On September 28th the Dutch investigative TV show KRO-Reporter broadcast a documentary about the Dutch microfinance investment sector, based loosely around my book. Below I provide an English transcript of the entire documentary. This is not an official translation and has not been approved by KRO. I will post a Spanish translation shortly, and will comment on this in a seperate post.
(Jos Slats)
Once upon a time there was a princess with a big warm heart, she was beautiful AND she understood finance. Princess Maxima wanted to help poor people with small loans. With such a microcredit they could start small businesses and escape their abject poverty. Tireless, the princess travelled the world to promote her ideals. Microcredit became a big success. But then the story takes a turn for the worse. That’s the way it goes in fairytales.
Reporter Theme Music
(Jos)
Spring 2009, in Amsterdam the yearly shareholders meeting is taking place of the ASN Bank investment funds, you know , that socially motivated Bank for the World of Tomorrow that makes such a sharp distinction between good and bad money.
Short Fragment of Dutch Song about money
(Jos)
Guest of honour is Godwin Ehigiamusoe from Nigeria, founder and director of the microfinance institution LAPO. LAPO gives small loans to hundreds of thousands of poor people. ASN Bank has invested 1 million Euro in his organization. Ehigiamusoe is given ample space to talk about his social engagement and the good work that LAPO is doing. Of course he is given a thunderous applause.
A little bit later, during question time, a young woman in the room stands up and this is what she wants to know from Godwin Ehigiamusoe:
“If you look at the actual cost that LAPO is charging poor Nigerian women, you see that it is approximately 110% per year when you consider all the costs. So LAPO is basically one of the most expensive MFIs that there is and one of the most profitable. Now my question is to all of you, is poverty alleviation really happening at these interest rates? Thank you.”
More than 100% interest? Oops, they were not anticipating that question….
Hugh Sinclair, a 38 year old British microfinance advisor, is a witness of this embarrassing moment in Amsterdam.
(Hugh Sinclair)
“After the question was asked the CEO attempted to answer the question but was very caught off guard, he didn’t know what to say, he was completely shocked at the question, and tried to explain it but really was unable and at a certain point one the panellists, I forget whether it was Triple Jump or ASN, stood up and called an immediate coffee break. “
(Jos)
Sinclair is more than a coincidental witness. In 2007 the young British banker works for Triple Jump in Amsterdam, a company that manages the microfinance funds of Oxfam Novib and ASN Bank among others. With the money of these organizations, Triple Jump makes large investments in LAPO. From the outset Sinclair tries to convince his employer that LAPO is no good. That LAPO, by charging extremely high interest rates, is guilty of usury. That criticism is internally not much appreciated.
(Hugh)
“I was offered a pay rise to continue working for them as a consultant, on the condition that I signed a series of additional confidentiality clauses, very restrictive confidentiality clauses, preventing me from discussing anything with anyone ever basically. I was also given seven days to sign this letter and return it, otherwise they would seek to fire me by taking me to court in Holland”.
(Jos)
“So Triple Jump wanted to shut you up?”
(Hugh)
“It was pretty clear that they wanted to shut me up.”
(Jos)
But Sinclair does not allow himself to be shut up. He does NOT sign. And that costs him his job at Triple Jump.
(Hugh)
“The bottom line is simply that there is mass exploitation happening and I just eventually tired of this and something had to be done and I’m prepared to suffer the consequences of that because I think that is what is required to do to clean up this sector.”
(Jos)
And now he has written a book. Confessions of a microfinance heretic. A kind of anti-fairytale book about how the big bad wolves ran off with princess Maxima’s ideals.
(Hugh)
“I believe that for microfinance to be effective, interest rates charged to the poor have to be much lower than they currently are. They have to be genuinely reasonable in order to give the poor a fighting chance of actually growing their businesses. Now the problem with such interest rates is that low interest rates mean lower profit, lower profit means investors are less willing to invest. The problem with microfinance is if you want to do it well and effectively it’s not super profitable.”
