Spin Unlimited

by Hugh Sinclair Posted on 15 September, 2012

The embattled sector is doing what it can to salvage its image. An excellent example was yesterday’s entry on the Huffington Post blog by Kadita Tshibaka. Mr Tshibaka spent 33 years at Citibank, and in 2003 moved to Opportunity International, a large microfinance network, serving on their board since 2008. He is presumably, hopefully, aware of the situation unfolding in the microfinance sector. He is educated at the top US universities and originally from the DRC, thus aware of the realities of poverty.

It is thus a total mystery how he could possibly have written the article appearing in the Huffington Post for any reason other than to present senior-level spin in an attempt to appease the mounting criticism facing the sector. It is also mysterious how the Huffington Post could have published such an entry, failing to verify many of the facts stated. It is a final mystery who actually reads this PR and takes it seriously. This is not someone writing as an outsider, or a man who may reasonably be unaware of the realities of microfinance. This is spin in its purest, most refined form, and a sign of quite how desperate the sector is. Let’s deconstruct his modest effort.

Mr. Tshibaka presents an uplifting vision for an effective microfinance sector, particularly in light of the mounting negative publicity surrounding microfinance currently. However, it gets off to a bad start on factual accuracy. His estimate of 100 million microfinance clients is a gross under-estimate. The MicroCredit Summit Campaign currently boasts 205,314,500 microcredit clients. One or other, or both, are clearly flawed. Obviously multiplying this by five gets us into the billions, which should be music to Mr. Tshibaka’s ears. These folk like to multiply their statistics by five, the estimated number of people in the family, to talk about “people impacted”. This was a missed headline opportunity: “A billion catapulted out poverty”. It will emerge shortly.

However, he then suggests that wherever one looks one will find evidence of the positive impact of microfinance. This suggests Mr. Tshibaka’s research has not extended very far. David Roodman, noted US academic at the Center for Global Development, succinctly summarised the overall impact of microfinance upon poverty as “zero”. A rigorous analysis of nearly 3.000 academic papers spanning 30 years performed by Maren Duvendack at the Overseas Development Institute came to similar findings. Ruth Stewart’s recent paper suggested that there was no conclusive evidence either in favour or against microfinance having any notable impact on poverty. He has presumably missed the writings of noted economists Ha-Joon Chang, Milford Bateman, and extensive articles in the NYT, WSJ and the Huffington Post itself. He’s clearly not read my book either. One cannot help but wonder if perhaps he ought to cast his investigative net a little further before making such bold statements. Or does he simply dismiss this body of evidence as tosh?

This is not to suggest that all microfinance is utterly useless. Good microfinance undoubtedly exists, as I’ve repeated on numerous occasions, but the truth may be a little less rosy than Mr. Tshibaka suggests, and on average the impact is pretty modest. At best.

The reason the microfinance sector is facing such scrutiny currently is not because of the amazing positive impact it is having, as he bizarrely suggests. It is because it is often closely associated with predatory lending; there is mounting evidence of minimal or negative overall impact upon poverty; crises are emerging at an alarming frequency, most recently involving a spate of suicides in Andhra Pradesh amongst over-indebted women being bullied by aggressive microfinance bank staff; the entire microfinance sector of Nicaragua (where Opportunity operate) collapsed under a grass-roots uprising by the poor against the very same MFIs that were apparently lifting them out of poverty; fraud and deception within the microfinance investment funds and the so-called peer-to-peer lending platforms has recently emerged as a very real threat; entire funds and even governments are withdrawing support for microfinance, Norway being a fine example; questions surrounding massive compensation to individuals behind the large IPOs in the sector have been raised (Maria Otero of Accion, Vikram Akula of SKS); and academic evidence is increasingly suggesting that one additional negative side-effect of microfinance is that some so-called entrepreneurs may be removing their children from schools in order to work in what may best be described as “micro sweat-shops”, in direct contradiction to the worthy aim of Millennium Development Goal #2 (detailed blog forthcoming).

This list is not exhaustive, but gives a flavour of additional reasons why the microfinance sector may be under such scrutiny. To suggest the scrutiny originates from the astonishing impact of microfinance is, frankly, preposterous.

Where Mr. Tshibaka and I agree is that MFIs should not engage in predatory lending and charge extortionate interest rates. But, let’s not fail to examine the details of where this occurs. Two topical MFIs charging rates of up to 144% and 195% respectively are LAPO in Nigeria and Compartamos in Mexico. An uncomfortable truth emerges when we examine the source of funding for these entities. They include microfinance household names, such as Deutsche Bank, Accion, Grameen Foundation, IFC, Kiva, Calvert Foundation, Citi etc. So, while we can criticise such exploitation, let’s not ignore who provides the capital, and therefore benefits, from such interest rates, and yet manages to turn a convenient blind eye to such practices. As has Mr. Tshibaka presumably.

“MFIs must be careful not to follow the path taken by the mortgage crisis, with imprudent lending practices involving over-lending to clients”

Mr Tshibaka’s wise advice is, alas, too late. By a number of years. Over-indebtedness has led to the collapse of entire countries’ microfinance sectors, and now holds the number one position as the greatest threat facing the sector, as reported in the 2012 Banana Skins report. Given that Opportunity operates in Mexico, Peru and Colombia, countries with serious over-indebtedness problems, I am surprised Mr Tshibaka is not already aware of this. Opportunity also operates in Nicaragua, so presumably recall the “no pago” uprising, even though they survived.

That not all microfinance clients are entrepreneurs is well understood, particularly when we consider that a substantial amount (no one knows exactly how much, nor cares to find out) of microfinance is not invested in any entrepreneurial activity whatsoever, but on consumption and repaying loans to other microfinance banks. Or is 100% of Opportunity’s capital directed to entrepreneurial activities?

