Learning from a Heretic

By Larry Reed, Director, Microcredit Summit Campaign

What can we say about a book that exposes a huge vulnerability in the microfinance industry, but does so by exposing only those facts which make its case and excluding those which give more context to the story? It seems that the microfinance industry has grown to the point that it can sustain a “tell all” book, and like most books of this genre, Confessions of a Microfinance Heretic by Hugh Sinclair tells only selective truths to build the case for an important pre-conceived point.

The important point that Hugh makes very well is this: the funding system for microfinance, which still depends in part on donors and investors located far from the clients who receive financial services, carries a large incentive to tell only good stories and hide negative results from those who are contributing the funds. Hugh describes this as a “principal-agent” problem. Those making the investments and donations (the “principals”), on their own, do not know how the end user, the client, is faring as a result of their support. Investors and donors rely on agents (the microfinance funds and MFIs) to vet the options for them. And when the financial success of those agents depends on raising more and more money, agents tend to hide or ignore information from the principals that might make that fundraising more difficult.

As an industry, I think the most important response we can give to Hugh’s book is to address this problem directly, to come up with systems and solutions that give investors and donors independent information on not only the financial performance of a microfinance institution, but also the degree to which the practices of the MFI match the ethical values and desired outcomes of those who support it.

What Hugh fails to acknowledge in his book, however, is that the industry has recognized (if belatedly) this issue and has taken steps to address it. Hugh criticizes the Client Protection Principles of the Smart Campaign  because an MFI can be listed as an endorser without actually following the principles.  This is a challenge that the Smart Campaign has addressed from the beginning by developing training tools for applying the principles and assessment methods for evaluating whether an MFI is in compliance with them. The Smart Campaign is in the process of developing a certification that will involve rating agencies doing assessments that make public an MIF’s performance against the Client Protection Principles.

The Social Performance Task Force (SPTF) is another industry-wide initiative that has been bringing together practitioners, raters, donors, and investors since 2005 to establish standards of practice for double bottom line microfinance institutions. In June this group adopted the Universal Standards for Social Performance Management, which includes standards for many of the issues that Hugh addresses, including executive compensation and board oversight. These standards will be incorporated in the social ratings carried out by the major microfinance rating agencies.

Investment institutions have also developed standards to make sure that their investments match their messages to the people and institutions providing the funds. Oikocredit, one of the largest microfinance investment funds, is not mentioned in Hugh’s book, but it is an exemplary investor to whom we could look for guidance on due diligence. Oikocredit often bases its investment decisions on analysis that includes social ratings of MFIs and measurement of poverty levels using the Progress out of Poverty Index  developed by the Grameen Foundation.

Finally, the Seal of Excellence for Poverty Outreach and Transformation, an industry initiative under development since 2010 and housed at the Microcredit Summit Campaign, is an initiative aimed at recognizing those institutions doing the most to create positive and lasting change for poor clients and creating a learning environment for improved practices in serving these clients. This Seal will be awarded to those MFIs that have been formally assessed and have been found to:

  1. Exhibit commitment and progress toward the Client Protection Principles
  2. Show effective operations and progress within the Universal Standards for Social Performance Management
  3. Demonstrate that they are reaching poor clients, and
  4. Demonstrate that those clients are benefitting from those services and, ultimately, are showing progress over time.

In this way, those who want to invest in MFIs with a poverty mission will know which MFIs are meeting or exceeding expectations.

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.  Have we reported only the good stories and positive results, afraid that the general public would not be able to understand all the complexities of our work? Have we relied too heavily on happy anecdotes of client success without sufficiently probing their challenges?

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.

Also read: “What a Microfinance Heretic Has to Say to US Microlenders” on huffingtonpost.com by Elaine Edgcomb, Director of the Aspen Institute Microenterprise Fund for Innovation, Effectiveness, Learning and Dissemination (FIELD). 

22 thoughts on “Learning from a Heretic

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  8. [Letter from the heretic to Larry, reproduced with Larry’s permission]

    Thank you for the open response, and for being the first senior person to have the courage to comment publicly about my book. The book is a first-person memoir, there are inevitably omissions as I did not work with everyone in the sector, nor did many MIVs invest in the questionable MFIs I mention (SKS, Compartamos, LAPO etc). Besides Oikocredit, I did not mention Triodos, Vision Fund, Opportunity… the list is extensive. Those not mentioned in the book are no doubt relieved, and perhaps with good reason – I state repeatedly that there are good MFIs, good MIVs and good P2Ps in the microfinance sector.

    You and I both understand that there are some serious claims in the book, well backed up, and yet unanswered to date. No one has even denied them. These will, at some point, need to be addressed, or they will haunt the sector indefinitely. You criticise my selective use of facts, but you do not challenge their veracity – this has far-reaching implications that will make many implicated parties yet more nervous.

    I am concerned for two groups of people: the poor, who are often (not always, as clearly stated) exploited; and the ultimate investors, who are invariably not provided with accurate information. You suggest that direct action is required as opposed to the usual window-dressing, which I applaud. The sector should never have reached this current situation, and frankly, we all could have done more to prevent this but we decided to take the path of least resistance. I do have some fundamental concerns with the likes of SMART, discussed on my blog with more to follow shortly. Self-regulation, particularly with such obvious conflicts of interest, is limited. Would the SEC have done a better job if Goldman’s were their main funder? Policing is not only required for the MFIs on the ground, but the MIVs. And let’s not forget, your own sponsors earn a mention or two in the book. This sector is rife with potential (or rather, very real) conflicts of interest which need to be cleared up.

