartamos, just about!

This information presented here is all publicly available already. Why not collate this on the Triodos website in an act of true transparency? Defining the “best” MIV in the world is a subjective opinion, but defining who is the “most transparent” is more objective. Transparency hurts those with something to hide, and Triodos appears to have little to hide, so why not place their head above the parapet and be the “most transparent”? This would shine an interesting light on the other MIVs, and in the current climate of suspicion of MIVs, could well attract business away from the opaque MIVs to Triodos – an opportunity waiting to be seized perhaps? The fact that some investors select the ASN Novib fund when the Triodos fund operates in the same country has always been a mystery to me.

None of the serious microfinance offenders appear to be on the Triodos list of investments; the vast majority of their MFIs seem to be fine, given this “light” analysis; and it wouldn’t take much effort for Triodos to improve its transparency.

But the strangest finding of all is that these MIVs bang on incessantly about transparency, endorsing the various window-dressing initiatives and lecturing us in annual reports and conferences on the subject, but there seems to be rather little transparency applied to their own activities. The information is out there if you know where to look, but most don’t, or can’t be bothered.

So far I am yet to find a single MIV that I would invest in, with Triodos the current front-runner. I will analyse Opportunity International shortly. I will end this blog with a favourite quote from Damian von Stauffenberg, a man I respect enormously:

“…. the microfinance funds on the whole, with some exceptions are not terribly transparent, if you go into their websites you will find beautiful pictures of what’s going on in Bangladesh or in a poor country but you will not get the kind of information that you would take for granted in any fund that you invest in here in the US, and that’s worrying, if people invest because its microfinance and microfinance is good and Muhammad Yunus is for it, that is sowing the seeds for trouble, and so I think yes, a lot more transparency is needed in the field of microfinance funds”

(Testimony to the Subcommittee on International Monetary Policy and Trade of the House Financial Services Committee, January 2010, my emphasis)

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Another Dodgy Microfinance Fund?

by Hugh Sinclair Posted on 29 October, 2012

I’m often asked “who are the good guys?”.

It’s fair to say my reporting is somewhat skewed towards the less-than-ethical players, but is the entire sector rotten? I like to think not. I’m hesitant to say “XXX fund is a good one” for a variety of reasons, but I know very few to which such a phrase could possibly apply, and it only takes one outlier to undermine my case. Funds which are often referred to as “clean” include Opportunity International, Vision Fund, Cordaid, Oikocredit, Triodos etc. I don’t know all these guys, and my recent post shed some doubt over at least one of Oikocredit’s investments. There may be other possibly “clean” funds, this list is not exclusive, but I thought I would have a sniff around the so-called “good guys” after receiving yet another email this weekend along the lines of “is XXX a good fund to invest in or work for”?

It’s quite hard to investigate microfinance funds, because they generally disclose very little information about their portfolios. Given that there is clearly much to be ashamed of in the microfinance sector at large, unwillingness to disclose information about a portfolio makes me nervous: if your MFIs treat their clients fairly, have an impact on poverty and charge reasonable interest rates, why not list them on your website? Why not state the APRs charged? Why not provide evidence of an impact of poverty rather than a few isolated success stories and some meaningless statistics like “number of women served”? I don’t care how many women have been “served”, I want to know how many women have been “helped”, and I want proof of such claims. For all the rhetoric about transparency that these funds bang on about, they are remarkably non-transparent themselves. Funds are generally un-regulated, un-rated, opaque and provide much of the fuel for the fire that is currently raging in the microfinance sector.

I was asked specifically about Opportunity International in a talk at Politics and Prose in DC, to which I replied that they were one of the better operators, I was hard pressed to think of a scandal involving them, but that I hadn’t had a thorough look. I would place Cordaid in the same category. Until now.

When a negative documentary about microfinance came out in Holland a few months ago (not the KRO-Reporter documentary based loosely around my book), Cordaid jumped to the defence, distinguishing themselves from such outrageous activities. They acknowledged that extortionate interest rates exist, but they avoid them like the plague apparently. They operate in the most challenging regions, often post-conflict. The interest rates their MFIs charge are typically 2% to 5% per month. This may sound reasonable, but in fact if these are flat rates and there are fees and forced savings, this can amount to well over 100% per year in APR terms, but let’s put that issue aside until more information is forthcoming. They expressly state that the alternatives faced by the poor they serve would be the famous evil moneylenders who may charge up to 10% per month. We’ve heard that argument before – we’re cheaper than the evil moneylender so therefore we’re ok. Anyway, they also perform a rigorous social impact assessment apparently, with their Social Performance Assessment Tool, which covers topics such as over-indebtedness, unfair debt collection practices, functional complaints procedures offering clients some form of protection etc. Naturally they endorsed SMART Campaign which specifically encourages reasonable and transparent interest rates. They’ve been in microfinance for 22 years and have seen that it works, despite the fact that most academics have somehow missed this, but that’s a story for another day. And they were one of the early funders of Chuck Waterfield’s magnificent MFTransparency initiative, which publishes the actual rates charged by MFIs.

So, they must have been a little disappointed when MFTransparency published the interest rate data on one of their partners in Tanzania – Tujijenge:

The black line in the graph shows the average APRs charged by MFIs in Tanzania (very small loans are generally more expensive than larger loans). The green bubbles are Tujijenge’s various rates charged, almost all of which are above the national average. Their most expensive loan, the Group Loan, is quoted as 36% per year, but in fact costs up to 97.7% a year – quite a margin of error. However, when the forced deposit is taken into account, the maximum rate rises to an impressive 150.6%. I’m not one to quibble about a few percentage points here and there, but if someone tells me an item costs $36 but it transpires that it actually costs a slither over $150, I may raise an eyebrow.

