Smart or Crafty?

Smart Campaign rarely speak in public. They lecture, but dislike questions. This is a rational response given their flawed certification model, which has just managed to praise one of the world’s most vilified institutions, Compartamos. Besides a few MIVs paying lip-service to client protection it is hard to find anyone who takes Smart seriously. The only person I know of, beyond Accion themselves, to stick his head out and publicly support Smart is Larry Reed, the head of the MicroCredit Summit Campaign. He launched yet another voluntary, self-regulatory model called Truelift. My sarcastic blog post on Truelift is about the only publicity they ever received. At Larry’s recent MicroCredit Summit in Mexico none other than Muhammad Yunus publicly announced that “self-regulation doesn’t really work”. Thus Larry is in a tight spot. His Truelift venture culminates in the ultimate accolade of Smart certification, undermined entirely by the Compartmos certification, and if Truelift is to retain any hope of becoming a meaningful certification for decent MFIs, it may wish to sever its link to Smart. Alas they sit on his steering committee.

I shan’t repeat in detail the rather obvious criticisms of Smart. Briefly, it is ineffective; voluntary; has no teeth; awards certifications even to the worst performing MFIs; is owned, managed and run by Accion (think of vultures); has barely attracted any clients; and Smart has failed to address possibly the two most important aspects of its own Client Protection Principles – fair pricing and over-indebtedness.

They sub-contract the actual certification process out to the rating agencies, who were somewhat obliged to do the certifications, and hoped this would lead to additional business with their standard ratings. It didn’t. No one knows quite how much money has been wasted on Smart, but it has so far rustled up a couple of dozen ratings in nearly five years – less than the regular rating agencies do in a month.

So, it was a surprise when Isabelle Barres, current head of Smart, published an article on Next Billion prompted by criticism of Smart for awarding Compartamos a certificate. Compartamos, for anyone who has not heard of them, is a by-word for exploitation of the poor and extortionate interest rates. Alas exploitation and extortion are profitable activities, and have yielded vast profit for Accion. Perhaps not entirely coincidentally Accion are the owner of Smart, and also a primary investor in Compartamos. The fact that the microfinance sector is unable to detect a possible conflict of interest here suggests either that the sector is populated largely by fools, or that people simply don’t take Smart sufficiently seriously to worry about such details. Or a combination of both.

Naturally Smart’s feeble effort on Next Billion was met with immediate and blunt criticism, to which Smart has failed to respond. I have written for Next Billion, and the instructions are very clear – authors are expected to respond to comments. That is the entire point: open and transparent debate. Yet it seems Smart can debate only with people that agree with them, and there aren’t many around.

I actually feel sorry for Isabelle, author of the silly post and current head of the silly organisation. Elizabeth Rhyne set up Smart (at $250.000 a year salary), but seems to have moved aside recently. Isabelle was handed a lemon, everyone knows it, and probably so does she now. What can she do? Admit the thing is totally flawed? Agree that her own employer is a vulture? Attempt to deny the claims? Try to defend the actions of the sector’s most vilified MFI (actually SKS might compete for the top spot)? I have reviewed Smart/Accion’s salaries elsewhere – they are publicly available in the 990 Forms. With the exception of Vikram Akula (former CEO of SKS), Maria Otero, director of Accion during the juicy period around the IPO of Compartamos, was the second best paid employee in the microfinance sector ($2m).

A number of things surprise me about Smart. First, how did it get so much publicity in the first place? Thousands endorsed it, although very few actually bothered to get the certificate. It offered a low-cost, low-effort way to perk up the reputation of microfinance without actually doing anything to clean up the fundamental flaws. Secondly, how did the sector allow Accion to manage it? Would we allow Goldman Sachs to run the SEC, or Wonga to run the FCA? Thirdly, why did the rating agencies jeopardise their own reputations by participating with Smart? I suspect lobbying and politics played a role here. Fourthly, why did Larry Reed embrace them? I suspect there were some discreet negotiations behind the scenes: Larry needed to give the impression of cleaning up the reputation of the sector, and Smart needed support. The fact that Smart is meaningless doesn’t matter if PR is the sole objective. Larry might be regretting his bed-fellow currently.