(Jos)
The rise of microfinance starts in the seventies of the previous century. In Bangladesh economist Muhammad Yunus gives out small loans to poor women. We are talking about amounts of 25 to 50 dollars, not more. But that turns out to be enough to start small businesses and to gain an income. Sufficient income to repay the loan, pay a little bit of interest and also some personal gain. That is microfinance in all its simplicity. Soon enough the concept is being copied around the world.
(Chuck Waterfield)
“I remember walking out and giving that first 200 dollars to a shoemaker, a male shoemaker, wondering if and how he might ever return that money and he never missed a payment and all the rest of the clients almost nobody every missed a payment. It was in many ways startling, you know, we expected defaults, we expected people to struggle and instead we found mysteriously almost the exact opposite.”
(Jos)
In Baltimore we visit Chuck Waterfield, a true microfinance veteran from the United States. Thirty years ago he first experimented with small loans financed with money from charity.
(Chuck Waterfield)
“The idea, oh this is the magic bullet, wow, here we were, you know, we are loaning, we are not giving anything, we are making a loan, we are teaching people some training, and we’re getting all the loan money back and that was seen as really exciting because the poor were benefitting by our beliefs and the institution would not need to continue, would not need to depend on grants to stay alive and continue to help more and more of the poor. The poor around the world are almost, the vast majority of them are self-employed, there’s no safety net. If you can’t go and get a salaried job the government doesn’t give you a safety net so your only alternative, the alternative of the poor is to start your own business. Not even start but to have your own business. So we look around and there is self-employed everywhere. You walk through the markets and they are all self-employed, you look at the welders, the carpenters, the shoemakers, the tailors, all self-employed, and what we, sort of the obvious that occurred to us is that these businesses need capital. And so we started, this was the experiment, we would go up to those that already had a business , see what they would do with a little extra money and then they would put that money in their business generating additional income and that’s how they could pay back the loan plus interest. “
(Damian von Stauffenberg)
“ A loan, we discovered kind of by accident in the last 20 or 30 years, a loan allows many of these people to sort of bring their entrepreneurial talent to the fore and to start producing, to start creating wealth. And that is really the key word: creating wealth. If microcredit doesn’t create wealth, then forget it, it’s for the birds.”
(Jos)
Another veteran, Damian von Stauffenberg, a nephew of Klaus von Stauffenberg, the man who in 1944 bombed Hitler. Damian von Stauffenberg is the founder of MicroRate a bureau in Arlington Virginia that vets and scrutinizes microcredit providers worldwide.
(Jos)
“This is about fighting poverty and making money at the same time, one could say that is asking for trouble.”
(Damian von Stauffenberg)
“Yes, one could say that but you kind of make me think of something Churchill said about democracy, I can’t put it together literally, I can only paraphrase it. I think it is something like, it is a terrible system but it is better than all the alternatives. And then I would say the same when you mix capitalism, which is really what you are alluding to, with microfinance. It is not pretty, it is very hard to have a warm cuddly feeling about it but when you see the alternatives they are worse.”
(Jos)
In the first years microfinance is mainly financed with charity money. Giving loans to poor people? The financial sector is having none of it. With the exception of Triodos Bank.
(Marilou, Triodos Bank)
“Almost 20 years ago we were indeed, yes I think we were the first bank that on a worldwide scale started doing this and at the time this was quite unorthodox. The sector was still in its infancy but we thought it important to do it”.
(Jos)
“And how did the banking sector respond to this at the time?”
(Marilou)
“At that time microfinance was very little known and sometimes people responded with disbelief because it wasn’t clear at all back then that people at the bottom of the pyramid on the one hand were able to repay credits and on the other hand there were sceptical reactions to the fact that people would be interested in saving money. In that period it was quite a new thing.”
(Jos)
“When did this change?”
(Marilou)
“Actually the last 10 years this has changed, the sector has lived through a huge development, and especially the last 10 years this has really changed.”
(Jos)
The United Nations declare 2005 as the year of Microcredit and in 2006 the inventor of the small loan, Muhammad Yunus from Bangladesh, receives the Nobel Peace Prize.
(Fragment Nobel Ceremony)
“I call upon the Nobel Peace Prize Laureate of 2006, Muhammad Yunus, to come forward to receive the gold medal and the diploma.”
(Jos)
Microcredit becomes a fashion, then the established financial order starts to realize that money can be made with poverty alleviation. A LOT of money.