In a previous blog I discuss this questionable MFI at some length, but if I may repeat just one highlight from the social rating of Tujijenge:

“[1] Despite the fact that over-or cross indebtedness is high amongst the clientele, no specific measures are put in place to limit the risk; [2] Information given to client is not sufficient to guarantee transparency on pricing as clients are not given the effective cost of the loan and documentation of transaction is not given to all members of groups; [3] Current policies and procedures do not sufficiently prevent the occurrence of inappropriate collection practices, which have been noted in the recent past.”

Read the blog for a fuller description of quite how flawed this MFI is. It seems to refute most of Cordaid’s claims. Anyway, the bottom line is that I struggle to name a decent microfinance fund. It is facile to tear to pieces the likes of Triple Jump, Oxfam Novib, Grameen Foundation USA, Deutsche Bank, Citi, Standard Chartered, Calvert Foundation, Incofin, Blue Orchard, responsAbility etc. In fact, it is so easy to criticise these guys it is not even that interesting anymore (actually that’s not true, the forthcoming exposé on Citi will be eye-opening). Opportunity, Triodos, Oikocredit, Cordaid etc. are generally off the radar, but these latter two have recently emerged as somewhat hypocritical. Everyone makes mistakes, and I do not doubt that the majority of their investments are in fact to good, clean, ethical MFIs struggling to help the entrepreneurial poor with affordable credit.

But if their due diligence is so sloppy as to allow the likes of Tujijenge to slip through the net, how many other such cases are there? As long as one has the ability to read a rating, you can spot the flaws with such institutions without leaving your armchair, and Cordaid managed to miss it. Are there other such cases in their portfolios? Probably, yes – I’ve hardly had a look yet, but within minutes came up with one that has been openly accused inappropriate debt collection practices, encouraging over-indebtedness, a total lack of transparency over interest rates and charges some pretty eye-watering interest rates. I wasn’t even looking for trouble.

I went to the Planet Rating website to see if there was an MFI with an even worse rating for “client protection and ethical finance” than Tujijenge, and to my horror there was: Socremo in Mozambique. I don’t have access to all the ratings, and not all MFIs are rated, so this is not rigorous analysis, but it does look like Tujijenge is approaching the bottom of the barrel. Tujijenge’s full social and performance ratings are freely available on the Planet Rating website. Planet Rating publish all ratings 2 years after publication, which I consider to be a true act of transparency and applaud them for this.

Now, even more enlightening is to observe what these funds do when they are confronted with evidence of malpractice. I am still awaiting a response from MyC4 about Tujijenge, and will close my account at MyC4 at the end of this month if no credible response is given. Kiva’s founder and their CEO, Matt Flannery and Premal Shah asked me to have a chat when I pointed the facts about Tujijenge out to them, but then cancelled the call and failed to arrange another. Given the farcical nature of Kiva I cannot be bothered to pursue them – see my previous posts on this institution (or almost any intelligent comment on the institution). Let’s see if Oikocredit or Cordaid step up to the plate.

So, my conclusion remains that not all microfinance is bad. I know some decent individual MFIs. But when it comes to the microfinance funds, I still struggle to think of a good one. Even the ones I thought were clean appear a little dubious. So, is it much surprise that academics are increasingly challenging whether microfinance works at all as a poverty alleviation tool when we have these jesters in charge of the financing of the sector? I stated in my book that Mongolia seemed like quite a good country overall for microfinance, and then along came an EBRD paper on Mongolian microfinance stating the opposite. I quote excerpts from a summary:

“The results at least partially support the growing body of evidence that microfinance doesn’t make much of a dent in poverty, as incomes remained static in both loan groups. It might just be too early to observe significant change…. But more and more research suggests that micro-finance is no poverty slayer, contrary to early optimism…. As regards business creation and household well being (measured by food consumption), the group loans were more effective…. For individual loan recipients, no impact was observed. Much of the lending didn’t go towards small business creation. In fact, half of the money went to consumer items.”

It is really dangerous saying anyone is honest in this sector, or that any fund is good, or that any region has shown genuine progress, because you just risk being ridiculed. If anyone knows of a clean fund, please tell me, I am desperate to find one. I do not go to the extent of some critics of microfinance, who reject the entire concept as a joke. I have seen a few isolated cases to prevent me jumping to this conclusion. But when I look at the mainstream funds, listed above (and throw in the P2Ps as well), yes, I consider most of the sector to be a joke, but it is not necessarily because microfinance doesn’t work. It is because the institutions we entrust our funds to (who act as the gatekeepers between Joe Smith in Oregon with some spare cash, and Maria Gonzalez in remotest Paraguay who’s looking for a loan) are invariably dishonest. Please, prove me wrong. If you have a tip of a fund that you think is actually honest, leave a comment, and I will sniff around.

To date my advice to anyone considering investing or donating in a microfinance fund is simply: don’t. I hope to revise this at some point, if I stumble across a good one. Next on the list is Triodos, then Opportunity International. I finish with Damian von Stauffenberg’s legendary quote to the House or Representatives on the topic of the microfinance funds:

“… the microfinance funds on the whole, with some exceptions are not terribly transparent, if you go into their websites you will find beautiful pictures of what’s going on in Bangladesh or in a poor country but you will not get the kind of information that you would take for granted in any fund that you invest in here in the U.S., and that’s worrying, if people invest because its microfinance and microfinance is good and Muhammad Yunus is for it, that is sowing the seeds for trouble, and so I think yes, a lot more transparency is needed in the field of microfinance funds” (my emphasis)

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LAPO (Alumni) Break the Silence

by Hugh Sinclair Posted on 26 October, 2012

I recently received a response to my blog-post “Doomsday”, which discussed a leaked document from Triple Jump and Incofin complaining about some of LAPO’s activities. The comment was from a group claiming to be students of LAPO. It’s as close as we’ve got to a formal response from LAPO. I would usually not bother posting or responding to an anonymous message from a generic email address, although it did appear to have originated from Nigeria at least. I cannot vouch for its authenticity, but it was sufficiently interesting to dissect. Thus I reproduce the entire comment in red text, and respond to it in black text for clarity.

