[This post is in response to a comment posted by Ms. Rhyne of the Smart Campaign on microDINERO regarding my article “Microfinance Awards Itself An Award“]

A curious fact about the book is that none of those implicated have dared to speak out. No press releases, no denials. I didn’t even get my own tab on the Friends of Grameen website alongside other heretics such as Tom Heinemann. Actually, that’s not entirely true: Triple Jump attempted a feeble denial, privately, which was subsequently published. My annihilation of their response was fun to write, so when the Smart Campaign published a critique of my book, at least with the courage of doing so publicly, I felt emboldened to respond.

This is a light-hearted response; I will address some more serious aspects of the Smart Campaign in a subsequent post. I know the author, Ms. Rhyne, we have met and sparred, but her response was simply too juicy to ignore! Forgive the crude journalistic style – I’ll insert her text and then my comment.

I would like to respond on behalf of the Smart Campaign. I would also like to note that I had no role in judging the Philanthropedia awards, so I do not know what that list is all about.

It’s the list of judges who awarded these fantastic awards to the leading non-profit microfinance players in the world, if that wasn’t pretty obvious in the blog post, or the column titles of the list (“Judge” and “Relation to winners”). The point being that they are insiders awarding themselves awards. Thus the title of the blog post, “Microfinance Awards Itself An Award”. I cannot think how I could have made this any clearer, but this is “what that list is all about”. I hope that’s clear. Ms. Rhyne, well aware of Accion, will no doubt be pleased to observe that Accion reached the #3 slot this year.

Comments below refer to critiques found in the book, which are somewhat more extended than the remarks in the blog post.

Yes, the critiques are more extended indeed, the blog post did not actually discuss the book, and Ms. Rhyne fails to address the relevant issues that were in the blog, or the massive payments to the former CEO of Accion which have been the subject of a mini-documentary, and extensive critique within the sector surrounding Accion, all of which failed to rouse a comment from Ms. Rhyne, who is, of course, ex-Accion. I only actually mention the Smart Campaign once in the blog post, although this apparently provided sufficient pretext for Ms. Rhyne to launch a defence of Smart, while evading the core central point of nepotism, or cult-like insider behaviour rampant in the microfinance sector.

Sinclair criticizes the Smart Campaign for allowing organizations he disapproves of to be endorsers, most notably, LAPO and SKS.

It is not whether I disapprove of them. It is whether they violate the Client Protection Principles (CPPs), which I happen to take seriously. Also, am I the only person disapproving of SKS and LAPO? These are severely criticised MFIs worldwide – read the press. However, Ms. Rhyne failed to mention Compartamos, the MFI I actually mention far more frequently than SKS in the book and the blog post she was supposedly responding to, the MFI that famously charges interest rates of up to 195% to the poor. Perhaps this one slipped her mind, which is surprising, as Accion made $270 million in the IPO of Compartamos. Anyway, the main point is that these three MFIs all endorsed Smart, are widely criticized across the sector, and are not merely my personal pet-peeves.

In this, he deliberately misinterprets the nature of endorsement. The Smart Campaign website (www.smartcampaign.org) clearly states that endorsement is a one way street. The endorser endorses the Campaign, not the other way around.

I do not deliberately misinterpret the nature of the endorsement – I think it is pointless. I understand it very well, it is window-dressing. It is ineffective. It is “endorsement without enforcement”, although finally it does appear that Smart has decided to actually do something, as Ms. Rhyne alludes to later. It is free self-labelling as “ethical” without having to actually be ethical, and therefore an open invitation to mislead microfinance investors.

The Campaign does not censor its endorsement list, but accepts all who wish to state their allegiance to the principles (as stated on the website). The Smart Campaign has not conducted any investigation of most of its 3,000 endorsers, although it has conducted on-site assessments of about 40 MFIs.