I also applaud the Smart Campaign, in theory. However, that is as far as my applause extends. It is endorsement without enforcement, and many of the worst offenders in the microfinance sector are endorsers of the campaign, which is a self-regulatory body funded by Accion, possessing carrots without sticks. A nice idea poorly implemented. However, apparently they are about to initiate genuine certification which will be a step in the right direction, but will not remove the inherent conflicts of interest within the organisation. Again, follow the money. I’ve discussed the Smart Campaign extensively, with more to follow.

But what is really interesting is his openly stated fear of “detrimental regulatory oversight and public scrutiny”, in favour of placid self-regulation (perhaps also described as window-dressing). The last thing the likes of the investment funds, Opportunity International or the microfinance sector at large want is genuine, independent, rigorous scrutiny of their activities by people not on the microfinance payroll. They prefer “business as usual” with trusted insiders to “self-regulate”, which is precisely what has got us into the current mess. At this point I disagree entirely with Mr Tshibaka. I believe dramatically increased public scrutiny and meaningful regulatory oversight is precisely what the sector needs. Those with nothing to hide have nothing to fear. That he would so brazenly admit his fear of such scrutiny is noteworthy and without doubt an entirely honest admission.

Three months following publication of my book not a single implicated party has issued a press release or even a denial of the claims made. However, this week the former CEO of Opportunity International – Larry Reed, now head of the MicroCredit Summit Campaign, issued a press release which Mr Tshibaka would be well advised to read.

I’m going to dissect this press release in a later post, as its implications are fascinating. But is it a coincidence that Reed’s press release, largely supporting my book (perhaps begrudgingly) is followed by a senior Opportunity Board Director issuing a text of the most refined spin I’ve seen in ages?

Mr Reed suggests I select my (to date un-refuted, rigorously backed-up) facts to present a one-sided viewpoint of microfinance, but he issues a warning: “for those of us who have been working in microfinance a long time and who find ourselves getting angry when we read a book that seems to slant all its facts in one direction, we should ask ourselves to what degree we are guilty of doing the same thing when we have promoted microfinance.”

What on Earth is Mr Tshibaka’s article if not a ludicrously positive attempt to present a rosy image of the sector entirely oblivious of any research, any recent media coverage, or any facts? He is guilty of precisely the admission of the former CEO of his own company. If people actually believe this stuff we have a serious problem. The fanaticism with which such folk can sprout such hype, even when the hype within the sector is so well known, is yet further evidence of the almost religious, cult-like obsession they have with microfinance. Were this backed up by substantial evidence it may still be considered a little over-zealous, but it’s not, and everyone knows it’s not. And that this comes from a relatively well-respected institution (by the standards set within the microfinance sector) is even more disturbing. Meanwhile, those badly implicated not only in my book but also implicitly in Reed’s press release remain totally silent, praying for this whole incident to blow over. But it won’t, and this sort of nonsense campaigning is not going to help.

Mr Tshibaka’s article will resonate only with other members of the cult. To the remaining thinking, reading population of the planet it will serve only to undermine him, the institution he represents, and the sector at large. He may in fact be doing more harm than good. However, I must say, while I expect this from some institutions, I was surprised and disappointed to see Opportunity stoop to this level, even when their own former-CEO has the courage to step up to the plate.

Let’s stop dancing around the issues, pretending microfinance is the miracle cure for poverty reduction, posting endless heart-warming stories with nice photos and engaging in unadulterated spin, and get on with the important job of cleaning up the mess, fraud and corruption that has been allowed to permeate large parts of the sector from the top to the bottom. Microfinance can be fixed, but not with unfounded optimism and naiveté, but by tackling the problem head-on, as Mr Reed suggests.

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The Mouse that Roared – a Response to the Smart Campaign

by Hugh Sinclair Posted on 11 September, 2012

[This post is in response to a comment posted by Ms. Rhyne of the Smart Campaign on microDINERO regarding my article “Microfinance Awards Itself An Award“]

A curious fact about the book is that none of those implicated have dared to speak out. No press releases, no denials. I didn’t even get my own tab on the Friends of Grameen website alongside other heretics such as Tom Heinemann. Actually, that’s not entirely true: Triple Jump attempted a feeble denial, privately, which was subsequently published. My annihilation of their response was fun to write, so when the Smart Campaign published a critique of my book, at least with the courage of doing so publicly, I felt emboldened to respond.

This is a light-hearted response; I will address some more serious aspects of the Smart Campaign in a subsequent post. I know the author, Ms. Rhyne, we have met and sparred, but her response was simply too juicy to ignore! Forgive the crude journalistic style – I’ll insert her text and then my comment.

I would like to respond on behalf of the Smart Campaign. I would also like to note that I had no role in judging the Philanthropedia awards, so I do not know what that list is all about.

It’s the list of judges who awarded these fantastic awards to the leading non-profit microfinance players in the world, if that wasn’t pretty obvious in the blog post, or the column titles of the list (“Judge” and “Relation to winners”). The point being that they are insiders awarding themselves awards. Thus the title of the blog post, “Microfinance Awards Itself An Award”. I cannot think how I could have made this any clearer, but this is “what that list is all about”. I hope that’s clear. Ms. Rhyne, well aware of Accion, will no doubt be pleased to observe that Accion reached the #3 slot this year.

Comments below refer to critiques found in the book, which are somewhat more extended than the remarks in the blog post.

Yes, the critiques are more extended indeed, the blog post did not actually discuss the book, and Ms. Rhyne fails to address the relevant issues that were in the blog, or the massive payments to the former CEO of Accion which have been the subject of a mini-documentary, and extensive critique within the sector surrounding Accion, all of which failed to rouse a comment from Ms. Rhyne, who is, of course, ex-Accion. I only actually mention the Smart Campaign once in the blog post, although this apparently provided sufficient pretext for Ms. Rhyne to launch a defence of Smart, while evading the core central point of nepotism, or cult-like insider behaviour rampant in the microfinance sector.

Sinclair criticizes the Smart Campaign for allowing organizations he disapproves of to be endorsers, most notably, LAPO and SKS.