(Chuck Waterfield)
“The milestone, the event that changed, sort of the earthquake of microfinance was in April of 2007, 5 years ago, Compartamos in Mexico did an IPO. They had already been making very large profits, the figure we used, the return on investment, return on equity was over 50%, every year, year after year after year for about 7 years. How do you do that? Charging women over 100% and making very large profits, 50% again and so that is what got the attention of the investment world and so a very different kind of money started to flow in, you might even argue, flood into microfinance.”
(Fragment of publicity: Compartamos banco, tu especialista en microfinanzas).
(Hugh)
“Compartamos orginally started off as a charity organization receiving donor funding from a number of institutions but in particular USAID and ACCION, the American microfinance network. And as the institution grew at a certain point it decided to transform, as it is called in the sector, into a for-profit company. This is a common trick used by microfinance institutions that they start off as a small charity serving the poor and presenting themselves as a normal charity and they receive donor funding and when they reach a certain scale they are able to convert, give shares to the various donors or investors or in many cases senior management and become a for-profit company and realize all the gains that they have made as an NGO suddenly effectively becomes privatized and Compartamos is one of the first examples of that. “
(David Roodman)
“The Microfinance Bank in Mexico, called Compartamos went public, and the founders became millionaires and other organizations made millions of dollars, most of the organizations were non-profit, they weren’t nobody, but it still was very controversial that all this money was being made ultimately off of poor people .”
(Jos)
David Roodman of the Center for Global Development in Washington hits the nail on the head: non-profit organizations that earn large sums of money over poor people’s backs and then change into a normal commercial company. Issuing shares earns the founders and donors of Compartamos 500 million dollars.
(Chuck Waterfield)
“What they did was an IPO and again a secondary IPO means that instead of doing it to raise money to put into the institution to then have more resources and grow, it was a cash-out IPO, the money went out into the pockets of private individuals and the original stock holders. The total worth of the company the day of the IPO was over 2 billion US dollars. Now, in the year 2000 when they created Compartamos they put in a total of 6 million US dollars of equity. In 2000, there’s 6 million dollars, in 2007 it went from 6 million to 2 billion. That is over a 300 to 1 return on investment, again a cash-out IPO. So I put in a million dollars, OK, in 2000 and then I wait 7 years and then all of a sudden my million dollars are worth 300 million dollars. That’s the day that microfinance really changed. We drew the attention of a very different audience of funding source, we were barely on the radar prior to that IPO and after the IPO sort of every investment bank was forming a committee to explore and investigate you know, where is the next Compartamos.”
(Jos)
Lending money to the poor… while the established financial order first is having none of it, now everyone wants a slice of the cake. Banks, investors, pension funds all of a sudden all want to invest. Microcredit is HOT! THE alternative to the traditional, expensive development assistance. In the meantime Muhammad Yunus transforms into a kind of pop star, guest of honour at the festival Roskilde in Denmark where 100.000 delirious concert-goers cheer him on for an extended period.
(Fragment of Yunus at Roskilde saying: “I feel at home completely”). Only after that Coldplay is allowed to take the stage.
(Chuck Waterfield)
“What do we find in country after country after country is that the market starts to saturate, you end up with a larger and larger number of MFIs who are loaning in the same towns, the same villages, loaning to the same people and you find study after study of clients taking on more, multiple loans, OK, I don’t even, I don’t blame them. We have a growth mentality; we, the institutions all want to double their number of clients each year and the institution across the street and down the street also are looking to double their clients every year. So we tell our loan officers, go out and put more money, put more loans out there.”
(Damian von Stauffenberg)
“Whether you are poor or whether you are rich, if somebody offers you a loan and you are short of money, you are going to take it. Look at the banking crisis here, look at the credit card… bubble you might call it that we have here in Europe, it is not much different. That’s just part of human nature. If lenders are eager to lend to you and sort of push the money down your throat you are not going to close your mouth, you are going to take it.”
(Hugh)
“I would see women coming into the institution often illiterate, they didn’t understand really what they were doing, they would sign the contract with a fingerprint because they couldn’t read and write and they would receive a loan which was apparently going to help them out of poverty but at the interest rates which they were being charged there was very little likelihood of this actually happening in practice unfortunately.”
