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.
This last point was perhaps best made by Larry Reed, Director of the Microcredit Summit Campaign, who wrote:
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.
It is good of RESULTS to, finally, admit that something is wrong with the contemporary microfinance model, given that your whole existence is predicated as a support body for microfinance. But, still, you fail to go far enough to point out the structural problems with microfinance. And, as usual, you get seriously confused in trying to explain away Mr Sinclair’s book.
My own comments on his book, for example, should be quite understandable even to RESULTS: I thought the book was excellent in showing why so much of the microfinance indsutry is corrupt and its claims to be addressing poverty are actually quite hollow. However, I take issue with Mr Sinclair’s insistence on having a happy ending to his story, and you simplistic acceptance of this claim. He recounts the case of one MFI to show that ‘microfinance works’. I don’t think this statement works: we need more than one example to show anything, plus why did he not give more details about this supposedly wonder-MFI so that we could see what it has achieved? I understand it is in Ecuador, but thats about all. How can you, or Mr Sinclair, possibly claim that ‘microfinance works’ from this one example that no-one actually knows anything about!
But, anyway, its good that you point out that Mr Sinclair actually has an argument, even if your attempts to rebut it fall pretty flat.
Milford
I also loved your throw-away line about Hugh not being a ‘Marxist university professor or an anarchist political activists’, as if the only critics are within these groups, and so can be quite easily dismissed by the mainstream. Though I think I know who you might be referring to here working within the Marxist tradition, who are the anarchists you refer to? This form of smearing is fairly typical of the microfinance indsutry, but its all rather silly. I actually think you will find that most critics of microfinance are not actually drawn from that side of political economy but, for example like myself, from an institutional economics/industrial policy background. In my case, this makes me not an ‘ideological critic’ of microfinance, but a critic that simply points out the fundamental structural flaws in the wholly flawed arguments deployed in favour of microfinance. You also failed to entirely grasp that I only use ideology to explain why microfinance remains so popular in spite of the total lack of evidence that it actually works.
.
I concede the point regarding the lack of attention on savings and insurance. The book focuses on microcredit rather than the broader microfinance, although I am an avid supporter of current accounts (see pages 225-226). Regarding the proportion of microcredit used for non-productive purposes, evidence on this is hard to find. I cite a John Hatch estimate, and a recent article [1] from the Central Bank of Zambia matched this precisely (90%). It is enlightening to see the complete quote following the Hatch citation [2]:
“Abhijit Banerjee and Esther Duflo, of MIT’s Poverty Action Lab, recently evaluated dozens of rigorous studies on the economic lives of the poor, finding that regardless of country or continent, very little of each additional dollar of disposable income is spent on any form of investment, or even on food and shelter. In Bangladesh, where in 2001 approximately one out of four households had at least one microloan, microcredit seems to have had little impact on the country’s relative development performance. In 1991, for example, Bangladesh ranked 136th on the UN Development Programme’s Human Development Index (a measure of societal well-being); 15 years later it ranked 137th. And aside from the shortage of data showing benefits, there is evidence that some microcredit programs may actually be harmful, plunging the poor deeper into debt.”
MFIs, MIVs and the sector at large have neither the data nor the incentive to explore this too thoroughly. The point is not to debate the precise %, but to ask why the MIVs and MFIs seem to avoid the discussion. They give the impression that 100% of loans go to productive assets – this is part of the carefully honed public image of microfinance. Transparency is what I seek, let’s be honest about what loans are actually used for. We know over-indebtedness is the #1 threat in the sector this year according to Banana Skins – is anyone seriously suggesting this is unrelated to consumer lending (often at eye-watering interest rates) and refinancing loans? Go visit Mexico.
The issue that RESULTS does not fully address is the fact that serious allegations remain outstanding against some of the “darling” players in the MF sector, all of whom have remained entirely silent. I maintain that Citi, Deutsche, BlueOrchard, responsAbility, Kiva, Standard Chartered, World Relief, Grameen Foundation, Triple Jump, ASN Bank, Oxfam Novib, Incofin and a few others have serious questions outstanding, and as long as these remain outstanding I would urge investors or donors to tread extremely cautiously when dealing with these players. Innocent until proven guilty? Or vice versa?