We are alumni of LAPO, who have worked with LAPO for number of years and are in various fields of endeavor. What binds us together is the quality of training and experience  we received during our years at LAPO.

Conveniently the comment is unsigned, and cannot be considered an official response from LAPO, who are yet to make one. My name is on the front of my book, the names of the authors of the various rating reports these “students” refer to are on the front of their rating. Transparency?

Our concerns
•    Over the past few years, we have watched with utter bewilderment the smear campaign by Hugh Sinclair to rubbish an organization, which a lot of dedicated young Nigerians labored  very hard to build for over two (2) decades. 

I had presumably persuaded two professional rating agencies to join this smear campaign; the New York Times; Berrett-Koehler publishers; and endless other media outlets. Chuck Waterfield was presumably part of the conspiracy as well, and when Kiva, Calvert Foundation and eventually Triple Jump/Oxfam Novib/ASN Bank pulled out of LAPO, they did so on the basis of false information. The Dutch channel KRO-Reporter was also in on it.

I leave it to the (informed) reader whether they believe this conspiracy theory, but would refer to Occam’s Razor in such cases: “other things being equal, a simpler explanation is better than a more complex one.” A simpler explanation might be that LAPO was a questionable but very profitable MFI that led investors to salivate at the potential to benefit financially by supporting such an institution, and turn a convenient blind-eye regarding the impact upon the poor? We have to at least consider this possibility.

•    We are however peeved with choice of words and temperament in his comments and reference to LAPO. We strongly feel that  even in the act of whistle blowing there should be some level of decency and legal boundaries

So sue me. LAPO and its investors haven’t denied a single claim to date, resorting to utter silence. The book was meticulously fact-checked, legally reviewed etc. so if they wish to take legal action, by all means do so. We suspect LAPO’s investors might be a little hesitant to have their dirty laundry aired even more publicly for all to see. Does LAPO, or its investors, wish to engage in full disclosure of the activities that took place in a public arena? I would be delighted to do so, as there are still some unanswered questions, particularly relating to Grameen Foundation USA and their knowledge of events before and after they guaranteed the Citibank and Standard Chartered loans to LAPO. Bring on full disclosure. Those with nothing to hide have nothing to fear. However, I congratulate the author(s) on the use of the word “peeved” – a great word that one hears all too rarely nowadays.

Our aim
•    While we appreciate the dignified silence of LAPO Management in the face of this persistent unwarranted attacks over the last three years, we strongly feel that half-truth and falsehood when repeatedly peddled unchallenged would take the form of truth particularly for those who do not have the benefit of knowing:

i)    the other side of the story and
ii)    the real motive of the peddler

I am not sure of the distinction between dignified silence and cowardly silence. The only immediate time I can remember when LAPO publicly commented on anything was when they claimed to have reduced the interest rates, which turned out to have been a lie, confirmed in the rating reports, by MFTransparency, and reluctantly admitted by Oxfam Novib’s CEO Theo Bouma in the recent KRO-Reporter documentary. LAPO’s original press release announcing the “reduction” was subsequently removed from their website but is available on mine.  But, if LAPO would like to formally comment they are free to do so. However, in order to save us all time, could they carefully read the book and the source documents first?

The interesting thing here is that their response does not state either the other side of my story or the real motive of “the peddler”, aka “heretic”. I was so looking forward to hearing about my actual motive!

•    The other danger is that the peddler becomes bolder and will devise more channels to make the half- truth and downright falsehoods seem factual. We have seen this trend emerging in Sinclair’s campaign which began with his wife’s verbal assult on the Founder of LAPO  in 2009; his  writings  under various pseudo such  as Street cred;  various calls, threats of being ‘taken to the media’ and slanderous comments on LAPO to the organization’s partners; his ‘famous’  book and  now a web platform.

I love it – my wife verbally assaulted the CEO? It is true that a woman did ask a question in the AGM of ASN Bank, which was presumably her right to do so under Dutch law as a shareholder of ASN Bank – in Holland there are laws whereby shareholders can hold their boards accountable, I am not sure of the situation in LAPO, but to describe this as an assault is farcical. The question was reproduced in the KRO-Reporter documentary, is reproduced in full on page 142 of the book and available to listen to on my website (footnote 8), and is very polite. In a nutshell: “what social impact are you having at such high interest rates?”. A reasonable question given the glaring information available at the time and confirmed since, and no one has actually suggested that LAPO’s interest rates are anything other than “high”. This was an act of accountability, of freedom of speech, and one enshrined in the shareholder rights in Holland. It is a foundation of the corporate legal system not only of Holland, but of many democratic nations. The fact that the author(s) consider this a verbal assault perhaps says more about their stance on accountability rather than that of the woman in the ASN Bank meeting who asked a perfectly legitimate, polite question. Even ASN Bank didn’t consider it an assault, according to their (feeble) written response to KRO-Reporter, who reproduced the question in full. An inconvenient question perhaps, but valid nonetheless.

I am assuming ‘pseudo’ refers to pseudonyms – fair point, I concede that one. “Avatar” is another word. “Alumni of LAPO” is not much more transparent. ‘Various calls and threats’ – please elucidate. The book is not about LAPO, it is about LAPO’s investors. LAPO is merely another example of an exploitative MFI, of which there are hundreds, and LAPO is not necessarily the worst: Compartamos in Mexico charge even higher interest rates, Andhra Pradesh showed that mistreatment of clients can be more damaging than LAPO’s mere client desertion.

