Silence Interrupted

Larry Reed’s recent press release took me by surprise and flooded my inbox. A fundamental shift has occurred in the sector. Support is emerging from all sides now. The Dutch microfinance investment sector is abuzz with the news as it prepares for a rather critical documentary to be aired on September 28th. Ok, so Larry wrote something that didn’t entirely criticize the book, is that really something to bother blogging about? There are three reasons to think it may be. Firstly, for whom this guy is. Secondly, for what he implies. And thirdly, for what this may mean for the future of microfinance.

Who is Larry Reed?

He’s the head of the MicroCredit Summit Campaign, a fairly large lobby-group/watchdog/summit-organising body. He’s a well-educated Christian, and spent decades with Opportunity, 5 years as head of their Africa operations, 8 years as CEO. He taught at the Boulder Institute, and authored a few books, one of which was co-written with our friends Rhyne and Otero of Accion. He knows just about everyone in the sector according to Linked In. I’ve never met him, but mutual friends speak highly of him. Nor have I worked with Opportunity, but they didn’t earn a place in the book, and while I can’t claim to know much about them, I’ve not heard their name involved in any scandals or shady activities that I can recall. Basically, as far as I can discern this is a qualified, well-respected, senior and decent guy. In the book there’s a minor dig at the Summit Campaign event held in Halifax in 2008 – “narcissism in its purest form” (page 129), but otherwise neither Larry, Opportunity nor the Summit Campaign are directly mentioned. So, he perhaps had less reason to formally comment on the book other than in his role as something of a figurehead in the sector, which makes this all the more interesting….

The press release and its implications

What does he actually say? “Learning from a Heretic” – the title suggests he doesn’t think I’m a complete idiot, which is reassuring. He concedes a “huge vulnerability” in the sector, albeit presented in a one-sided fashion. But here’s the critical point: he doesn’t suggest that anything I say is incorrect. None of those implicated have dared speak out (except a minor tit-for-tat with Smart, and a private communication from Triple Jump which was published unintentionally, and utterly flawed). The evidence in the book is well documented and they remain silent simply because they are unable to refute the claims and dare not draw more attention to their guilt. And now a senior figure is apparently supporting my premise, albeit in a veiled manner, making it hard to shrug-off. Would Larry thank me at the end; suggest we “address this problem directly”; and offer partial solutions to the claims I make, if the claims were invalid?

One almost has to feel a little sorry for the guilty parties. Triple Jump must be sweating, and one must wonder what the innocent, capable employees of this MIV are thinking as this unfolds before their eyes. They claim to be saving the world, and a quarter of a million Dutch people are about to watch a documentary on a leading investigative TV-show directly challenging this claim. And now one of the leaders of the microfinance sector has abandoned them. Sure, Larry will issue reassuring words about strengthening the sector and working on weaknesses blah blah, but he isn’t going to lead an attack against me now, nor offer them much public support. He has to actually do something now, or he risks looking ridiculous. It is becoming increasingly hard for the guilty parties to dismiss the claims in the book as mere scaremongering when the media disagree, most in the sector disagree, and the head of their Olympics Summit disagrees. Nope, they’re on their own now.

I could launch into a critique of Larry’s press release, but he’s in a tough spot, and what would be gained? Of course my book is one-sided, it’s a memoir, not a text-book. Of course there are omitted institutions – how could I have worked at every MFI and every MIV in every country? And whether the self-regulatory bodies, most of whom are up to their armpits in conflicts of interest, are the suitable parties to address the issues at stake is seriously questionable, but let’s leave these minor points aside. They are over-shadowed by the courage it must have taken to write that release – my hat goes off to Larry.

Now, a more disturbing concern is his proposed solution. It is flawed in two key ways. First, it does not consider regulation of the intermediaries, but rather focuses on the MFIs. This is required, for sure, but who is going to regulate the likes of Citi and Grameen Foundation USA, Triple Jump and Accion (all of whom sponsor the MicroCredit Summit Campaign)? Does this not present an immediate conflict of interest? Look who sits on the steering committee of the magic seal of excellence award:

  • Asad Mahmood (Deutsche Bank, cover-up of LAPO case, sloppy due diligence etc.)
  • Alex Counts (CEO GFUSA, turned a blind eye to LAPO’s interest rates of 144% while Yunus sits on their board, denies LAPO’s interest rates while everyone else confirms them, then begrudgingly defends them because they’re cheaper than loan sharks)
  • Susy Cheston (Accion, I don’t know Susy, but Accion are behind the definitive loan sharks disguised as microfinance – Compartamos)

These are some of the worst offending individuals or institutions in the sector in my opinion. Is Bernie Madoff working at the SEC? Or the wolf guarding the sheep? Was this was masterful infiltration of the “regulator” – slip them some sponsorship and weasel your way onto the steering committee? How much does a seat on the steering committee actually cost I wonder?