It is not whether I disapprove of them. It is whether they violate the Client Protection Principles (CPPs), which I happen to take seriously. Also, am I the only person disapproving of SKS and LAPO? These are severely criticised MFIs worldwide – read the press. However, Ms. Rhyne failed to mention Compartamos, the MFI I actually mention far more frequently than SKS in the book and the blog post she was supposedly responding to, the MFI that famously charges interest rates of up to 195% to the poor. Perhaps this one slipped her mind, which is surprising, as Accion made $270 million in the IPO of Compartamos. Anyway, the main point is that these three MFIs all endorsed Smart, are widely criticized across the sector, and are not merely my personal pet-peeves.

In this, he deliberately misinterprets the nature of endorsement. The Smart Campaign website (www.smartcampaign.org) clearly states that endorsement is a one way street. The endorser endorses the Campaign, not the other way around.

I do not deliberately misinterpret the nature of the endorsement – I think it is pointless. I understand it very well, it is window-dressing. It is ineffective. It is “endorsement without enforcement”, although finally it does appear that Smart has decided to actually do something, as Ms. Rhyne alludes to later. It is free self-labelling as “ethical” without having to actually be ethical, and therefore an open invitation to mislead microfinance investors.

The Campaign does not censor its endorsement list, but accepts all who wish to state their allegiance to the principles (as stated on the website). The Smart Campaign has not conducted any investigation of most of its 3,000 endorsers, although it has conducted on-site assessments of about 40 MFIs.

Great, they’ve broken through the 1% barrier. So, just less than 99% remains totally un-investigated. It’s a very small step in the right direction. Of these 40, was anyone expelled? Anyone discovered to be in serious breach of any CPPs? Compare to this to a fair trade stamp, which Smart appears to resemble – they visit more than 1% of the farmers, and they have standards for joining their campaign and using the logo. Not with Smart. Technically they do not actually state “there is some actual content behind endorsing this campaign”, but the impression is clear – self-regulation is doing something positive. Without defining quite what this is, Smart is an effort to present a rosy picture to the outside world, in my opinion. As long as no one takes an MFIs endorsement of Smart seriously, no harm can come of this, but many people are unaware that an MFIs endorsement of Smart is totally without substance, verification or meaning, and required no more than an email address and a name. The whole purpose of Smart is to be taken seriously, without doing anything serious.

That said, the Smart Campaign’s has been developing standards to assess and ultimately certify that a financial institution does or does not apply adequate standards of care in client protection. It has spent several years developing a public certification program that will be launched by the end of this year.

How can it take several years to develop a program to see whether the CPPs are being violated or not? In the LAPO case all one had to do was read the newspapers and rating reports. The Andhra government went to lengths to publish the list of 54 client suicides as a consequence of aggressive loan practices at MFIs, with the MFIs explicitly named. How hard can it be to see if the MFIs are bullying their clients, deceiving them about interest rates etc? Anyway, that the public certification program will be launched is great news, albeit way over-due.

It is deceptive for Sinclair to criticize endorsement without acknowledging that the Campaign is relying on standard-setting, assessment and certification as the real tools to measure performance.

I hadn’t heard about the certification actually happening, and if that is actually true, that would be interesting. They’ve been talking about it forever. I’m sceptical, the proof will be in the pudding. But Ms. Rhyne apparently fails to get the central point, or is deliberately evading it. What has standard-setting and assessment got to do with my criticism? My criticism is that this is useless, ineffective window-dressing, which, to date, is entirely true. If this changes for the better, great. Smart used to have a discreet waiver on the website warning astute readers that the campaign made no actual assurance about actual behaviour of the MFIs (my suggestion), but they removed it recently.

2. Relationship to Accion. Sinclair implies that the Smart Campaign’s origins and staffing at Accion’s Center for Financial Inclusion make the Campaign a suspect part of some dark purpose. Horrors! A dastardly scheme by Accion to promote client protection practices across the microfinance industry!

I merely point out the irony that Accion is the US-NGO that made vast profit from the IPO of Compartamos, one of the least respected MFIs in the microfinance sector (other than amongst the neo-liberals and profiteers, of course, who rather like such MFIs, especially when they are shareholders). It’s analogous to a billionaire investor writing up the certification criteria for Goldman Sachs to label itself as an ethical institution.

Compartamos could well be accused of predatory lending, with rates reaching 195%. I have not, in over a decade, come across an MFI charging more exploitative rates. Should we ask Mohammad Yunus what he thinks of such rates? What do the general public think of such rates? This is not a loss-making, socially motivated, small, struggling MFI; this is a highly profitable loan-shark, let’s be crystal clear about that. So, if Smart wants to retain any credibility, please explain how 195% is compatible with the Smart CPP on responsible pricing: “Pricing, terms and conditions will be set in a way that is affordable to clients while allowing for financial institutions to be sustainable.”

So, Ms. Rhyne, a public question: what do you think of the interest rates of Compartamos? Compartamos endorsed your little campaign, so they presumably love the idea of responsible interest rates. Is 195% responsible therefore? Mohammed Yunus suggested that interest rates over 25% were too high – what do you think of his opinion on this? Or you dispute the calculation of 195%, done by respected US-academic David Roodman at the Center for Global Development?

The Smart Campaign should be judged by its actions.

There haven’t been any yet, other than gathering endless endorsements. But action is about to start, according to Ms. Rhyne, so watch this space!

The Campaign operates in good faith as exactly what it claims to be, a global effort to embed a set of client protection principles deep within the microfinance industry.

So deep that when you endorse the campaign they offer you a check-box to avoid having to ever hear from them again, just shove your name on the list and forget about it. I wonder how many select this option?

It works with a diverse Steering Committee whose members represent all facets of the industry.

The usual suspects mostly: CGAP, Deutsche, UN, SEEP, Finca, Microcredit Summit, Oikocredit, IFC, and Ms. Rhyne herself from CFI.

It has partnerships with dozens of local and international supporting organizations. The Client Protection Principles have, as a result of the efforts of the Campaign, become widely known, accepted, and understood throughout the industry.