We are declaring emphatically that this half-truths, falsehood and reckless comments on LAPO MUST be confronted now.
Who we are to address
We are not addressing those who know LAPO so well and have discovered the falsehood and real motive of Hugh Sinclair. We are rather trying to enlighten persons and institutions who have little or no knowledge about LAPO beyond the tales by Hugh Sinclair

Please, tell me what my real motives are, I am so keen to hear these! Once again, an allusion to ulterior motives without definition. Even I am curious now! And what about the investors Kiva, Calvert, Triple Jump, Oxfam Novib, ASN Bank etc. that pulled out of LAPO – in which camp do they sit? Are these in the camp that have no knowledge about LAPO? They were LAPO investors. Ironically the anonymous author(s) might in fact be correct, they probably did have no knowledge about LAPO, but when they did, their actions were fairly clear.

What are the issues?
We will address the issues Hugh Sinclair has raised since 2009 which have been rehashed in this blog. The only difference is that at every presentation, they are ‘enhanced’ with outlandish claims and half-truths  to make them believable to the unsuspecting!
Illegal operations
Those informed on the local non-profit microfinance context have made their comments on this accusation,  through channels we know Hugh Sinclair had access to. Repeating it here is part of the mystery about Hugh Sinclair and his campaign against LAPO. We summarize the non-profit microfinance context in Nigeria thus:
•    Non-profit microfinance institutions operate savings and loan schemes which are  indigenous to West Africa. A major feature of these institutions is that members who are borrowers make contributions to a ‘loan fund’ from which ONLY them (the member-savers) can borrow. It was these pools or ‘loan funds’ early donors provided grants to support. To our knowledge, LAPO and several non-profit microfinance institutions still in operation in Nigeria do NEITHER accept deposit from the public NOR make loans to non-savers.

Indigenous they may be, but I am very careful in the book, if these students read it, to state that according to two rating agencies, they are also illegal. Note that I am equally careful to stress that it is the intermediation of savings which the rating agencies consider illegal, and that this is their choice of word, not mine. I cite every reference with page numbers from the original reports. It seems that this email is misdirected: LAPO’s students apparently disagree with the rating agencies rather than with me regarding their bank’s legal status. But perhaps more fundamentally, any astute reader of my book will have picked up fairly promptly that any so-called smear campaign is not against LAPO, or Compartamos, or any of the other shady institutions one might care to select from the generous supply the microfinance sector has available, but against the investors. I found this review of my book particularly astute precisely for this reason – it summarises the implicated parties but doesn’t even mention LAPO. They’re a sideshow.

•    After a number of rating exercises on local microfinance NGOs, rating agencies which Hugh Sinclair has copiously quoted on this, now know better.

I use data and ratings up to the Planet 2011 rating. I haven’t seen a rating since then. If things have changed, hopefully for the better, then this is great news. Do tell us about it. Maybe publish any more recent ratings perhaps? It does appear that LAPO did in fact get a banking license eventually, as I mention on page 182. I meticulously reference every claim in the book, whereas this email makes no reference to any independent, verifiable document. It’s simply what the “alumni of LAPO” seem to believe.

•    It is preposterous for anyone to believe that LAPO with all its huge size and long history would have been allowed by regulatory authorities to carry out illegal savings mobilization!

Er, whether the Central Bank of Nigeria’s tolerance of these activities is preposterous or not is a matter of personal opinion. However, some would say that the regulatory oversight of financial services in “developed” countries has been somewhat preposterous over the last decade or two, evidenced by the recent financial crisis, so it is not inconceivable that such attitudes have reached further afield. Bernie Madoff provided us with an example of how preposterous the regulatory oversight was – and he also ran a large institution with a long history. But yes, I do personally find that the existence of institutions charging these sorts of interest rates with these levels of transparency, given the long list of criticisms about LAPO raised repeatedly in the ratings, does raise some serious questions about the regulatory oversight not only of institutions such as LAPO in Nigeria, but also of the funds that invest in LAPO, based in these so-called “developed” nations, this latter point being the focus of my book as the astute reader will have detected.

High Interest rate
•    Hugh Sinclair continued to quote various rates from various sources as it suited him. However, he has never made the following outlandish claim before as he makes this blog: “But instead increased it And(sic) not by a few basis points as we are accustomed to in Europe, but BY whopping 144% “(emphasis ours).

It’s not their emphasis, but their mis-quoting. I believe the original quote was ‘To a whopping 144%’, although I’ll have to check this. The 144% claim comes from the extremely well-recognized Chuck Waterfield, who founded the interest rate transparency website MFTransparency. His reputation is unprecedented, his work is respected by almost everyone in the entire microfinance sector, and he is a person of unquestioned integrity. Grameen Foundation announced that he would be visiting LAPO to verify the interest rates, but alas the report was never published – it was apparently a ‘private’ rating. Nonetheless, Planet Rating published the finding in the 2011 report. If LAPO refute this claim, then I suggest that they publish this report, and criticise either Chuck Waterfield for making a mistake, if that is what they boldly believe from possibly the most qualified person on Earth regarding calculating microfinance interest rates; or criticise Planet Rating for publishing this so brazenly in their 2011 report, which LAPO failed to notice for some reason in the review process of the rating prior to its publication. But let’s get this crystal clear – I do not calculate a single interest rate in the book, I only cite those reported by the likes of rating agencies, MFTransparency and the New York Times, and in all cases cite the source of such claims. These three sources can hardly be discarded as “various rates from various sources”. This email has so far produced not a single scrap of evidence actually refuting any of my claims and is not even signed.

So, to clarify this further I wrote the following email to Chuck Waterfield on 25/10/12:

Dear Mr. Waterfield,

The 2011 Planet Rating of LAPO made the following comment on page 7, directly referencing your company. Could you please confirm whether Planet Rating’s references to your work are accurate.

“However, Microfinance Transparency also noted that as the client remains with LAPO, the APR can reach between 99% and 144% by the third year (depending on the loan amount and increase at each cycle) due to the cost of accumulating weekly savings that cannot be withdrawn.”