But perhaps most mysteriously, how is it that Smart still exists? The obvious answer is that Accion have a substantial war-chest since the IPO of Compartamos and the juicy dividend stream thereafter. They can subsidize a dead duck almost indefinitely. But why bother? Very few want a Smart certificate, no one takes it seriously, and it hasn’t done Accion’s reputation any good. It seems a waste of time and money with no upside. Who benefits from Smart? The poor don’t, investors aren’t fooled by it and MFIs find it a hassle to have to get yet another certificate. It offers no obvious benefit to regulators, as any meaningful regulation is 100x more onerous than Smart.

But Smart is dangerous and inept in equal measure. It gives a false impression to the ill-informed that “all is well in the microfinance sector”, or at least “we are cleaning up the mess”. Sure, sector insiders are not fooled by it. The general public pour money into P2Ps and find Smart superficially reassuring that their money is being used ethically. Foundations or donors who buy into the microfinance model but don’t have in-house expertise might be fooled by it.

But there is a paradoxical manner in which Smart may actually go beyond uselessness to actually do harm. It offers investment funds a means in which to easily claim to comply with “industry standards of client protection”. If an MFI is found to be abusing its clients this raises questions regarding the due diligence and motivations behind not only the MFI but its investors and lenders. If they can point to a Smart Campaign certification, this acts as a defence to the fund: “we did all we could, alas sometimes things slip through the net”. Incofin, for example, places Smart at the centre of its social performance metric. The fact that it is meaningless in practice is irrelevant. Incofin’s investors are sufficiently convinced, Incofin is protected in the case of a scandal, and no one really needs to do anything constructive in the meantime. Smart offers reputational immunity to the investor community.

Remember, before it was surreptitiously removed from the Banana Skins reports in 2012, reputation risk came # 2 in their report of the greatest risks facing the microfinance sector.

Smart offers a license to continue engaging in foul play without having to face the consequences of being caught. Previously (at least some) funds might have thought twice about investing in suspiciously profitable (i.e. exploitative) institutions such as Compartamos and SKS for fear that this might irritate their own investors, who often (naively) believe that their money is being wisely invested for the benefit of the poor. Now these funds can happily invest in Compartamos and point to a silly certificate awarded by none other than one of the main shareholders in Compartamos.

The future of microfinance self-regulation

Poor Isabelle mentioned Smart 2.0. Is this a hint that Smart might be about to improve? It could hardly get worse. But while owned by Accion any such model will have to ensure the activities of Accion are tolerated, and some of these activities are, as mentioned, a by-word for exploitation. I cannot see Isabelle criticising MiBanco for over-indebtedness in Peru, or Compartamos for exploitation in Mexico – these are the institutions that pay her salary. The rating agencies have minimal incentive to promote Smart, it generates trivial additional revenue, and they more than anyone else can see how useless Smart is. So, unless something radical happens at Smart, I suspect we will see it quietly fade away into the history books – yet another failed effort to apparently improve the lives of the poor, with zero actual impact, while doing no harm to the interests of the rich. But it needn’t be like this.

Take the charity regulators, for example. They generally do decent research of the target companies, they are independent, and they are not afraid to say negative things. Certifications needs carrots as well as sticks. The US charity assessor Givewell says quite simply:

“Our current view is that microfinance is not among the best options for donors looking to accomplish as much good as possible”.

Paul Polak and Mal Warwick, authors of The Business Solution to Poverty, state:

“In our view, microcredit is one of the least worthy fields in social enterprise. That so much of the scarce resources available to address the challenges of poverty and climate change is squandered on for-profit microfinance ventures is a tragedy. While some microcredit programs — principally those operated as nonprofits — have achieved a lot of good, the rush by the big banks and profit-minded entrepreneurs into the field has proven to be a curse, not a blessing.”

If Smart were able to stand up and criticise foul practice it would add to its credibility. But that would involve shooting the goose that lays the golden egg: Compartamos. Were it to actually address serious harm done to microfinance clients and their children then people may give more credence to their certificates. If it actually defined terms like “usurious interest rates” and “adequate loan products” then people might actually know how to interpret the findings. Currently banks can charge any interest rate they like and this is considered “reasonable” as long as they are not the most expensive in the country. Drink-driving is okay as long as you are not the most inebriated in town.