Great, they’ve broken through the 1% barrier. So, just less than 99% remains totally un-investigated. It’s a very small step in the right direction. Of these 40, was anyone expelled? Anyone discovered to be in serious breach of any CPPs? Compare to this to a fair trade stamp, which Smart appears to resemble – they visit more than 1% of the farmers, and they have standards for joining their campaign and using the logo. Not with Smart. Technically they do not actually state “there is some actual content behind endorsing this campaign”, but the impression is clear – self-regulation is doing something positive. Without defining quite what this is, Smart is an effort to present a rosy picture to the outside world, in my opinion. As long as no one takes an MFIs endorsement of Smart seriously, no harm can come of this, but many people are unaware that an MFIs endorsement of Smart is totally without substance, verification or meaning, and required no more than an email address and a name. The whole purpose of Smart is to be taken seriously, without doing anything serious.

That said, the Smart Campaign’s has been developing standards to assess and ultimately certify that a financial institution does or does not apply adequate standards of care in client protection. It has spent several years developing a public certification program that will be launched by the end of this year.

How can it take several years to develop a program to see whether the CPPs are being violated or not? In the LAPO case all one had to do was read the newspapers and rating reports. The Andhra government went to lengths to publish the list of 54 client suicides as a consequence of aggressive loan practices at MFIs, with the MFIs explicitly named. How hard can it be to see if the MFIs are bullying their clients, deceiving them about interest rates etc? Anyway, that the public certification program will be launched is great news, albeit way over-due.

It is deceptive for Sinclair to criticize endorsement without acknowledging that the Campaign is relying on standard-setting, assessment and certification as the real tools to measure performance.

I hadn’t heard about the certification actually happening, and if that is actually true, that would be interesting. They’ve been talking about it forever. I’m sceptical, the proof will be in the pudding. But Ms. Rhyne apparently fails to get the central point, or is deliberately evading it. What has standard-setting and assessment got to do with my criticism? My criticism is that this is useless, ineffective window-dressing, which, to date, is entirely true. If this changes for the better, great. Smart used to have a discreet waiver on the website warning astute readers that the campaign made no actual assurance about actual behaviour of the MFIs (my suggestion), but they removed it recently.

2. Relationship to Accion. Sinclair implies that the Smart Campaign’s origins and staffing at Accion’s Center for Financial Inclusion make the Campaign a suspect part of some dark purpose. Horrors! A dastardly scheme by Accion to promote client protection practices across the microfinance industry!

I merely point out the irony that Accion is the US-NGO that made vast profit from the IPO of Compartamos, one of the least respected MFIs in the microfinance sector (other than amongst the neo-liberals and profiteers, of course, who rather like such MFIs, especially when they are shareholders). It’s analogous to a billionaire investor writing up the certification criteria for Goldman Sachs to label itself as an ethical institution.

Compartamos could well be accused of predatory lending, with rates reaching 195%. I have not, in over a decade, come across an MFI charging more exploitative rates. Should we ask Mohammad Yunus what he thinks of such rates? What do the general public think of such rates? This is not a loss-making, socially motivated, small, struggling MFI; this is a highly profitable loan-shark, let’s be crystal clear about that. So, if Smart wants to retain any credibility, please explain how 195% is compatible with the Smart CPP on responsible pricing: “Pricing, terms and conditions will be set in a way that is affordable to clients while allowing for financial institutions to be sustainable.”

So, Ms. Rhyne, a public question: what do you think of the interest rates of Compartamos? Compartamos endorsed your little campaign, so they presumably love the idea of responsible interest rates. Is 195% responsible therefore? Mohammed Yunus suggested that interest rates over 25% were too high – what do you think of his opinion on this? Or you dispute the calculation of 195%, done by respected US-academic David Roodman at the Center for Global Development?

The Smart Campaign should be judged by its actions.

There haven’t been any yet, other than gathering endless endorsements. But action is about to start, according to Ms. Rhyne, so watch this space!

The Campaign operates in good faith as exactly what it claims to be, a global effort to embed a set of client protection principles deep within the microfinance industry.

So deep that when you endorse the campaign they offer you a check-box to avoid having to ever hear from them again, just shove your name on the list and forget about it. I wonder how many select this option?

It works with a diverse Steering Committee whose members represent all facets of the industry.

The usual suspects mostly: CGAP, Deutsche, UN, SEEP, Finca, Microcredit Summit, Oikocredit, IFC, and Ms. Rhyne herself from CFI.

It has partnerships with dozens of local and international supporting organizations. The Client Protection Principles have, as a result of the efforts of the Campaign, become widely known, accepted, and understood throughout the industry.