I received the following reply from Mr. Waterfield later that day:

“The quote included in the Planet Rating report is entirely accurate, fully and correctly stating information that was contained in the LAPO Pricing Certification Report produced by MicroFinance Transparency.  LAPO provided this report to Planet Rating, and Planet Rating quoted the material correctly.  LAPO provided material to MicroFinance Transparency that was used to generate the rates of between 99% and 144%.  The material and methodology used are contained in that report.”

So, LAPO (or its alumni) – are you still sure these rates are incorrect?

[I would like to point out here that there is no link between the URL of my website and Mr. Waterfield’s company, usually referred to as “MFTransparency”, to avoid any confusion. I have met Mr. Waterfield, respect him enormously, but our work is entirely separate]

When we read this we did not know whether to laugh or to weep.  Those who know LAPO for over 20 years will pity this peddler of falsehood. How can a microfinance institution increase its interest rate “by whopping 144%”.

You should weep rather than laugh, and for the sake of the poor. Once again, it is not BY a whopping 144% but TO a whopping 144% – I really hope you understand the difference between these two concepts. Who is the peddler of falsehood? I cite a reputable source, written by an industry leader, who has confirmed the validity of the comment once again. I suggest here that it is the author of this increasingly ridiculous response to my blog that is the peddler of falsehood, but I shall entertain the response simply to demonstrate the origin of falsehood.

The true position  is as follows:
•    In her over 20 years of operations, LAPO has never increased its interest rates, not to think of “by a whopping 144%”!

So, Mr. Waterfield is simply wrong? LAPO is in possession of Mr. Waterfield’s report, if they would like to publish this, we can review the methodology. I have never seen the report, I simply refer to the Planet Rating report, and would thus be interested to see the full document. Has LAPO complained to Mr. Waterfield for making this claim? Did LAPO refute the findings of Mr. Waterfield at the time?

•    While we were at LAPO and to our knowledge now, the only direction LAPO’s interest rates have gone is downward. Indeed in 2010, we are aware that rates and fees were massively reviewed downward and a ‘road map’ for further reduction was developed in 2011. We are aware that in its September 13, 2012 meeting, the Board of the Microfinance Bank approved further reduction of interest rate

This is wonderful. If there is one part of this apparent response which actually brings outright laughter, it is this section. LAPO attempted to decrease the interest rates, but instead increased them. They did this cleverly, as described in the book. The cost of capital to the poor, known as the APR or EIR in Europe or the US, consists of a number of components, of which the interest rate is the main one, but fees, forced savings etc. are others. What LAPO did was reduce the nominal interest rate but raise the other fees. Such that the APR actually rose. I will quote, once again, the Planet Rating report, which explains concisely this “massive” reduction in interest rates:

“The decrease in interest rates coupled with the increase in the level of cash collateral resulted in an increase of the average Effective Interest Rate (EIR) for the clients to 125.9% from 114.3% before” (page 5, right hand side).

If LAPO have actually decreased the interest rates since the last rating report (2011) then I applaud this move. Alas my book was unable to anticipate future events, however. If, on the other hand, the rates were reduced in response to the book, then I shall claim that as a victory on behalf of the poor.

But, as if more proof was required, in the KRO-Reporter documentary, Oxfam Novib actually admit that this was the case. Having claimed that they were attempting to pressure LAPO to decrease the interest rates, the interviewer points out that LAPO had not in fact decreased the rates, and the CEO of Oxfam Novib states: “They told us that they did. And later, after a new rating, I think at the beginning of 2010 off the top of my head, it turned out that they didn’t.”

It is important to add that:
•    The accumulated surplus generated from microfinance operations has never been appropriated by anyone. This was eventually used to capitalize LAPO Microfinance Bank.
•    LAPO offers a range of social empowerment services to its clients. These services include scholarship awards for secondary/High school education , legal aid, insurance cover for complications at childbirth  , fire in the market place and life.

What does this mean – “LAPO offers a range….”? We have to be careful which institutions we are referring to. Is this LAPO Bank? There are a number of affiliated institutions bearing the LAPO name, for sure. I don’t discuss them.

•    As at today, LAPO Microfinance Bank offers one of the lowest pricing in the local microfinance market in terms of total pricing. 

LAPO as a jester? and “the CEO of LAPO just pocketed 12% of the equity of the  company having enslaved  the best part of a million people in debt”

Once again, I refer to the 2011 Planet Rating, which states clearly “Shares will be allocated to LAPO NGO for 88% and for 12% to founder and Managing Director (MD) Mr. Godwin Ehigiamusoe” (page 4, left hand side). The fact that it has lent to nearly a million people is indisputable. The word enslaved is a fair description, in my opinion, of what such interest rates constitute. We are happy to refer to the legendary “evil moneylender” enslaving people in poverty, but the microfinance community has never had the courage to actually determine at which interest rate enslavement begins. In my opinion LAPO’s rates are well within this boundary. Mr. Waterfields excellent presentation on profitability and extortionate interest rates suggests a red line is passed when the ROE exceeds 25%, and that reported by LAPO in 2010 was 41.7% (page 17 of the same report).

This is the most UNFORTUNATE and SAD  comment of the blog, and indeed of all his comments and tirades against LAPO and our former boss over the years. He did not even get to this sad point in his book! We will request him to withdraw this statement for the following reason:
•    While the jester part is his opinion, the pocketing of 12% of the equity of the company is completely FALSE.
•    The CEO did NOT pocket any portion of the profit accumulated by the company. To our knowledge and this is available in the audited accounts by Deloitte the CEO’s stake in LAPO which he paid for with his money is approximately 2% as at December 31, 2011.