Nonsense – do a test. Next time you’re at an MFI that endorsed Smart, or meet an individual named on the roll of honour of endorsers, ask them to name the CPPs. There are only 7 – hardly a challenge – but they’ll miss things like client privacy (Kiva publish clients loan details and photos on its website – er, is that even legal?) and the one about appropriate loan products. They might remember the one about preventing over-indebtedness, but will mention it sheepishly, as the entire point of microfinance is to indebt the poor. Particularly if you have a chat with a Smart-endorsing MFI in Mexico, Ecuador, Colombia or Peru, ask what they are doing about over-indebtedness, which is rampant in all countries but carefully ignored.

If this is a sinister plot, let’s have more!

It’s not a sinister plot, it’s feeble window-dressing aimed to perk up the ailing reputation of a sector that has increasingly ignored the interests of the poor and eventually, when this reached an embarrassing level of public scrutiny, something had to be done to fix the reputation of the sector. Which, thanks to its massive earnings on Compartamos, Accion was able to spend a little money on, by developing a label to assuage investors while not requiring any changes in MFI behaviour whatsoever.

That said, it is entirely appropriate to scrutinize the Campaign’s relationship with Accion. The Campaign is an initiative of the Center for Financial Inclusion at Accion (CFI), and all Campaign staff are CFI staff. CFI is legally a department of Accion, but it operates with an independent Advisory Council and maintains an industry-facing stance with a high degree of intellectual independence.

Right, well, like I said, there seemed to be something of a link between the two institutions. It’s strange that the entire microfinance sector was unable to come up with something a little more arm’s length or independent than this, no? Wouldn’t an actual independent body have been the obvious solution for an initiative with some token self-regulatory role promoting transparency etc? For example, imagine a body set up to protect the interests of smokers – would the offices of Philip Morris be the first place you would think of to establish such a body? Financed by Philip Morris. With lots of current and former Philip Morris staff. An unusual choice, but a convenient one.

It works on behalf of the microfinance industry as a whole.

What, like an elected government? The interests of the microfinance poor may conflict with the interests of the microfinance banks. For example, poor Mexicans presumably prefer low interest rates, while Compartamos and its investors seem rather fond of high interest rates. Both are part of the microfinance industry presumably, so how does Smart work on behalf of both in such a case? Or does the “industry” refer only to the lenders? Besides, if Smart works for the broad industry, who selected the staff and key positions? Who interviewed Ms. Rhyne herself for this job? Accion had a lot of cash sloshing about after the Compartamos IPO, but faced mounting criticism not only of their goose with the golden egg, but of the sector in general. Smart was a cheap solution, but best kept in-house with trusted insiders to run it. This is no plot, nor is it sinister or dastardly. It is simply fact.

The issue of the connection to Accion has come up several times in Smart Campaign Steering Committee meetings.

That some members of the steering committee had noted the connection between the two institutions is not entirely surprising given that they are housed in the same building.

Each time, the CFI has received praise for its transparency and even-handedness in administering the Campaign.

Praise from whom? Note the original blog title was “Microfinance Awards Itself an Award”. Oh, is this just praise from the club? The CFI praising Smart, and vice versa presumably? Ah, now I see.

There are ongoing discussions about possible long run homes for client protection in the industry, which could involve a migration into some other organizational home or form. Accion has been by far the largest financial contributor to the Campaign, and it continues as anchor funder.

Deutsche Bank is another key funder, no doubt embracing transparent pricing. Ask Deutsche whether they find LAPO’s interest rates to be in line with the CPPs (up to 144%). They just invested in SKS, so will probably soften their stance there also, and not a bad investment – up 40% in a couple of months. Regarding a sensible home for Smart, how about in a developing country run by independent people actually doing something?

It has supported the Campaign because it sees client protection as an integral part of its approach to microfinance.

As long as it doesn’t involve sniffing around the interest rates charged to their Mexican clients.

3. Effectiveness of the Smart Campaign. The broader claim that Sinclair makes is that the Campaign is an ineffective whitewash that will not result in substantially better client protection practices. Here, too, the Smart Campaign should be judged on its actions and their results, which have already been substantial. First result: it is unequivocal that the Smart Campaign has made the microfinance industry far more aware of and committed to client protection principles than it had previously been. This awareness has taken hold among MFIs, their supporting organizations and the investors and funders who supply their capital.

Perhaps not surprisingly, I challenge this unequivocal truth. The Andhra Pradesh suicides were relatively recent – since Smart was formed. The over-indebtedness problem is getting worse each year, this year making it to the sought after #1 spot in the Banana Skins Report despite Smart dedicating a whole CPP to it. But my objection with the comment above is “the Smart Campaign has made the microfinance industry far more aware of and committed to client protection principles”. Nonsense. The media has done this. Most people can’t remember what the CPPs are, let alone analyse in any detail what Smart is all about. But they read newspapers. The journalists have made the microfinance industry far more aware of the risks of not having proper client protection. Read the NYT and the WSJ for decent truth about the microfinance sector. Look at the impact of Heinemann’s documentary – it even prompted the insiders to set up their own useless spin machine in defence – the Friends of Grameen (who no doubt endorse Smart and vice versa). Ms. Rhyne implies causality – that because Smart popped into existence the sector became more aware of the abuses suffered by the poor at the hands of the microfinance sector. Er, perhaps this is putting the cart before the horse: the mounting abuses led to the media attention and the need to rustle up something to counter-act this – welcome Smart. Let’s just keep in the back of our minds that the causality could have been the other way round, and that Accion, of all folk, would be pleased to see the image of the tarnished sector improve.

Second result: the Campaign has developed standards of practice for the implementation of client protection principles. These did not previously exist. They are still young, but they constitute a body of practice that can help put client protection principles into action.

This is farcical. Sure, there may not have been a set of explicit standards that said “don’t screw the poor with extortionate interest rates, don’t encourage them to go bankrupt, don’t design products which actually harm them, try not to leak private client data etc”. There isn’t actually a CPP that says “don’t shoot your non-repaying clients”, or “don’t encourage female clients to become prostitutes if they are struggling to repay their loans” (as occurred in India), or “don’t take your kids out of school to work in some micro-sweat-shop because you think that will help them in the long run” (subject of next blog post). They did exist before, but they were called common sense.

