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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