(David Roodman)
“I do worry with credit because credit as we know is a very dangerous thing. Within one area, you know, say the state of Andhra Pradesh, in India a whole lot of MFIs almost racing each other to see how fast they could grow. Right. And so, I met some villagers outside of the capital of Andhra Pradesh, which is Hyderabad. They told me how a few years ago there was maybe one or two micro lenders in their village. And suddenly that jumped to five. Because these new people showed up saying “please take our loans”. And so a lot of people were wise enough not to take the loans but some did and some used them in ways that would make it very difficult to pay back, like if they bought a television. Not all but some. And so there is some percentage of people who made poor choices because of the easy money and then were put under a lot of stress.”
(Interview with woman from Andhra Pradesh)
“That evening I poured kerosene on myself and I was about to light a match, my husband broke the door and stopped me. There was commotion. The neighbours came around and consoled us. They said we shouldn’t have taken so many loans. Dying wouldn’t solve our problems. They told us to think of our two children. That night my husband and I had a big quarrel, we didn’t even have dinner. The next morning he took the buffalo to the field at 6 am and didn’t return for lunch. My father-in-law and I went to look for him. We found him hanged from a tree. He was dead. “
(Chuck Waterfield)
“India is very well documented. You know the stories of the suicides. One of the worst that I have seen details on is that she commits suicide by dousing herself in kerosene lighting on fire, her husband sees her, her husband tries to cover her and put it out and he’s killed too. And the kids loose both parents in a matter of minutes because of over indebtedness.”
(Jos)
Also in other countries the market overheats. Nicaragua is being inundated by micro lenders that all want to try to push on as many loans to the people as possible. Many poor cannot resist the temptation and get credit after credit, often paying high interest rates. When they can no longer repay their debts and the micro lenders start expropriating them, the shit hits the fan! The population takes to the street to protest.
(Nicaraguan peasant)
“Well, we are here in Rio Blanco with this impasse. Because a law has been approved on microfinance institutions right, which basically ends this problem and we agree with this law because from now on it will regulate the financial system and above all the for-profit organizations. However, the law regulates starting now, but we need to remember that during the past 16 years these financial institutions were not regulated by the state and committed a number of abuses, such as high interest rates, what we call default, we all know about this, and the eviction from properties.”
(Damian von Stauffenberg)
“It is always very dangerous if there is too much money around. In microfinance at the moment there is too much money. If MFIs have easy access to very cheap money, too much of it, it simply seduces them into becoming less and less cautious in lending.”
(Jos)
At the websites of credit providers we read about the amazing success stories, about a poor woman from Sri Lanka who with a small loan bought a sewing machine and now has her own business. Great, but microcredit also causes casualties.
(David Roodman)
“We shouldn’t just blame MFIs, we also need to blame ourselves. As donors we give money to charities, we are creating an evolutionary environment that rewards certain kinds of storytelling and exaggeration and penalizes realism. Right, and so we need to change how we give money and demand evidence, not just good stories. “
(Jos)
In 2008 The Netherlands’ second pension Fund ‘Zorg en Welzijn’ also joins microfinance. PGGM, the investor of the fund announces in a press release that they plan to make a serious investment.
(Else Bos, PGGM)
“Originally we had planned to invest around 200 million”.
(Jos)
“We are now talking about 2008?”
(Else Bos)
“We are talking about 2008. In the end we were able to invest 40 million. By now we have taken out a big chunk of those investments, only about 10 million now remains.”
(Jos)
“Why so little?”
(Else Bos)
“That is because we struggled to find sufficient good investment opportunities. To find those players that showed sufficient stability, transparency, clarity in their processes which gave us the sense of trust that we were finding the kinds of investments that we were looking for in such a way that we wanted.”
(Jos)
“So initially PGGM started off feeling very confident but in practice it turned out to be a bit more tricky?”
(Else Bos)
“Yes, we started off full of confidence and ambition, and this ambition moreover we still have, but it was, we found it very tricky, yes.”
(Jos)
Not only PGGM is treading water, stichting DOEN, the charity vehicle of the Postcode Lottery among others, also hits the breaks.