First, I did mention this in the book (page 182), but I am increasingly suspecting that the anonymous author of this email has not read the book. Secondly, if this is false, take the issue up with Planet Rating, not me. The Planet Rating report could not have been clearer on these two topics: the rising interest rate and the allocation of 12% of the equity to the CEO. And remember, we are largely ignoring the other issues raised in the same report – MIS, governance, savings frauds, etc. Perhaps he subsequently reduced his shareholding to 2% and the interest rates charged to the poor – great.

•    From what we know of our former boss,  he cannot even think pocketing another portion of the accumulated profit of the company.  This is a man who refused a raise in his monthly salary and benefits between 1996 and 1999 s imply because in his words: “I want LAPO to attain sustainability”; a man who vehemently and successfully argued against ‘sweat equity’  when it was suggested to him.
•    We are sure that those who know LAPO’s CEO well enough will be alarmed by this false allegation. This is unfair to a person who has spent his life and made enormous sacrifice, which we have all witnessed, to build LAPO into a foremost social and economic empowerment institution in Nigeria.
•    We hope Hugh Sinclair will be humble enough to tender an apology to him once he gets his figure right!

Actually, if anyone owes him an apology it is those who wrote the four ratings, and given that all MFIs have the opportunity to review a rating prior to publication, it is unusual that they seem to be refuting the claims now and not in the review process. However, it is the consistency of the ratings and their integrity in the market that leads me to have more faith in their analysis than those of these alumni. That this data is largely consistent with the MixMarket data, and confirmed by a wide range of external parties from the New York Times to those investors who did eventually quit from LAPO adds further credibility to this claim. In fact, if an apology is to be granted to anyone it should be to the poor that have provided the generous income stream to LAPO over the years, often with the barest of knowledge of the interest rates they were paying.

Risk premium
Hugh Sinclair makes a huge issues out of the Risk Premium (RP) indicating that “LAPO was caught sneaking in yet another fee on the poor “ and “as if these interest rates weren’t high enough ” He gives the impression that this was in addition to  the rates that was derived as the calculation of the microfinance bank’s interest rates.

“A huge issue”? I have never mentioned this once, in fact I think this is the first time I ever heard of the risk premium. I simply quote a letter written by Triple Jump and Incofin that does make an issue out of the risk premium. The letter was confirmed as authentic by the head of legal compliance at Incofin. They write the following:

“We are quite concerned about the fact that there is no data available on the use of the risk premium charged to clients at disbursement. This is an important part of your income and should absolutely be included in the external audit by the new auditing firm” (their emphasis).

Triple Jump and Incofin raise the point, not I. This is the first mention of it as far as I know, Triple Jump and Incofin seem pretty concerned about it, and it appears to have evaded the former external auditor, who was the brother of a board member, perhaps coincidentally.

The position is that:
•    Risk Premium was not sneak Risk Premium. It was introduced in 1994, fifteen (15) years before Hugh Sinclair began his campaign against LAPO.

This is a fair point, I had no idea about the antiquity of this particular fee. The blog post to which they refer discusses Triple Jump and Incofin’s concern about the risk premium. However, my concern about LAPO began in 2007, not 2009 as the author suggests, thirteen (13) years after 1994. It began when I visited LAPO and saw first-hand the institution’s operations, interest rates, treatment of the poor, back-office operations, and the fact that Triple Jump was so willing to turn a blind-eye to these activities.

•    RP, as we remembered, was introduced to address the challenges arising from incidences which constrained clients’ capacity to be in business and repayment. Common incidences were fire outbreak in the market (which is covered by a insurance policy arranged from a major insurance company now), floods, illnesses and robbery attacks amongst others.  All clients who suffered from these had their loans completely written off. The decision to introduce this in 1994 was discussed and taken at Branch Councils (A Branch Council in LAPO is a body of all leaders of a credit groups supervised by a Branch Office. The Council has an elected leader and meets quarterly to discuss issues that affect operations and clients). This initiative has been highly recognized and commended by the microfinance community in Nigeria and has been adopted by most microfinance institutions in the country.
Withdrawal of Rating
•    We are aware that like all rating agencies,  guarantees the timeliness of a rating for a limited time period only. MicroRate’s performance ratings of MFIs remain valid for up to twelve months from the date of the financial statements evaluated.  The said rating by Microrate was conducted during 2008 using December 2007 data. Naturally, LAPO rating *expired* under the regular policy that Microrate employs for all of its ratings. Hugh Sinclair has consistently flagged this as a withdrawal by the rating agency.
•    We are also aware of written confirmation by MicroRate which is  available and accessible, stating that the rating was not withdrawn but expired naturally after two years.
•    He has also ignored the fact that MicroRate later admitted on August 26, five days after the said ‘withdrawal’ that
“we have only reminded our readers that the LAPO rating expired under the regular policy that we employ for all of our ratings” and added that “ We have not withdrawn (emphasis by MicroRate)the rating” .

Referring once again to my suspicion that the author(s) of this email have not read the book, I refer to footnote 3 of Chapter 10, where I clearly state: “Or, more accurately, the ‘expiration’ of its rating. LAPO’s own rebuttal to the press release referred to it three times as a withdrawal, so I use LAPO’s term. The LAPO response to MicroRate’s press release is available on [the] book website” (emphasis original, page 254).

•    Hugh reveals his motive when he lied in his book where he declares that:
“LAPO warned MicroRate that unless the press release was immediately withdrawn it would make sure MicroRate never worked in Nigeria again”.

Confirmed by Sebastian von Stauffenberg of MicroRate. But I was so looking forward to the description of my real motive!

We have confirmed that there was NO such threat, except it existed only in Hugh Sinclair’s fertile imagination
•    It may interest Hugh Sinclair to know that the same MicroRate, that LAPO had supposedly been  “warned ” to steer clear of the Nigerian market has just conducted a rating exercise of LAPO Microfinance Bank, the final report of which is expected in the next few weeks!

I am aware of this. It was an idle threat.