Third result: it has laid the groundwork and will soon introduce certification, which will allow for public recognition of organizations that apply these standards. With certification will come a means to separate those MFIs that take adequate care from those that do not and to incentivize MFIs to improve their practices.

Great, we’ve been waiting a decade, some more, let’s start with the folk on your own list, maybe with the three MFIs mentioned here, SKS, LAPO and Compartamos? And can someone be expelled, or banished, or dis-endorsed? Are there any consequences for violations of the CPPs? Please state them openly.

That said, the Smart Campaign is not the last word on client protection, because incentives at both the client and provider levels that lead to poor client protections are intrinsic to financial systems.

Not entirely sure what is meant here, but something along the lines of Smart not being perfect and regulation of financial services in general is not perfect either. At last we agree on something.

The Campaign acknowledges that regulation of some aspects of client protection, with enforcement, will be necessary. However, microfinance operates around the world in places where regulatory frameworks for securing client protection are far from adequate, and even where they are strong, regulation is often the last line of defense. Far better to also have client protection embedded as norms and transparent standards. Thus, the Smart Campaign does not position itself as a substitute for regulation, or as a complete solution to the problems of client protection. Rather it is as an industry-development effort that will contribute in a substantial way to improved client protection practices.

Or rather, it has been an ineffective window-dressing PR-stunt until now, and is apparently about to actually take action for the first time ever, so watch this space with baited breath. The bear has awoken, stretched, yawned, and is now, ever so slowly, emerging from the cave into the sunlight of the real world. Or is it a mouse?

It is politically incorrect to criticise Smart because it apparently helps the poor. It also helps the sector clean up its image to the non-insiders who assume this has some substantial meaning in practice, which it doesn’t. It is a vain effort at playing on the “seal of approvals” that we have all become accustomed to. But it’s sloppy, ineffective, has no teeth, and may actually do more harm than good. Either beef it up or scrap it. The Diverging Markets review of my book summarised the situation concisely:

The SMART Campaign is actually misnamed—CRAFTY would be more appropriate.

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Norway throws the baby out with the bathwater

by Hugh Sinclair Posted on 2 September, 2012

NORAD, the Norwegian equivalent of DFID or USAID, recently announced that it has all but ceased microfinance activities. The Norwegian Microfinance Initiative (NMI) is the only remaining large microfinance investor, although it is partially funded from the Norwegian public purse (Norfund). Stromme Foundation, CARE Norway and Kolibri Capital contribute a further NOK 100m ($20m or so); and Telenor has made forays into microfinance. Some smaller operators exist: see the relatively recent survey entitled “Inventory of Microfinance Activities Supported by Norway” (2011).

Two matters concern me. First, does this establish a precedent of entire countries despairing of microfinance and pulling out altogether? Second, is Norway risking throwing the proverbial baby out with the bathwater? These are major questions, but perhaps I can scratch the surface here.

We are aware of the growing disillusionment with microfinance – there is no need to re-iterate the debate here. The Duvendack report in the UK was hardly complimentary. Roodman’s succinct summary of the overall impact (“zero”) did little to boost credibility. DOEN in Holland have done no new investments in microfinance for years, although the Triodos-DOEN fund ticks over. NOTS reduced its committed capital from €14m to €1m in 2011.

The Norwegians were uniquely and directly embroiled in the recent scandal involving Grameen Bank and Muhammad Yunus. Danish journalist Tom Heinemann splashed the story across the media in his documentary on the subject, so perhaps Norway is particularly sensitive to such adverse media coverage. Heinemann then followed up with a shorter report on huge payouts to the CEO of Accion, one of the early investors in the Mexican Bank, Compartamos, which was discovered charging the poor interest rates up to 195%. The article and accompanying video footage, entitled “Gave Small Loans, Received Big Payments” was unlikely to impress the Norwegian electorate, and NORAD announced their departure from microfinance shortly afterwards.

Other Scandinavian countries may be taking note of Norway’s actions. Sweden and Denmark are both active supporters of microfinance. But perhaps the exiting of public funding for microfinance is actually a sign of success? If private capital is now able to fund the sector, public funds can be better deployed elsewhere. Obviously this line of reasoning avoids the thorny question of whether microfinance works or not. Or whether public funding may be preferable simply because it tends to be less overtly profit-motivated. Also, the distinction between public and private funding is increasingly blurred, as public funds are channelled through MIVs. In the case of NMI  this includes BlueOrchard, Incofin, Symbiotics, Developing World Markets etc. – the usual private sector suspects.

It is hard to read between the lines as to why the Norwegians took this decision, and they have been hesitant to comment on a number of topics related to the Grameen scandals. I tried to contact NORAD for this post, but got no reply. And let’s be realistic, they are unlikely to openly state “we find the entire microfinance sector a waste of time and money with zero supporting evidence that it’s working”, even if that were their opinion. Political correctness will prevail regardless of the internal conversations.

So, speculation of motivations aside, my question is “who’s next”? Remember when Unitus closed all of a sudden in 2010? That sent a small shock through the sector. Pro-Credit distanced itself fairly openly from the microfinance sector. Indeed, Pro-Credit’s comments may have been prophetic and shed some light on Norway’s announcement:

“We fear, however, that the importance attached to microfinance – presented as the cure-all to eliminate poverty – will raise expectations that cannot be fulfilled. If these expectations are disappointed, the public may be disillusioned and lose interest.”

Did Norway simply become disillusioned and lose interest? Ironically the number of criticisms and scandals in microfinance recently may have served to mute the announcement from Norway, most recently the effective take-over of Grameen Bank by the Bangladeshi government. NORAD was a big investor in Grameen Bank stretching back to the 1980s. Now it’s pulled out of the sector altogether. That appears to be big news to me.