(N Tellegen, DOEN)
“We are leaving the market of the smallest loans. We are retreating from it and we will no longer be giving out loans below 2000 dollars but we are really focusing on the next level up because there is another misconception within microfinance that everyone is an entrepreneur, and of course that is not the case. It is not the case here and it is also not the case there. And the consequence is thus that there are also people who have been given loans who are not able to set up their business and therefore you also get the serious over indebtedness and so we have chosen to focus on the slightly larger segment where you do often find true entrepreneurs. People with employees that offer work to precisely the poorest of the poor and you thus create a situation where you can contribute, in our eyes, in a bigger way to economic development and this means that we have retreated from the smallest loans.”
(Jos)
“Stichting Doen also subsidizes Chuck Waterfield’s ‘Microfinance Transparency’. Why do you that?”
(N Tellegen, DOEN)
“Yes. Chuck Waterfield is a kind of gadfly, he is someone who publishes the details on loans, on what all the microfinance institutions are doing and with this he plays a very important role as a kind of whistle blower. The abuses in the sector are known but he makes sure that the whole world knows about this and with that investors will retreat from those parties that are operating in microfinance in an unethical way. In 2008 he contacted us and we subsidize him especially because we find it extremely important that microfinance and the provision of financial services remains a clean/unadulterated business, a sector in which you contribute to development with people’s best interests at heart and you make sure that those parties who have joined to earn lots of money are dealt with.”
(Chuck Waterfield)
“There’s 4 billion people living on less than 2 dollars a day. That’s the vast, that’s two thirds of the world’s population. And the rich are very small, the very pinnacle of this pyramid. Some of what is happening in microfinance right now is a transfer of wealth, not the old-school ‘help the poor’ send money down to the bottom of the pyramid. 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.”
(Jos)
“Is it ethical to make profit on helping the poor?”
(Damian von Stauffenberg)
“Absolutely, yeah. I have no doubt about that. Because the emphasis here is on helping the poor, as long as you help them. Then it’s a win-win situation. The essential thing is that it be a win-win situation. That it’s not one person exploiting another for his own benefit.”
(Jos)
“When does it become unethical? Where do you draw the line?”
(Damian von Stauffenberg)
“It is not a line. It’s a broad, sort of grey band. Which is fairly, quite hard to draw. I can’t draw it. But I can intuitively say: look, if the interest rates go way up there into the three digits then we have probably crossed the line.”
(N Tellegen, DOEN)
“You see that parties have appeared on the market that charge 120/130% interest on loans.”
(Jos)
“What do you think of that?”
(N Tellegen, DOEN)
“Yes, I find that disgraceful. That is of course not the way in which we want to contribute to economic development and helping people to further develop their entrepreneurship. So we take a critical look at the interest rates and we also take a critical look at what the most important goal is to be operating therein, so what kind of attitude do the people behind the MFI have, are the investors only on board for the money? Because those are the people that want to make huge profits and therefore will charge such interest rates. “
(Chuck Waterfield)
“We can’t keep the loan sharks away from the poor. Can we keep the loan sharks away from what we call microfinance? If we don’t set really clear standards, and watch that like a hawk and watch it with transparency and rate everyone by objective criteria, and state really clearly who is in and who is out, we don’t certify, we’re dead. Then microfinance will just be sort of a little blip on the screen, on the timeline of history and money lending to the poor which has been around since money was invented will continue actually in larger scale, larger scale then it was before.”
(Jos)
Hugh Sinclair has worked as an advisor for MFIs in Mexico, Ecuador, Mozambique and Mongolia. In 2006 he starts working for Triple Jump in Amsterdam, the manager of the microcredit funds of Oxfam Novib and ASN Bank among others. At the beginning of 2007 Triple Jump sends him on an assignment to LAPO in Nigeria, Godwin Ehigiamusoe’s club in which Oxfam Novib at that point had already invested 400.000 Euros. Triple Jump is about to provide new loans to LAPO.