But above all, Smart needs to be totally independent. It should be managed by pro-poor campaigners with actual experience in MFIs. It has to be absolutely removed from any investors, an entirely self-sufficient body reporting outside the microfinance sector. It’s funding should be transparent (Smart is fairly transparent, but it comes mainly from commercial microfinance investment funds) and sourced in part from MFIs wishing to obtain the certification (as with a normal rating), but also from state actors. US and European regulators are funded by obligatory payments from the members of their jurisdictions, and through taxation.

Two candidates spring to mind. Truelift has the vague semblance of a sensible idea behind it, focussing on both client protection and poverty alleviation measurement, and were it to sever ties with Smart it would be relatively independent. It lacks any protection for the children of micro-entrepreneurs; turns a blind eye to MFIs that finance illegal activities; fails to define any level at which an interest rate may be considered extortionate; and looks like a wonderbra advertisment. However, it is part of the MicroCredit Summit Campaign, which at least adds some credibility and a guaranteed audience, and is funded mainly by Results (as well as Deutsche and Ford Foundation). It even has Ananya Roy on the board, which is a bonus. However, Premal Shah of Kiva also apparently advises (the mind boggles as to what on), and Alex Counts sits on the steering committee alongside Isabelle Barres, so these three would have to go to ensure any semblance of integrity. It lists Asad Mahmood of Deutsche on its steering committee, presumably oblivious to the fact that he “left” Deutsche some time ago. One wonders how much input Asad has. He’s at Finca now, supposedly founders of Smart Campaign, busy charging Zambians 347.5% interest a year to get out of poverty.

To ensure transparent pricing and open criticism of extortion, a formal partnership with Chuck Waterfield, founder of, would be ideal. Chuck is an outspoken critic of extortion, and plays a quasi-regulatory role – a joint venture between the two would be potentially powerful. I would also seek some form of participation with all the rating agencies, Givewell (or some comparable charity assessor), and from sensible microfinance regulators such as Ecuador’s SBS, who have designed arguably the best regulatory environment on earth (often to the disappointment of MFIs and investors). And instead of handing out lollypops to its friends, it could actually engage in promoting truly decent MFIs, and naming and shaming the rogues. If independently financed this would become possible.

This is, of course, unlikely to ever happen, for one simple reason. The microfinance sector doesn’t want to be regulated. It doesn’t like scrutiny. It doesn’t want people to examine the actual impact on the poor. This is the ultimate reason why, more than 30 years after the microfinance experiment began, we have no meaningful regulation in place. We don’t want it. We are far happier going about our comfortable and profitable ideologically-driven practices with some watered-down voluntary code of principles which we can slap on a website and then ignore, and in this regard Smart is a genius player.

Diverging Markets summarised this succinctly a couple of years ago: “The SMART Campaign is actually misnamed—CRAFTY would be more appropriate”.

So, let’s not hold our breath for a sensible reply by Smart on the Next Billion blog – silence is wise when your next best alternative is digging your own grave even deeper. Their post went up a week ago. Not a whisper from Smart since then.

Here’s just a couple of quotes from Smart’s own website:

“Information for Investors – Certification contributes to a stronger, more stable microfinance industry by encouraging practices that aim to reduce client over-indebtedness and financial instability”

Facts: neither investors nor MFIs have embraced Smart, and over-indebtedness continues to rise. The Economist claimed that Peru was the best regulated microfinance country in the world and yet its #1 player was just sold in a firesale, and take a wild guess who one of the principal shareholders was – Accion! So much for stability.

“The value of certification is far greater than its cost”

Facts: Smart costs about $12,000 and almost no one has done it to date. A Smart certificate was worth pittance before they handed one to Compartamos, and its value has subsequently plunged. But if it really does command such a stellar value, why has almost no one bought one?

Smart 2.0 will be a flop once again unless they address the core problems of the organisation. Wolves shouldn’t guard sheep. It’s a pity, because the sector does need decent regulation, and while it is tempting to criticise self-regulation per se, at least sensible self-regulation would be a step in the right direction.

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