My principle claim in the book is that it is precisely these folk who are the problem, and Larry seems light on suggestions about what to do about that. The text is clear: Smart, the Seal of Excellence and the SPTF are aimed principally at MFIs. MFTransparency, the transparency initiative not mentioned by Larry, does likewise: it reveals the interest rates of the MFIs. None have anything to say about the MIVs. By deflecting attention repeatedly towards the MFIs, local standards, treatment of the poor – all of which are important – Larry is deflecting attention away from where it is most required. It’s not immediately obvious at first glance, but this appears to be a claim to tackle the problem directly, when it is possibly a red-herring. It’s easy to get support for a campaign to “help protect the poor”; it’s harder to get support to reign in the real villains – especially when they are funding the sector and the campaigns.

The second issue is that he crystallizes my concern into the principal-agent problem alone. In the broadest sense he is right. The outstanding issues are very serious, encompass a large part of the sector, stretch to the top, and include frauds, deceptions, turning convenient blind-eyes, ignoring evidence of abuse, lying, cover-up up wrong-doings, and one could debatably add bribery to the list of accusations. The scope, size and magnitude of the institutions mentioned is immense – Deutsche Bank, Accion, Citibank, Triple Jump, BlueOrchard, responsAbility, Kiva, Grameen Foundation USA, Calvert Foundation, Incofin etc., this is a large part of the entire sector, implicated severely. Are we to believe Larry, armed with his Seal of Excellence and the Smart Campaign, is going to reign in these guys?

Within 24 hours of Larry’s announcement, including an acknowledgement of our collective guilt in over-hyping microfinance, a board member of Opportunity, Larry’s old stomping ground, was singing the miraculous claims of microfinance once again and scared stiff of the idea of the “R” word – Regulation. I blogged about this here. How can Larry dismantle the spin that he acknowledges exists, but which forms the very bedrock of microfinance? Microfinance without spin is like a car without fuel – it grinds to a halt. Microfinance spin is relentless and institutionalized. The Friends of Grameen got none other than Burson-Marsteller to help them out recently!

And what authority does Larry actually have? Minimal, and less so beyond the confines of the USA. A microfinance summit without those implicated in the book would be thin on the ground, and fail to serve its key function as dating agency for the supply and demand of capital and a bit of self-congratulatory back-slapping funded by donors’ money. I do NOT actually doubt Larry’s intention. I just wonder whether he has the tools available to solve this problem.

I shan’t go through all the flaws pointed out previously, but here’s a summary:

  • The evidence that microfinance is working to anything approaching the naive claims we have made for two decades to justify our own existence simply doesn’t exist. The debate fluctuates between whether it is marginally useful, marginally harmful, or merely useless. The sector can produce endless heart-warming videos, but no widespread, rigorous, independent, credible evidence of poverty reduction. So they moved the goalposts to suggest that poverty wasn’t the focus – it was “financial inclusion”. Next stop – “Doing stuff”.
  • Some of the major MIVs and P2Ps have knowingly lied to their investors, covered-up their actual activities using questionable techniques, have presented a deliberately and knowingly false impression of their activities, while, in some cases, extracting vast sums from the sector for personal gain. At times such behaviour can be explained by naiveté, laziness and incompetence, but these are generally the best cases.
  • A few MIVs have come to dominate the sector in a quasi-monopolistic cartel, with employees and management bouncing from one to the next, and increasingly to and from the public sector bodies (including the US administration in the case of Maria Otero) in a massive revolving door of like-minded insiders, investing in overlapping MFIs (the “herd instinct”) and making ludicrous claims about poverty reduction from air-conditioned offices in Geneva, Amsterdam and DC. They increasingly fund the self-regulators.
  • The sector has persuaded celebrities, high-ranking officials, donors, investors and entire governments into believing they are eradicating poverty when in fact the data suggests otherwise.

How is Larry going to dismantle this mess? When Accion sniffed a $270 million return on their meagre $200.000 investment would it really have made much difference if someone like Larry had whispered in their ear “hey guys, that’s not entirely ethical, I’m not going to invite you to my Summit if you do that”? And look at the supposedly effective self-regulatory bodies in the sector – The Summit Campaign, Smart, MFTransparency, etc. Who funds them and sits on their various committees and management teams? The usual names keep re-appearing, and many of these names are precisely the investing institutions that need to be scrutinized and regulated. Sponsors of these campaigns badly implicated in the book include:

  • SMART: Accion, Deutsche Bank, IFC
  • Summit Campaign: Citibank, various Grameen bodies including Grameen Foundation, Triple Jump, Blue Orchard, Accion.
  • MFTransparency: Triple Jump, Deutsche, Citibank, Oxfam Novib

I have explained in detail why none of these jokers should be trusted, and none of them have publicly commented, let alone denied the claims made in the book. Can Larry clean this up, funded as he is by some of the worst offenders? If people learn only one thing from my book, let it be this: “follow the money”. This is certainly not Larry’s fault, he led one of the better microfinance networks (or, rather, one of the least implicated) before inheriting a total mess of a sector from Sam Daley-Harris.