USAID, CGAP, Kiva, GFUSA etc. have a well established microfinance following which religiously adheres to the mantra of the miracle cure, but the UK has also expressed some concerns. The All Party Parliamentary Group on Microfinance recently made a call for evidence on regulating the microfinance sector. Indeed, even the private sector microfinance community is shifting away from traditional microfinance, in favour of “all inclusive finance”, or whatever the latest catchphrase is. It appears re-branding away from the embattled bedrock of micro-credit, loans to women to buy goats etc., is underway across the entire sector. Remember when the “P” in CGAP used to stand for “Poorest”, and then changed to “Poor”? Now they prefer to use the broadest of generalisations possible – inclusive finance, debatably reflecting the mother of all mission drifts. Perhaps the Norwegians are simply the first, boldest, most pro-active, most forward-looking folk out there? Again, let’s be honest, it wouldn’t be the first time those Scandinavians have run circles around the rest of us. Bergen has had traffic congestion charging since 1986.

So, Norwegian wisdom aside, who are the casualties in this? There is good and bad microfinance out there, and some of the former will presumably suffer as a result of a lack of public funding. Public funding may be “softer”, and thus directed to more socially motivated microfinance. Relying entirely on the hard-nosed private sector may reduce yet further any genuine glimmer of social focus that remains in the microfinance sector. Return on assets and risk adjusted returns are all fine and good, but start-up MFIs may struggle to raise Norwegian capital. MFIs not seeking profit maximisation but rather to serve an overtly social purpose may struggle. Indeed, could this herald the dawn of a new era, where the distinction between for-profit and socially-motivated MFIs becomes yet wider? The former will raise finance from sources that increasingly resemble any other part of the financial sector. The latter will revert to the traditional NGOs and donor led organisations. Would that necessarily be a bad thing?

Indeed, given that over-indebtedness made it to the number 1 spot in this year’s Banana Skins Report discussing the principle challenges facing the sector, indicative of an excess rather than a scarcity of microfinance (albeit concentrated in certain regions), perhaps a reduction in the availability of capital is precisely what the sector needs? Are the Norwegians simply leading the way in making a wise choice?

The Norwegian announcement raises other interesting questions. Is the “cooperation between the public authorities and private investors in Norway” into NMI, who then direct the funds to a few profit-motivated private sector MIVs, an innovative mechanism to leverage public funds while reaping the efficiency of the private sector. Or is it the height of laziness? We have the interests of the Norwegian tax-payer, private investors, and the poor at stake. The Norwegians entrust this mix of interests to a private sector agent – NMI. What assurance do we have that NMI acts to maximize this complex medley of often conflicting interests, and not simply to maximize their own best interests? Isn’t this a classic case of the principal-agent problem?

Perhaps a more fundamental question is not whether Norwegian tax-payer money should be directed towards microfinance at all, nor whether private-sector MIVs are a viable mechanism for doing so, but rather whether the public sector could better assist MFIs. What other models did they consider? In short – did they throw out the baby with the bathwater in withdrawing from microfinance?

This is all pure speculation prompted by some bureaucrats in Scandinavia. The microfinance sector is in a transitional period and I for one am going to keep a close eye on these northerners. They are more nimble and less encumbered with large development sectors with strong political ties and vested interests, so there may be clues as to what the future holds for the rest of us. Watch this space.

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Microfinance Awards Itself an Award

by Hugh Sinclair Posted on 30 August, 2012

Philanthropedia has just published its list of the 11 most outstanding non-profit microfinance players. The mind boggles. Three feature in my book – prominently, and not too favourably. Grameen Foundation USA (GFUSA) was #2, Accion was #3 and Kiva was #6. I am personally amazed that any of these three are legal. It is hard to know where to begin.

GFUSA also managed to obtain the “GuideStar Exchange Seal, demonstrating its commitment to transparency”. GFUSA is a vehement supporter of one of the most questionable MFIs in history, the Nigerian Lift Above Poverty Organisation (LAPO). It’s adherence to transparency is nebulous, particularly when it comes to interest rates, which GFUSA can somehow often underestimate by nearly 100%. I will not re-iterate the criticism of LAPO here, I cover it fairly thoroughly in my book, and information is widely available on this institution. Summary of flaws: illegal intermediation of savings, providing dodgy data to rating agencies, family members on board and acting as external auditor, savings frauds, sloppy MIS, chronic client drop-out. GFUSA report the interest rates as about 50-80% usually, but the highest recorded rate is 144%, as reported by US-based NGO MFTransparency, who should have won this award instead of GFUSA for their excellent work revealing the full cost of microfinance loans exhorted from the poor. But perhaps that sort of transparency is not exactly what the nominators want to see?

ACCION of course, is the infamous NGO that pocketed vast sums in the IPO of Compartamos, the bank that charges interest rates of 195% to the poor women of Mexico, lambasted by Chuck Waterfield, CEO of Microfin. Nevertheless ACCION also got the transparency seal from GuideStar. It is farcical. A recent documentary revealed the massive pay-outs made to the departing ACCION CEO, Maria Otero, before she shuffled through the revolving door into the current US government administration. Now ACCION is run by a former Citibank bod, another institution with a chequered history in microfinance, who managed the IPO of Compartamos through their Mexican subsidiary. And that of SKS Microfinance in India, another player with, let’s say, less than a pure bona fide history. Guessed right: it involves forced prostitution and suicides. Pure coincidence. And finally, ACCION is also the mastermind behind the SMART Campaign, the industry’s best effort to date of pretending that microfinance is ethical without any actual need of checking, complete with a seal of approval given to many of the worst offenders in the sector.