(Hugh)
“So I flew down to Nigeria and discovered an institution which was charging extremely high interest rates, it was suffering a very high level of client desertion, clients were simply just leaving the institution after one, maybe two loans. The institution was in a complete chaos and had no internal control, no governance, it was run by a small group of family members all from that region of Nigeria. The computer systems that are designed to cope with the high volume of transactions and retain some sort of order within the institution, for all practical purposes, did not really exist. It was a completely chaotic institution. And with very little poverty impact.”
(Jos)
LAPO charges costs that can go up to no less than 144%. A poor Nigerian that borrows 100 Euro one year later has thus paid 244 Euro in interest and repayments. How can you even begin to explain that?, we ask Theo Bouma of Oxfam Novib, the charity organization that between 2005 and 2010 did business with LAPO.
(Theo Bouma, Oxfam Novib)
“When we start doing business with an organization that wants to give out loans to poor clients the first thing we look at is the height of interest rates. And it doesn’t actually really matter if that is 60 or 80 or 100 or 140…
(Jos)
“Well, for the client that DOES matter.”
(Theo Bouma, Oxfam Novib)
“It has to go down. Wait, let me finish my story. Of course this is an important factor. If you look at Nigeria, because that is where this discussion is taking place, also back then it was a big discussion, try to put yourself in the shoes of a poor client. Say he wants to invest in a business, in his own business, he has several options, he can go to the loan sharks where he will pay 200/250%, then he goes to a national bank and he discovers that they keep their doors closed to poor clients, and when he does manage to get in he will pay much more than what LAPO is charging. This is not a justification for high interest rates but it does place it into context because in a lot of situations a poor client’s only option is to go to an MFI when he wants “affordable” credit.”
(Jos)
“Also when the MFI is acting like a loan shark?”
(Theo Bouma, Oxfam Novib)
“Well, what I just tried to say is that a loan shark charges 180, 200, 250% interest. Compared to that LAPO is relatively favorable, but don’t forget what I just said, 144% we also think is too high. We have told LAPO from the beginning and certainly from 2007 that we were adamant that they change their ways.”
(Jos)
“They didn’t.”
(Theo Bouma, Oxfam Novib)
“Well, uh, yes, the opinions on this subject differ, depending on who you talk to. They told us that they did. And later, after a new rating, I think at the beginning of 2010 from the top of my head, it turned out that they didn’t.”
(Jos)
LAPO has now been branded as an untrustworthy partner. Triple Jump, the fund manager of Oxfam Novib, however already knew back in 2007 that things were not right in Nigeria. But despite the alarming findings of employee Hugh Sinclair, Triple Jump that same year invested 1million Euro in LAPO on behalf of ASN Bank. And later another loan followed on behalf of the American organization Calvert. ASN Bank is not willing to comment in front of the camera. The chairman of the board of directors of Triple Jump, Ab Engelsman, now acknowledges that his organization in the past did not pay sufficient attention to the interests of loan takers.
(Ab Engelsman)
“First one would look at the income for the MFI. Then the focus shifted to what the client is actually paying when you take all costs into consideration.”
(Jos)
“But isn’t that the very first question you should be asking: How does this help the client?”
(Ab Engelsman)
“Yes, but…. yes of course, but the client was helped, the client didn’t… it is more our problem than the client’s problem, because as I said the repayment rates were 95% and above. So the client didn’t have any problems with the high interest rates. It is more an ethical problem we have that we find that strange.”
(Jos)
And this is how it could happen in this fairytale that the provider of small credits changed into a large profit maker, a mega jackpot machine, with financial support from The Netherlands. Well intentioned, yes, but well spent??
(Jos)
“Do you feel screwed by LAPO?”
(Ab Engelsman)
“No, I personally don’t. As Triple Jump, I also think not. No.”
(Jos)
“Would you, with the knowledge you have now, again provide a loan to LAPO?”
(Ab Engelsman)
“Not to the LAPO as it was back then, but yes to the current LAPO.”
(Closing notes: written)
LAPO has grown into one of the biggest credit providers in Nigeria and has now obtained an official banking license.
LAPO is now a commercial company.
Founder/Director Godwin Ehigiamusoe owns 12% of the shares of the company.
(Sound fragment of loud applause).
(Jos)
If you would like to know more about this program, visit kro.nl/reporter
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