I am afraid to say that my faith that precisely the same people who have led us into this mess are going to lead us out of it, including many who have made vast financial returns specifically from the mess, is precisely zero. I do not use the term “hi-jacked” to describe this sector arbitrarily, this is precisely the correct word.

Microfinance needs external, governmental regulation for both MFIs and MIVs. The sector will be up in arms about this. “Oh, it’s so anti free-market”, “the regulators will interfere to the detriment of the poor”, “this will drive investors out of the market”, “that’s protectionism”, blah blah. A classic from the horse’s mouth (referenced above):

“If the microfinance industry and its members fail to self-police, to exercise due prudence and restraint in the conduct of their operations, to serve and treat their clients fairly, and to rigorously comply with the laws of host countries in letter and in spirit, then we are inviting tight and perhaps detrimental regulatory oversight and public scrutiny.” [emphasis added]

Kadita Tshibaka, Board Director of Opportunity, 33 years at Citibank

God forbid, not just regulatory oversight, but public scrutiny also! I can hear the sector shuddering. There is no middle ground – it is the evil regulator or self-regulation. The very idea of a sensible and effective regulator is an anathema to these guys. They are free market devotees let loose, alas, on the poor. No, Larry’s job now is to appease the heretics and the media, maintain the Campaign’s funding, and avoid at all costs the dreaded regulator. He can’t actually do much. Sufficient appeasement to keep the sector ticking over may his only option (and function).

What does this say regarding the future of microfinance?

Alas I must revert to pessimism here. The MIVs are a little nervous now that this is attracting media and regulatory attention, and there will be a push to prevent this at all costs. So, the ways they will do this will likely include the following:

  • Lots of press releases and media coverage promoting the miracle cure. Maybe a documentary. Expect some mild confessions of “scope for improvement”, but no actual admissions of guilt: “Yes, we lied to our investors deliberately in our newsletters and knowingly screwed the poor in the meantime” – this just won’t happen, there’s no point hoping for it. Maybe they can recruit a new celebrity or come up with a new catchphrase? Quadruple bottom line mega-inclusive holistic financial integration has a ring to it.
  • Slightly beefing up the likes of Smart Campaign to give a tiny appearance of it having some teeth, and doing so with heavy marketing. They might single out a few “rogue operator” MFIs, sacrificial lambs involved in particularly unpleasant aspects of exploitation, but they will avoid any scrutiny that could damage the inner-club, particularly the MIVs.
  • Dinners and meetings and discreet conversations with regulators to put them off the scent. The usual arguments to keep the regulators at bay usually involve a combination of “you are not informed enough to know how to regulate this niche sector”, and “if you regulate it badly you will drive investors away and this will be so detrimental to the poor”. Larry suggested the general public are unable to understand the massive complexities of microfinance, which I found slightly insulting, but the regulators are generally treated with utter disdain by the microfinance community.

Larry, to some extent, represents the sector. His hands are tied with conflicts of interest over funding and lack of ammunition, but his intentions may be pure. He seems to be relying on the self-regulatory bodies to an unhealthy degree, a faith I do not share, but perhaps he’s correct. He better be, as he is betting his career on them. At the end of the day he has little to lose – the sector is in turmoil, and if he messes this up he might not be the only one looking for a job. In the meantime he is not directly beholden to any MIV or party or institution, and would Citi actually cut funding because he didn’t play ball with them? They would face (even more) severe reputation damage. They already look a little questionable, and perhaps, ironically, Larry is their lifeline to restoring them to some semblance of decency. Right now one could be forgiven for considering them some mafia cartel with discreet fingers in all pies – they even fund the Banana Skins reports. Robert Annibale may have delivered a questionable testimony in front of the House of Representatives, and his poverty credentials are equally dubious, but he is no fool. He has his own career on the line, and already looks a little guilty, which may provide Larry with negotiating power. But Larry’s statement needs to be supplemented with a plan, in due course, and unless this is extremely far-reaching, I maintain my call for a genuine solution to the crisis facing the embattled sector:

Full, formal, external, independent regulation of the MIVs and P2Ps. Microfinance affects poor, vulnerable, and at times desperate citizens, they deserve at least the same regulatory protection that we take for granted in developed countries. Investors in MIVs likewise deserve the same regulatory protection and oversight as any other fund. If this results in the culling of a few unscrupulous players who are no longer willing to play on a level playing field by some clearly defined rules, so be it.

Some suggestions to inject credulity into the Summit Campaign and the likes of Smart could include, inter alia, defining a level at which real interest rates charged to the poor are labelled extortionate; adding the rights of children to the CPPs and equipping the self-regulatory bodies with teeth; and demanding public responses from those implicated in the book.

Parallel to formal regulation the sector requires an independent rating agency for the MIVs. Just as we sang the praises of the rating agencies for MFIs, now it’s time to move a rung up the ladder, but that’s a post for another day.

So, Larry, thanks for the muted praise, I appreciate it and respect you for being so bold, but what are you going to actually do? Are you going to address the issue of corruption within the MIVs? Are you going to put a wolf in charge of the sheep? And what are you going to do about the rampant conflicts of interest in the sector, including within your own institution?

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