Then we have Kiva, the mother of silly ideas combined with excellent marketing. That this company exists is testimony to the intelligence of its users, the “Kivans” as they refer to themselves. They provide vast sums to Kiva in the undocumented belief that they are helping the poor. A large portion of this money in fact never leaves California, according to Kiva’s own financial statements. The poor often stump up eye-watering interest rates while the Kivans settle for 0%, with the intermediating microfinance banks pocketing the spread, which can approach 100% per year interest. Kiva also picked up the GuideStar award for transparency, despite having never actually published a single one of these interest rates. However, Kiva is, debatably, the only means for US citizens to lend directly to the coca-leaf sector of Peru or to animal-cruelty sports, without being prosecuted, thus cornering this market. They also pumped $5m into LAPO before they were named and shamed by the New York Times. Kiva’s operating expense ratio of 20% makes it possibly the least efficient mechanism for a microfinance investment ever invented by mankind, while most funds manage to cover costs with only a 2% management fee, and still make a profit (though not necessarily better-informed or more ethical investment decisions).

Anyway, how can we explain this strange result? Well, some clues may lie with the judges. If we extend the analysis to three other winners of the award, Pro Mujer, Freedom From Hunger and Opportunity International, an interesting result emerges:

Judge Relation to winners
Amulya Champatiray IFMR – GFUSA partner in India
Anne Hastings CEO Fonkoze, GFUSA partner, GFUSA award winner
Beth Rhyne MD of the Center for Financial Inclusion at ACCION
Bobbi Gray Freedom From Hunger
Camilla Nestor Vice President GFUSA
Carmen Velasco ProMujer Founder, award winner, receive GFUSA funding
Chris Baker Kiva Fellow
Chris Dunford Freedom From Hunger
Frans Purnama Ex-GFUSA
Iris Lanao Finca
Jeffrey Ashe Ex-Accion
John Hatch Finca
Kyle Salyer MicroCredit Enterprises, investors in GFUSA partner LAPO
Lisa Kuhn (3 mentions) Ex-Finca, Freedom From Hunger and Opportunity International
Mark Lutz Opportunity International
Mohammed Khaled Consultant to GFUSA
Richard Schumann Ex-Accion
Rupert Scofield Finca
Susy Cheston Accion
Tanya Counts Accion
Tim Geisse (2 mentions) Opportunity International and Accion
Yeva Grigoyan Finca

So, of the 72 judges, there are 25 mentions of these 6 “winners”. The website states that judges cannot vote for their own organisations, but does not state whether they can vote for their former organisations. However, this does provide supporting evidence for the “inner-club theory of microfinance”, aka the cult hypothesis, by which most achievements claimed for microfinance are in fact claimed by those involved with microfinance, with no need for even a shred of evidence. I’ll vote for you, you vote for me, we’ll all win the top prizes, all look good to the outside world, and everyone will applaud us and ensure the flow of capital to the beleaguered sector. Everyone’s a winner.

Except, as usual, the poor. I wonder how they may have voted.

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A question for Muhammad Yunus regarding exploitative interest rates

by Hugh Sinclair Posted on 27 August, 2012

Muhammad Yunus has faced yet more trials this week at the hands of a Bangladeshi government of questionable transparency. Prime Minister Sheikh Hasina has essentially taken over Grameen Bank, on what some have described as a “Black Day” for the microfinance sector. In the build-up to this grand finale senior folk in the US government have weighed in to defend Yunus. Yunus is the good guy and Hasina is the corrupt prime minister, so the argument goes. I am generally a fan of Yunus’s broad principles of ethical, effective microfinance, and Hasina’s appearance on the BBC’s Hard Talk does leave the viewer wondering about her motivations.

Muhammad Yunus warned of the dangers of exploitative interest rates charged by some microfinance institutions. “I never imagined that one day microcredit would give rise to its own breed of loan sharks”, he told the New York Times. Alas the microfinance sector has conveniently failed to avoid a formal definition of exploitative interest rates, or what level constitutes a shark-like practice. So, I ask the question: does a highly profitable MFI charging annual interest rates consistently over 100%, and up to an independently verified rate of 144% constitute exploitation or shark-like behaviour? If you think not, stop reading now. If such rates make you feel uncomfortable, I have a second question:

Why did Grameen Foundation USA (GFUSA) invest in LAPO, the Nigerian microfinance institution that has been found by two separate rating agencies (MicroRate and Planet Rating), the New York Times, and the US-NGO MFTransparency to be charging such eye-watering interest rates? Criticisms of LAPO do not end here, but I will focus on this single point for now. Muhammad Yunus sits on the board of GFUSA and suggested that interest rates above 15% more than the cost of capital (typically of the order of 10%) are inexcusable. GFUSA not only supports LAPO and invests in LAPO, but guaranteed two loans to LAPO from Citi Microfinance and Standard Chartered Bank. There appears to be a contradiction here, and not a small one. GFUSA, Citi, Standard Chartered and Yunus have remained ominously silent on this topic.

Why?

I have a hypothesis: Yunus is likely rather disappointed that he is associated, via GFUSA, with an MFI charging the poor precisely the sort of interest rates he abhors. However you cut the numbers, whatever you assume about inflation rates, 144% seems a little steep and not entirely in line with Yunus’s preaching of the topic. But he dare not protest. To do so would send a shock wave through the US microfinance sector. With friends extending as high as Hilary Clinton, and with GFUSA acting as something of a rallying call for the US microfinance investment sector, it is as politically unacceptable for Yunus to take any action as it is for LAPO to charge the poor such interest rates to the poor, despite being extremely profitable. Politics win over exploitation of the poor. Yunus is in an impossible bind.

A hypothesis ought to yield a prediction. I therefore predict that as long as Yunus remains associated with GFUSA he will cease publicly lecturing the world about the evils of exploitative interest rates for fear of facing a rather obvious and embarrassing question from the audience about the rates charged by LAPO. Ironically, this will deny the world of one of the key advocates for fair pricing of loans for the poor, which is sad.

So, I imagine that Yunus is as irritated as many of us about LAPO charging the poor such interest rates in the name of development. His name if flaunted across the Grameen Foundation USA website thus he has further reason to be piqued. But, before we jump to the conclusion that Yunus was perhaps unaware of GFUSA’s activities regarding LAPO and its interest rates, we need to dig a little deeper.