LAPO and Subsidiaries
Much has been made out of the subsidiaries in LAPO, this we consider to have arisen out of limited understanding  of the social perspective of early microfinance practice,  and in some cases, mischief.  Subsidiaries in LAPO arose from the history and scope of activities at inception.
•    LAPO started as a poverty alleviation organization. It conceptualized (LAPO still does) poverty as i. material deprivation, ii. Poor health and iii. Social exclusion. 

•    LAPO therefore developed program mix of which micro-credit or microfinance was just one item. As the microfinance operations grew, it was considered efficient to set up sister institutions to implement health and social empowerment activities. Most microfinance institutions which began operations before 1990 (when commercialization of microfinance began) adopted this credit-plus approach and  have subsidiaries. It is interesting to note that many successful microfinance institutions or banks which adopted minimalist (only credit ) approach  are setting up subsidiaries to implement social empowerment programs

•    We understand that it may be difficult for those who came into microfinance at  commercialization  phase to fully  understand and appreciate the existence of subsidiaries and level of resources for the implementation of programs which have been proved to be very helpful.  Even rating agencies which have highly acknowledged the double bottom-line approach of LAPO still need for education on this.

For instance LAPO subsidiaries implement :

i.    innovative HIV/AIDS prevention and support program in rural communities;
ii.    malaria awareness and treatment campaigns,
iii.    training and equipping Traditional Birth  Attendants in rural communities;
iv.    legal aid for poor women particularly, in cases involving deprivation of rights to  the property of deceased husbands; provide scholars to children of clients;
v.    Collaboration with insurance company to provide micro-insurance  against risk to life, fire in market place, and complications at child delivery and
vi.    Production  and air a gender sensitization TV program called Bridging the Gap.

•    It is impossible for one institution to provide the above social empowerment services as single entity.

•    LAPO in 1996 began clear separation of these entities from microfinance operations in terms of management and staff; financial reporting and performance assessment.

“Much has been made out of the subsidiaries in LAPO” – not by me. I don’t mention them once in the book. The ratings do not go into them in much detail, and I didn’t have enough information to discuss them with any certainty. However, Triple Jump and Incofin did appear rather concerned about LAPO’s subsidiaries, and I discuss this in some detail here, in the context of misappropriation of Dutch tax-payer funding, as it appeared to have been diverted into non-microfinance activities much to the annoyance of Triple Jump and Incofin. Their comment on LAPO’s investments in its subsidiaries is interesting:

“We are concerned about the high level of lending and investments to affiliated LAPO organizations. This is a significant risk for a microfinance organisation, and not in line with the core business of LAPO” (their emphasis).

Audit
In his earlier writings and book, even in this blog, Hugh Sinclair has refused to provide the context of audit of LAPO though some other persons have made clarifications.
•    To our knowledge, the period 2009 was that of institutional transition for LAPO preparatory to transformation into a regulated entity. It was a couple of challenges and actions during this period that Hugh Sinclair has most capitalized on in his writings and book. For instance, in his book he recklessly declared that the “MIS was in a mess”. Show us a microfinance institution that has operated manually for over 15 years one that would not have experienced challenges transiting to automation of its data processing?

The MIS was a mess as reported in all the rating reports, but perhaps more interestingly, I have never seen an MFI of even half LAPO’s size operate manually for 15 years, full stop.

•    A transitional Board which was to give (and indeed gave) way to a Board of the regulated entity had existed in 2010. There was a relationship between a new member and the existing auditor

The relevant point was that the external auditor was the brother of a board member, as reported in the rating report. This is rarely considered a sign of good corporate governance. He was subsequently promoted to the board, and a new external auditor was hired. This was publicly available information since 2005, and it is interesting to note that the investors in LAPO either didn’t detect this (i.e. read LAPO’s own annual report as part of their due diligence), or didn’t care. Take your pick.

•    In 2010, a new board  for the regulated Microfinance was in place
•    In 2010, the firm of Deloitte was engaged as the external auditors. The firm was mandated to review 2009 key  transactions under an Agreed Upon Procedures (AUP). The reports were shared with partners of LAPO. It is important to note that there were no significant infractions in the AUP reports  by Deloitte.

Can we see this report? I gather it discusses the subsidiaries in some detail. Perhaps LAPO would like to publish it, as I am sure other people would be interested. If there is evidence that refutes any of the claims in the book the mystery to me is why LAPO have failed to reproduce them.

Lastly, We wish to advise Hugh Sinclair on the use of words and comments. Whatever cause he is pursuing, if it is to promote responsible financing, then his efforts could be constrained by reckless and intemperate comments and claims which border on slander and libel.

So, sue me. Prove that a point raised in the book is invalid, but read the points carefully first. This apparent refutation is, frankly, feeble and proves absolutely nothing. In fact it supports the point I make in the book that this is a questionable MFI. Explain why two separate rating agencies seem to have messed up repeatedly. Demonstrate that Chuck Waterfield was wrong in his interest rate calculations. That all the media fell for it. That the investors who withdrew from LAPO were wrong to have done so. This is a serious conspiracy. The alternative may be worth considering.

Conclusion

My hidden and nefarious motivations appear to have remained obscured another day! If this is the best refutation that LAPO can come up with, I find that more telling than any supporting evidence. It reminds me of Triple Jump’s equally lame attempt at a discreet, private refutation of the book, found here. We all know LAPO is guilty, but who cares (well, apart from the million or so poor people slaving away to repay their loans)? It is one mid-sized MFI. The far more interesting questions relate to the investors in LAPO: Citibank, Standard Chartered, Incofin, Triple Jump, BlueOrchard, responsAbility, Grameen Foundation, Deutsche Bank etc. Ignore LAPO, it is a mildly interesting drop in the ocean. How did these large funds, representing a substantial proportion of the entire private capital in the world, invest in the institution described above? This is the billion-dollar question. How much of their combined portfolios represent institutions like LAPO? When the academics report that microfinance is falling short of its miraculous claims of poverty reduction, to what extent is this the fault of the funds? These are the questions thinking, rational, conscientious people should be asking.

