Promotion, Dismissal, Nationalization and Defection: Microfinance January 2013

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

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

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

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

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

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

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

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

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

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

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4 Responses to Promotion, Dismissal, Nationalization and Defection: Microfinance January 2013

  1. Elisabeth Rhyne says:

    It is good to know that you think client protection certification is a step in the right direction. You are right that only time — and the response of the microfinance industry — will tell whether it will make a significant difference. Readers who want to know more about certification can look to the Smart Campaign website (

    • Thank you for your comment. I look forward to seeing how the idea catches on more widely, how compliance is monitored and enforced, and what impact this has on the sector. Will investors be attracted to MFIs with this certification? Again, only time will tell. It is possible that some investors may find the costs associated with actually treating the poor well, as the CPPs suggest, hinders profitability and could dissuade certain types of investors. Regardless of the impact, any move in the direction of improved treatment of the poor and increased transparency is applauded. We have seen the impact that Chuck Waterfield’s stellar work has had on interest rates with regards transparency. I have used this publicly available data to draw attention to the actual practices of a host of operators, MFIs and MIVs. This information was previously not available, and now the concerned investor can at least make an informed choice rather than investing blindly.

      Once awarded the Seal, can it be removed for breaching the conditions? As I pointed out previously, one of the most farcical aspects of the Smart Campaign is that it is “endorsement without enforcement” – anyone with the ability to write their own name and possessing an email address can become an endorser. Does the Seal have teeth? Could you describe them?

      However, you have repeatedly managed to avoid answering the question that many people have for Smart, for your Seal of Excellence, for the MicroCredit Summit Campaign: what about the children? You are well aware that child labour is openly occurring in micro-enterprises, that it is illegal, and that the MFIs are turning a blind eye to it, as are most of their investors. Academic research is emerging supporting this. I can send you the papers if you dispute this. You are in an ideal position to add the rights of children to the CPPs, and you have repeatedly failed to do so. I find this unethical, unreasonable and inexplicable. If we do not address this issue promptly we risk raising a generation of children, albeit not direct microfinance recipients, who are inadequately educated and fit for no job other than to remain stacking shelves in the informal sector. You would not need to design an elaborate definition of child-labour tailored to each country, but simply demand that MFIs only lend to legal micro-enterprises and obey the existing laws in their countries regarding child labour.

      The fact that you fail to do this despite mounting evidence of a problem, acknowledging yourself that it is a problem, and while being ideally situated to actually make a tangible improvement to the lives of children, reduces my respect for your organisation dramatically. As the evidence of child labour mounts, the question that will recur over and over again is simply “why did Smart not include this in the CPPs?”. Your reputation is accordingly on a slippery slope until you get your act together on this.

      Speak to Oikocredit and Vision Fund – they both have policies on this – it is hardly difficult. The fact that both come from Christian/social backgrounds may explain why they take particular care of children (World Vision is a specifically child-focused NGO). Larry Reed is formerly of Opportunity International, another Christian organisation, and head of the MicroCredit Summit Campaign. I would be extremely surprised were he not to support you on adding this as a CPP, and I believe other funds and networks will be adding the rights of children to their policies over the coming months. The fact that you don’t bother risks making you look absurd. I am sure you can come up with technical defenses to explain why you have failed so abysmally in this regard, but I would ask you to explain this to the children who are denied a free public education in countires such as Peru and Bolivia and instead stack shelves each day.

      One can only speculate that the reason for ommitting the rights of children is firstly that you know very few MFIs would ever earn your amazing Seal of Excellence were this a criteria, as you well know how rampant this is. Secondly, you are presumably unwilling to even place such an emotive topic on the table, particularly in a time when microfinance is facing criticism from all sides. Best brushed under the carpet.

      Add the rights of children, or rather the insistence that MFIs adhere to local laws regarding child labour, or stop lecturing the world on how you promote client protection. Or at least have the courage to openly explain why you think children’s rights are not worth protecting despite the mounting evidence that this is a serious problem. Failing to act due to impotence is one thing, but you fail to act while being well positioned to take a stance on this. Shame on you.

      The other lingering question on many people’s minds regards your independence, and the fact that Accion (where you previously worked) are considered as the benchmark of vulture-like, parasitic, profiteering and exploitative microfinance since their investment and IPO of Banco Compartamos. I am not aware of you stating an opinion on the interest rates of Compartamos publicly, reaching 195% as documented by respected academic David Roodman whom you know well. Your own CPP reads “Pricing, terms and conditions will be set in a way that is affordable to clients while allowing for financial institutions to be sustainable.” Do you therefore find rates of 195% “affordable”. Could you explain the last time you took out a loan at a rate of this level? This is the elephant in the room, we know it, you know it, and by failing to address it you come across as a hypocrite. Particualrly as a large part of your salary presumably comes, indirectly, from the proceeds of the IPO.

      If your only defense is that there is no definition of “affordable”, then you make a mockery of not only your own work, but that of microfinance in general.

      So, Elizabeth: what’s your response? Will you do anything about child labour? Will you rebuke vultures for charging the poor rates of 195% (Accion recently bought CrediConfia charging up to 229%, link below)? Or will you brush this under the carpet and continue with business-as-usual which convinces only fools? You’ve made a decent start with the Seal of Excellence, now take the next step and actually earn the respect you crave and benefit the poor in the process.

      • Rina says:

        I appreciate you Hugh Sinclair to bell the cat. I never think that, that you are one sided. The minifornacce industry clearly has taken a wrong path, in its greed to position itself. I have witnessed single woman being member of many MFIs and SHGs, borrowed from all of them, and finally unable to cope up with the credit burden, turns as a defaulter or spends all she earns to pay the credit. I have seen half built houses, which they incidentally have constructed using the money borrowed through minifornacce, which is unfit to live and yet they started paying repayment. I have seen failure of woman in business, which they are forced into by NGOs to meet their donor commitments. I have seen most of the loan going for consumption, honoring social commitments and external debts rather than for productive purposes in Indian condition.Nothing much differs in India from the facts you stated in your book.

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