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.