Nonsense – do a test. Next time you’re at an MFI that endorsed Smart, or meet an individual named on the roll of honour of endorsers, ask them to name the CPPs. There are only 7 – hardly a challenge – but they’ll miss things like client privacy (Kiva publish clients loan details and photos on its website – er, is that even legal?) and the one about appropriate loan products. They might remember the one about preventing over-indebtedness, but will mention it sheepishly, as the entire point of microfinance is to indebt the poor. Particularly if you have a chat with a Smart-endorsing MFI in Mexico, Ecuador, Colombia or Peru, ask what they are doing about over-indebtedness, which is rampant in all countries but carefully ignored.

If this is a sinister plot, let’s have more!

It’s not a sinister plot, it’s feeble window-dressing aimed to perk up the ailing reputation of a sector that has increasingly ignored the interests of the poor and eventually, when this reached an embarrassing level of public scrutiny, something had to be done to fix the reputation of the sector. Which, thanks to its massive earnings on Compartamos, Accion was able to spend a little money on, by developing a label to assuage investors while not requiring any changes in MFI behaviour whatsoever.

That said, it is entirely appropriate to scrutinize the Campaign’s relationship with Accion. The Campaign is an initiative of the Center for Financial Inclusion at Accion (CFI), and all Campaign staff are CFI staff. CFI is legally a department of Accion, but it operates with an independent Advisory Council and maintains an industry-facing stance with a high degree of intellectual independence.

Right, well, like I said, there seemed to be something of a link between the two institutions. It’s strange that the entire microfinance sector was unable to come up with something a little more arm’s length or independent than this, no? Wouldn’t an actual independent body have been the obvious solution for an initiative with some token self-regulatory role promoting transparency etc? For example, imagine a body set up to protect the interests of smokers – would the offices of Philip Morris be the first place you would think of to establish such a body? Financed by Philip Morris. With lots of current and former Philip Morris staff. An unusual choice, but a convenient one.

It works on behalf of the microfinance industry as a whole.

What, like an elected government? The interests of the microfinance poor may conflict with the interests of the microfinance banks. For example, poor Mexicans presumably prefer low interest rates, while Compartamos and its investors seem rather fond of high interest rates. Both are part of the microfinance industry presumably, so how does Smart work on behalf of both in such a case? Or does the “industry” refer only to the lenders? Besides, if Smart works for the broad industry, who selected the staff and key positions? Who interviewed Ms. Rhyne herself for this job? Accion had a lot of cash sloshing about after the Compartamos IPO, but faced mounting criticism not only of their goose with the golden egg, but of the sector in general. Smart was a cheap solution, but best kept in-house with trusted insiders to run it. This is no plot, nor is it sinister or dastardly. It is simply fact.

The issue of the connection to Accion has come up several times in Smart Campaign Steering Committee meetings.

That some members of the steering committee had noted the connection between the two institutions is not entirely surprising given that they are housed in the same building.

Each time, the CFI has received praise for its transparency and even-handedness in administering the Campaign.

Praise from whom? Note the original blog title was “Microfinance Awards Itself an Award”. Oh, is this just praise from the club? The CFI praising Smart, and vice versa presumably? Ah, now I see.

There are ongoing discussions about possible long run homes for client protection in the industry, which could involve a migration into some other organizational home or form. Accion has been by far the largest financial contributor to the Campaign, and it continues as anchor funder.

Deutsche Bank is another key funder, no doubt embracing transparent pricing. Ask Deutsche whether they find LAPO’s interest rates to be in line with the CPPs (up to 144%). They just invested in SKS, so will probably soften their stance there also, and not a bad investment – up 40% in a couple of months. Regarding a sensible home for Smart, how about in a developing country run by independent people actually doing something?

It has supported the Campaign because it sees client protection as an integral part of its approach to microfinance.

As long as it doesn’t involve sniffing around the interest rates charged to their Mexican clients.

3. Effectiveness of the Smart Campaign. The broader claim that Sinclair makes is that the Campaign is an ineffective whitewash that will not result in substantially better client protection practices. Here, too, the Smart Campaign should be judged on its actions and their results, which have already been substantial. First result: it is unequivocal that the Smart Campaign has made the microfinance industry far more aware of and committed to client protection principles than it had previously been. This awareness has taken hold among MFIs, their supporting organizations and the investors and funders who supply their capital.