Perhaps I benefit from the luxury of being able to state this so openly, but RESULTS do not seem to deny these accusations. Is this tacit acceptance that much of the sector is in fact rotten? We sing the praises of MFI ratings, but it is these funds that need scrutiny and regulation. Who’s suggesting that currently? I am re-assured by the recent questions [3] asked in the Dutch parliament relating to the recent documentary [4] examining the specifically Dutch connections raised in the book. This may lead to a tightening of regulations not simply in developing countries, but also in Holland. If the MIVs in Holland, the US and Luxembourg were better regulated, this alone could have a profound improvement for the entire sector.
Regarding Milford’s point, I have a lot of respect for his work and found his book path-breaking in its boldness and willingness to discuss the elephant in the room. Where we disagree is that I do remain optimistic that microfinance can be of tangible benefit to a sub-set of the poor engaged in certain genuinely productive activities under certain circumstances. I do not believe that all microfinance is job-displacing (but much is, I do not have the precise %). I do believe that some micro-enterprises can reap benefits to both the owners of the enterprise and their clients (but not all: an army of trinket vendors does not constitute economic development). I believe such micro-enterprises can sustain a reasonable interest expense, and that a well-run MFI can make a modest net return. But entrepreneurs and MFIs that meet these criteria are few and far between, and there is currently an excess of both supply (MIV funds) and demand (consumer/refinancing loans) that explains much of the current mess we find ourselves in.
A central theme of my book is that the fundamental structure of the microfinance sector is geared to perpetuate precisely this state, driven principally by a mis-alignment of interests between the principals and the agents; an unhealthy desire to profit from vulnerable people denied the consumer protection we take for granted; a lack of transparency; and almost no meaningful regulation of either the funds or the MFIs.
I remain optimistic that each of these can be fixed if the desire and authority exists, and I will not discard the fundamental premise until we have tried. However, it is going to be tough work, as the sector is riddled with conflicts of interest. But what is the solution – to walk away? Let’s reserve judgement on whether microfinance works or not until we have at least attempted to genuinely fix it. If that fails, I will be the first to wave the white flag. The problem is one of terminology. What I see in much of my work is not even microfinance by most standard definitions, it is crude, exploitative, unregulated, heavily marketed, opaque consumer credit disguised as a miracle cure to line the pockets of investors. That’s not the sector I signed up for a decade ago. Will a clean-up yield positive results? I don’t know. The question is whether it is worth trying or not, and perhaps this is the main point where Milford and I disagree. But I so appreciate his critical voice in the sector, holding us all to account, and I lament that this level of scrutiny was not applied a decade or two sooner.
Do I have a happy ending to my story? Read between the lines. If the microfinance sector embarked on half the suggestions I make it would be a massacre. The sector is terrified of one thing – regulation, which is precisely what I am calling for. Regulation means culling in practice. Is that a happy ending? Ask Deutsche Bank, Citi, GFUSA, Triple Jump etc. what they think. No, Milford, there is no happy ending in my book. There is a day of reckoning.
But can I claim a happy ending of another sort? Let’s not trade cheap blows over blogs, let’s rejoice that an ever growing number of people are waking up to the fact that we have slightly messed up the whole microfinance experiment. Who cares why, how, who or when? That’s detail. There’s a buzz emerging, a glimmer of hope that maybe we can improve things, that we can acknowledge mistakes and look forward to solutions. I think we would all be stronger, and better equipped to actually offer the poor a fair deal, if we worked together in this. We are never going to solve this problem 100%, and we can always disagree “after work”. We have a total mess on our hands; let’s put our heads together to work out how to clean up. We don’t need to agree 100%, and dare I say it, I think many of us agree more than we may acknowledge, but we focus too much on the DISagreements. Forget egos and ideologies, this is about the poor. Their welfare is our sole criterion for success. I am the first to state the evidence is pretty poor currently. Let’s try to improve that. You may (correctly) respond that we’ve given it 30 years already – fair point – but that was with ignorance and with jokers in charge – the tide may be turning now. Regulators are alerted, investors are sceptical, investment funds are petrified, the poor remain poor. Frankly, this is an ideal set of circumstances to improve the situation, albeit from a disgracefully low base. Let’s strike.
[1] http://www.lusakatimes.com/2012/10/01/90-microfinance-loans-consumptionbwalya-ngandu/
[2] http://hbr.org/2007/09/beware-of-bad-microcredit/ar/1
[3] http://reporter.dossierjournalistiek.nl/seizoenen/2012/afleveringen/28-09-2012/tweede_kamer_wil_opheldering_over_woekerrentes_microkrediet
[4] http://reporter.dossierjournalistiek.nl/seizoenen/2012/afleveringen/28-09-2012
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