In July, a book was published that has caused something of a stir amongst people interested in microfinance. This was not the first time an author had published a work critical of the sector, but the majority of previous attempts have been written by academics who criticise the concept from either an ideological or a technical perspective. Confessions of a Microfinance Heretic, however, is different. This is because the author, Hugh Sinclair, is not a Marxist university professor or an anarchist political activist, but rather a graduate of one of the world’s top business schools with a track record of more than a decade working in microfinance around the globe. In the book, Sinclair describes his first-hand experience of the corruption and profiteering that he believes characterises some organisations and individuals in the sector, and the evidence he presents has left many people in microfinance wondering what can be done to ensure that their work benefits the poor people who need it.
Sinclair describes how, during the course of several years working with microfinance institutions and investors in microfinance, he discovered that a number of investment funds were claiming to create social benefit when in fact they were simply concerned with generating profits. Investments were being made in microfinance institutions without proper due diligence, and in some cases investors engaged in deliberate cover-ups when evidence of wrongdoing later came to light. He was also shocked to find that there were microfinance institutions operating without sufficient concern for their clients’ wellbeing, and that some were even violating local laws by, for example, illegally lending their clients’ savings to other clients. Published hot on the heels of microfinance crises in India and elsewhere, Sinclair’s book posits that some of these problems were actually caused, or at least exacerbated, by investors whose main focus was profit, as well as microfinance institutions that felt emboldened by this approach and ignored their own responsibilities to clients.
Sinclair is keen to point out, however, that he believes in the power of microfinance to help poor people as long as it is done correctly, and doesn’t become simply about exploitation for profit. He puts forward several examples of microfinance institutions he has worked with that are concerned with helping their clients, and which provide reasonably-priced financial products as well as other support that can make a real difference in clients’ lives. Sinclair revisits this point several times in the book, at one point writing, “I beg the reader to not throw out the baby with the bathwater. Some microfinance is extremely beneficial to the poor…”
What is clear from his book, however, is that more needs to be done to ensure that investors and microfinance institutions that claim social benefit are actually helping their clients, rather than simply saddling them with unsustainable debt. Despite the strength of this message, and the way that Sinclair presents evidence in his book and on his website, reaction to the book has been predictably mixed.
Many reviews seem to indicate that reviewers felt the book was a condemnation of microfinance as a whole, rather than a criticism of specific institutions and practices that have become systemic in some countries. These include the quote on the book’s cover from long-time ideological critic of microfinance Milford Bateman, that “microfinance ended up destroying the lives of the very people it was supposed to be helping“. This perspective is given credence by Sinclair himself, who at times in the book sacrifices a nuanced perspective to make his prose more compelling, making sweeping condemnations of microfinance practitioners and the idea of microcredit. This is despite the fact that he frequently points out that he does believe that microfinance can make a difference when it is done well. For example, Sinclair writes of microcredit generally that “Loans are almost invariably not spent on the productive sewing machine or goat“, which gives a strong impression that nearly every loan given is used for consumption or unproductive purchases – which is simply not the case.
Reviewers more broadly sympathetic to microfinance (including many major voices in the sector) have been more critical of Sinclair’s tone and his conclusions. In his review of the book on the Center for Global Development website, researcher David Roodman noted that sweeping condemnation of the sector is not helpful and actually “contradicts the hope professed elsewhere for the potential of microfinance.” Yet Roodman and other reviewers are unable to avoid acknowledging the power of the evidence presented by Sinclair in his book, and it is Sinclair’s first-hand testimony that forces many in the microfinance sector to acknowledge that the sort of behaviour documented in the book needs to be addressed so that microfinance serves the needs of its poor clients.
We find it frustrating that many reviewers, and at times Sinclair himself, continue to use the term microfinance, which describes a range of financial services including savings and insurance, when they really mean microcredit, which involves small loans only. The RESULTS blog has written previously (such as here, here and here) about the need to refocus the microfinance sector towards inclusive savings and microinsurance and not just credit. It is also RESULTS’ position that an excessive profit motive is not compatible with an ideal of microfinance as something that serves poor people’s interests. And as Hugh Sinclair’s book has shown, the heavy focus on microcredit that has characterised some parts of the sector has created risks that microfinance becomes about profiting from the poor. Sinclair has also shown, however, that microfinance, if done correctly, has the potential to help many people out of poverty and uncertainty.
Ultimately, 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…
It is time for us to set high standards, hold ourselves accountable for meeting them, and be utterly transparent about who does and who does not stand up to scrutiny. And we can thank our heretical friend Hugh for providing further motivation for finishing the work that will make this happen.
“Confessions of a Microfinance Heretic: How Microlending Lost Its Way and Betrayed the Poor” by Hugh Sinclair, Published by Berrett-Koehler Publishers in the USA.