Perhaps not surprisingly, I challenge this unequivocal truth. The Andhra Pradesh suicides were relatively recent – since Smart was formed. The over-indebtedness problem is getting worse each year, this year making it to the sought after #1 spot in the Banana Skins Report despite Smart dedicating a whole CPP to it. But my objection with the comment above is “the Smart Campaign has made the microfinance industry far more aware of and committed to client protection principles”. Nonsense. The media has done this. Most people can’t remember what the CPPs are, let alone analyse in any detail what Smart is all about. But they read newspapers. The journalists have made the microfinance industry far more aware of the risks of not having proper client protection. Read the NYT and the WSJ for decent truth about the microfinance sector. Look at the impact of Heinemann’s documentary – it even prompted the insiders to set up their own useless spin machine in defence – the Friends of Grameen (who no doubt endorse Smart and vice versa). Ms. Rhyne implies causality – that because Smart popped into existence the sector became more aware of the abuses suffered by the poor at the hands of the microfinance sector. Er, perhaps this is putting the cart before the horse: the mounting abuses led to the media attention and the need to rustle up something to counter-act this – welcome Smart. Let’s just keep in the back of our minds that the causality could have been the other way round, and that Accion, of all folk, would be pleased to see the image of the tarnished sector improve.

Second result: the Campaign has developed standards of practice for the implementation of client protection principles. These did not previously exist. They are still young, but they constitute a body of practice that can help put client protection principles into action.

This is farcical. Sure, there may not have been a set of explicit standards that said “don’t screw the poor with extortionate interest rates, don’t encourage them to go bankrupt, don’t design products which actually harm them, try not to leak private client data etc”. There isn’t actually a CPP that says “don’t shoot your non-repaying clients”, or “don’t encourage female clients to become prostitutes if they are struggling to repay their loans” (as occurred in India), or “don’t take your kids out of school to work in some micro-sweat-shop because you think that will help them in the long run” (subject of next blog post). They did exist before, but they were called common sense.

Third result: it has laid the groundwork and will soon introduce certification, which will allow for public recognition of organizations that apply these standards. With certification will come a means to separate those MFIs that take adequate care from those that do not and to incentivize MFIs to improve their practices.

Great, we’ve been waiting a decade, some more, let’s start with the folk on your own list, maybe with the three MFIs mentioned here, SKS, LAPO and Compartamos? And can someone be expelled, or banished, or dis-endorsed? Are there any consequences for violations of the CPPs? Please state them openly.

That said, the Smart Campaign is not the last word on client protection, because incentives at both the client and provider levels that lead to poor client protections are intrinsic to financial systems.

Not entirely sure what is meant here, but something along the lines of Smart not being perfect and regulation of financial services in general is not perfect either. At last we agree on something.

The Campaign acknowledges that regulation of some aspects of client protection, with enforcement, will be necessary. However, microfinance operates around the world in places where regulatory frameworks for securing client protection are far from adequate, and even where they are strong, regulation is often the last line of defense. Far better to also have client protection embedded as norms and transparent standards. Thus, the Smart Campaign does not position itself as a substitute for regulation, or as a complete solution to the problems of client protection. Rather it is as an industry-development effort that will contribute in a substantial way to improved client protection practices.

Or rather, it has been an ineffective window-dressing PR-stunt until now, and is apparently about to actually take action for the first time ever, so watch this space with baited breath. The bear has awoken, stretched, yawned, and is now, ever so slowly, emerging from the cave into the sunlight of the real world. Or is it a mouse?

It is politically incorrect to criticise Smart because it apparently helps the poor. It also helps the sector clean up its image to the non-insiders who assume this has some substantial meaning in practice, which it doesn’t. It is a vain effort at playing on the “seal of approvals” that we have all become accustomed to. But it’s sloppy, ineffective, has no teeth, and may actually do more harm than good. Either beef it up or scrap it. The Diverging Markets review of my book summarised the situation concisely:

The SMART Campaign is actually misnamed—CRAFTY would be more appropriate.