If LAPO or any of these investors wish to comment on this, feel free. But “alumni of LAPO”, if you wish to comment further on this blog, please identify yourselves, read the book, and quote your sources. I don’t do PR. I do fact.

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Obligatory Viewing

by Hugh Sinclair Posted on 23 October, 2012

I rarely describe an article or PPT as obligatory reading. If you have any interest in the state of the microfinance sector, and wish to actually get to the heart of the matter rather than dance around the periphery, watch this:

http://www.mftransparency.org/resources/growth-profit-compensation-in-microfinance-how-much-is-too-much/

It is by Chuck Waterfield, an esteemed microfinance veteran. Chuck has been campaigning for a fair deal of the poor ever since the Compartamos IPO in 2007. He is not a “radical”, he does not suggest all microfinance should be run as an unsustainable, subsidy-fuelled charity, nor does he buy the mantra of the wonder of unbridled free-market neo-liberal capitalism. He is one of the few people to actually have the intellect and courage to attempt to define the point of equilibrium between these two extremes and present it in such an accessible manner. Frankly, I am hard-pressed to think of anyone remotely involved in this sector who should not be strapped down and forced to watch this PPT, enlightened with a lively and personal commentary by Chuck, in his wonderful rhetorical style that keeps you listening to every word, and occasionally chuckling at his laconic style. It is simple, concise, and describes exactly the issue at stake. The microfinance sector apparently oscillates between the extremes of sluggish NGOs and loan-sharking vultures, if the media coverage is anything to go by. The truth is more complex, and Chuck hits the nail on the head. It’s useful to a variety of people:

Microfinance funds managers: you are critical gatekeepers of both money and information between “the field” and your ultimate investors and often abuse this power. You should watch this to understand how your quest for returns can harm the poor and deceive your investors.

Microfinance investors: this will help you find that middle ground between making a reasonable return and avoiding either the pure subsidy model, or outright client exploitation. It may also guide you in how you select a microfinance investment fund.

Users of peer-to-peer lending platforms: don’t focus on the interest rates you charge, but those that the poor pay. If your P2P cannot even tell you the interest rate paid by the poor, ask yourself if this is an effective platform.

Regulators (especially in Mexico): wake up, you have a number of tools at your disposal, but if you don’t understand the core dynamics in the market you risk either ineptitude resulting in crisis, or over-regulation resulting in an exodus of microfinance from your country.

MFI managers: strive for efficiency, strive for improved service, but be aware of the perils of striving for profit-maximization. You need to pick your investors as carefully as you pick your clients.

I think the situation is perhaps a little bleaker than that presented by Chuck, although I suspect this is prompted by data limitations. Return on Equity can always be massaged downwards by paying massive salaries to senior management (an expense). The use of portfolio yield as a proxy for APRs is flawed, as I blogged here, but Chuck is well aware of this given the work of MFTransparency – it is just to stress that the portfolio yields are under-estimates of the actual cost of capital to the poor, so the data presented may in fact present an optimistic picture of the situation in Mexico. Counteracting this effect to an extent, the returns are nominal rather than real, so taking inflation into account would reduce the effect of accumulating returns. A minor point. Also, the cost to the poor is not necessarily the income of the MFI: the effect of VAT (IVA in Mexico) is an additional cost to the poor which is not income to the MFI. An expense of $120 to the client may represent an income of only $100 to the MFI. To stress, this is not to criticise Chuck’s work, which is ultimately limited by data constraints (Mexico is not a country he has analysed in his excellent country reviews) and the requirement to explain this simply in 40 minutes. I merely suggest that the situation may be worse than that presented.

This is a sobering but enlightening PPT. It lends serious weight to the fact that regulators could do so much more than they currently are. It demonstrates how woefully inadequate our due diligences of MFIs are in practice, and the paramount importance of transparency. It highlights the importance of aligning the interests of the poor with those of the ultimate investors, and those of the intermediaries used to channel funds. It acts as a guide to where we have messed up the microfinance sector, but equally to guide us how we can improve. We have procrastinated on these issues, as Chuck euphemistically suggests. I would suggest we have turned a deliberate blind eye bordering on outright deceit and negligence, but Chuck is often more tactful than I.

I directly asked Larry Reed of the MicroCredit Summit Campaign about defining the point at which interest rates become exploitative. For a sector that seeks to replace the evil moneylenders and loan sharks it is remarkable how we have failed to define extortion and loan sharking. Chuck’s framework provides us with a firm guideline as to how the sector could in fact take concerted action to put this monster on the table. His traffic-light system of ROE is excellent, although I might suggest a lower threshold than 25%, but it’s a good start. His interest rate pricing curves demonstrate how we need to consider loan size rather than a blanket interest-rate cap. This is the way ahead. The question is simply “What are we going to do about it?”.

a) do nothing, continue making a ton of money from the poor, extracting wealth from the bottom of the pyramid for the few lucky folk at the top, exploiting yet more poor women, causing yet more crises and adverse press coverage, until eventually we are all branded as scum akin to the loan-sharks we so merrily criticise but have in fact become.

b) wake up, take concerted action and some tough decisions, start using carrots and sticks to actually regulate this sector within reasonable boundaries, and act responsibly for a change.

Chuck suggests the sector may be at a turning point. I suspect we’ll see another collapse (my money is on Mexico, as it appears Chuck’s is also) before people wake up. But I share his optimism. The pressure and backlash against microfinance is in full-swing, and the temperature will continue rising until we do something. Scandals are emerging almost daily, how long do these jokers wish to continue along the current trajectory?

Thank you Chuck.

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