Yunus sits on endless boards. One is of particular interest – the Schwab Foundation. Yunus is the only board member with any obvious microfinance experience (a Nobel Prize no less). Following the rating withdrawal, downgrade and front-page NYT exposé of LAPO, Schwab decided to give LAPO their apparently prestigious award for Social Entrepreneur of the year. Is this a coincidence? Did Schwab know about LAPO’s interest rates? Had Schwab’s criteria for selecting a potential winner extended to reading the NYT or any rating reports? Of all the MFIs in Africa, how did they select LAPO? These remain unanswered questions (and I’ve tried asking Schwab repeatedly).

Yunus’s defence against the Bangladeshi government is largely political – that Hasina doesn’t care for Yunus is fairly clear, and she is doing what she can to take control of the bank he founded. But LAPO is an entirely non-political, unrelated affair. It appears to the untrained eye that Yunus has softened his approach to MFIs that charge extortionate interest rates. Yunus himself criticised the Nigerian microfinance sector for charging such rates, and yet seems to have turned a blind eye in the case of LAPO.

In response to Tom Heinemann’s documentary Alex Counts of Grameen Foundation went to lengths to explain how Grameen’s interest rates were a mere 23%, and refuted Heinemann’s suggestion they were much higher than this: up to 200% apparently. Actually Heinemann never said they were anywhere near this level if GFUSA had bothered to watch the documentary, but Heinemann did pick up on LAPO’s interest rates of well over 100%, and Friends of Grameen have also remained rather quiet on this topic. It appears the focus on interest rates and transparency is used only when convenient for Grameen Foundation and Friends of Grameen.

So, I have an open question for Muhammad Yunus:

“What do you think of LAPO charging the poor interest rates up to 144% per year, through an institution named after Grameen Bank, on whose board you sit, and to whom Schwab Foundation gave an award?”

I will post any response on this blog. Don’t hold your breath.

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Fear Strikes the Microfinance Funding Sector

by Hugh Sinclair Posted on 21 August, 2012

For all the scrutiny, academic research and press coverage that the microfinance has attracted over the years, one niche has been exempt: the investment community. This is now changing.

Individuals, NGOs, investors, CSR departments, even governments, have largely had to place their microfinance investments via third parties. Whether this be the $25 loan through Kiva or MicroPlace, or multilaterals placing tens or hundreds of millions of dollars in the microfinance investment funds (MIVs), we have implicitly trusted these intermediaries to invest on our behalf.

These intermediaries have acted as gatekeepers, for both the flow of capital to the microfinance institutions, and for the flow of information back to the investors. Their integrity has been accepted a priori, in direct contrast to the well known problems in all other areas of the financial services sector, defined by economists as the principal-agent problem. How can we ensure that those in whom we entrust our money act in our best interests and those of the final beneficiaries?

In short – we can’t.

At last, scrutiny is now being applied to the MIVs and peer-to-peers (P2Ps).

These players are collectively in lock-down mode. The CEO of BlueOrchard resigned recently. Not a single other institution or individual mentioned in my book has dared issue a single comment. Their traditional method of retaliating aggressively against any critic has failed them this time. The media are having a field-day. The likes of Citi, Deutsche Bank, Standard Chartered etc. are on the back foot after the mess Wall Street has caused in developed countries. Suggestions they have been behaving less than transparently in unregulated, developing countries where the potential to exploit the poor is far greater will come as little surprise to most.

The Norwegian government recently pulled out of microfinance entirely, with the exception of Sudan according to an article in NRK. Will others follow as the sector staggers forwards, religiously clinging to its ever-waning claims of the end of poverty thanks to glorified credit cards?

Much is said of human rights for the poor. Some suggest such rights should extend to access to often over-priced credit and harassment at the hands of profit-motivated MFIs seeking an IPO. Rather than enter this debate, I would like to propose two new rights. First, the rights of the poor to benefit from the same levels of client protection from financial service providers that we enjoy in developed countries. Secondly, the rights of well-meaning investors in developed countries who invest in microfinance via P2Ps or MIVs to benefit from the levels of scrutiny that other areas of the financial services sector are subject to.

I hope the sector wakes up to both these rights. We are all exhausted with the hype surrounding microfinance, and its miraculous impact on poverty despite an absence of much supporting evidence. Perhaps now it is time to focus on some good, old-fashioned regulation? After all, regulating financial service providers should not be such a revolutionary idea in the current climate.

Look at what Damian von Stauffenberg, founder of MicroRate, said in relation to MIV regulation in the House of Representatives hearing on microfinance in 2010:

“this is indeed a concern we have, not that we are seeing microfinance funds, MIVs, are crumbling, but we see the potential. Basically, the microfinance funds on the whole with some exceptions are not terribly transparent. If you go onto their Web sites, you will find beautiful pictures of what is 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 funds that you invest in here in the United States. That is worrying. If people invest because it is microfinance and microfinance is good, that is sowing the seeds for trouble. I think yes, a lot more transparency is needed in this field of microfinance funds.”

Since I wrote the book I have been delighted to receive overwhelming support from so many people. Even some whom I would never have expected to support me. Neither in writing the book, nor in the activities unfolding now, have I acted alone. Courageous people are collectively fighting for the rights of the poor, and we are having an impact. I do not know most of these supporters. I read their replies, comments, articles in the media or blogs. They send me notes of support, and we share information. I thank each and every one of them. People are waking up to the fact that increased regulation of the microfinance sector is a critical tool to ensure a fairer outcome for investors and the poor alike. Who will resist this most vehemently? Those with the most to fear: the MIVs.

Welcome to the revolution.

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Ramesh Accusation of Deutsche Bank

by admin Posted on 5 August, 2012

Following the publication of the book I have decided to begin a blog to update readers of more recent developments in the murky world of microfinance. Much news, particularly that which challenges the mantra of microfinance, receives very little airtime. I will attempt to present the untold side of the microfinance story, in my traditional, blunt and direct style. However, as with the book, I will attempt to present a balanced view of the sector: good microfinance can and does exist. It’s just extremely rare.

Continue reading →

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