    The sector needs actual, real, tangible, implemented regulation. A growing number of people are looking at this closely. It is a pity that it took my book to accelerate this conversation, if it did in some small way. The suicides and abuses documented in the book are also lamentable. If you want to take concerted action, which may at times be painful, embarrassing and revealing, then you have my support. But I am not participating in a back-slapping exercise; handing out awards to my friends (the few I still have in the sector); or presenting a rosy image to the outside world while the fundamental questions remain unanswered. Diplomacy is fine, but only goes so far. Policing is also required. Carrots are necessary but insufficient. Sticks are also required, and sometimes may need to be applied close to home. Benefit to the poor is my sole measure of success. No one should be angry at the messenger – I state verifiable facts, am entitled to an opinion, and wrote a memoir, not a text-book.

    You are a respected, experienced and influential person. You are also one step removed from the direct activities MIVs and MFIs, and therefore well equipped to lead the sector out of a dark period. The issue of child labour in micro-enterprises, to the detriment of their education, will shortly rear its ugly head. The Smart Campaign flatly refused to address this in the CPPs. Academic evidence for detrimental child labour, as well as more broadly challenging the poverty-reducing ability of microfinance is mounting, as I am sure you are aware. I believe the sector is at a critical juncture and needs clear leadership to steer it towards a brighter future. To some extent this is in your hands.

    I would suggest a good place to start is (1) defining, formally, the definition of exploitative interest rates according to the MicroCredit Summit Campaign. Yunus managed to do so some time ago, as have entire countries. (2) Adding the rights of children to the CPPs – to the best of my knowledge (please correct me if this inaccurate) only two MIVs have stated policies on preventing child labour – Oikocredit and Vision Fund. Deutsche Bank suggested they would do so, but never bothered. (3) Equipping the self-regulators with sticks as well as carrots. (4) Initiating formal, independent, ratings of MIVs, comparable to the ratings we expect MFIs to obtain. This should not be owned, run, financed, affiliated to, staffed etc. by Accion, GFUSA, Citi etc. (5) Demanding answers to the claims made in the book – as long as these remain unanswered the sector remains blighted.

    This is not an exhaustive list, merely a start, and (5) is perhaps wishful thinking.

    I appreciated your press release and admire your courage. However, overlooking MIV regulation ignores the elephant in the room. You know it, I know it, the MIVs and MFIs know it, and the regulatory bodies are fast finding out about it. Window-dressing won’t work. We either implement genuine self-regulation (with teeth), or await full formal regulation. Conversations with the regulators have already begun, and the forthcoming documentary in Holland about the antics of Triple Jump will accelerate this. If we wish to restore public faith in the embattled sector we need to start with the organisations that act as intermediaries between the investors/donors and the MFIs. The recent financial crisis was a fairly clear example of this, and the microfinance crisis is a mere continuation of the same fundamental problems – conflicts of interest, greed, warped incentives, poor transparency, sloppy regulation and corruption. If you really believe the self-regulatory bodies are the way ahead (given their current funding sources), let me ask you a question. Would you approve of self-regulation of Wall Street funded by Goldman’s, Deutsche and Citibank? Wolves are rarely selected to guard sheep for obvious reasons.

    We need to act quickly. More scandals are brewing. I have only actually published a sub-set of the information I alone have (rule #2 of whistle-blowing: do not put all your cards on the table). I receive daily emails now from insiders across the planet with more examples. I’ve also received amazing support, including from some fairly senior people in the sector. And I am not acting alone here – there are more co-heretics in the church! Norway has already withdrawn from microfinance – this is going to occur repeatedly if we don’t take firm action to re-assure people that microfinance can be saved. I beg people not to throw the baby out with the bathwater, but some will ignore this advice, to the detriment of the poor. But, the alternative is not to deny the existence of the bathwater, or to allow the culprits to continue with a slap on the wrist and the comfort of light-touch self-regulation that they can discreetly manoeuvre.

    Finally, let’s be frank about the claims in my book. They are true, they are well-documented, they are unanswered, you know most of the people named, and you have probably suspected that these activities have been going on for some time. Indeed, one valid criticism of the book was simply “there’s nothing new here, we’ve know all this for ages”. How sad that this may be true. It is not simply the over-hyping that you refer to in your press release – it is a lot more serious than that and you and I both know this.

    [With reference to your point on over-hyping microfinance, there was a wonderful example in the Huffington Post written by none other than Kadita Tshibaka, board director of Opportunity International the day after your press release. You probably know him. I dismantle the article on my blog entitled “Spin Unlimited”. The Huffington Post declined to publish an edited response on their website. This was hype in its purest form, even the fanatics may suspect Mr. Tshibaka had gone a step too far – but it’s actually quite a funny read. One may assume he was unaware of your press release, as one may also assume that he remains blissfully unaware of any of the academic or critical press regarding microfinance.]

    You have substantially more experience than I, but I believe we share common beliefs in many ways, but particularly in yearning to help the poor. I also acknowledge that you are in a tight spot and have limited tools available to you. I may have even fewer tools, but I am not in such a tight spot – I don’t rely on funders, I don’t enter the politics of the sector, I have a wealth of information growing each day, and people are taking the book seriously. In this regard I may be better positioned than you. Like a good-cop/bad-cop routine.

    So, if we’re on the same page, my question is simply: how can I help?

    Hyperlinks from text:
    http://www.huffingtonpost.com/kadita-tshibaka/micro-finance_b_1881064.html
    http://blog.microfinancetransparency.com/spin-unlimited/

  9. That’s true, one key problem is not only the investors are far away from the clients but also the MFIs are not near enough to the clients. The clients can not depends on outside financial insititutes,even the MFIs. They shall depend on themselves by setup financial cooperatives.

  10. I agree with Larry Reed that we should address the issues instead of killing the messenger. Of course the book is biased, but so is much of the rethoric in the industry. The microfinance journey is one of continuous learning and refining. A peppered debate about certain aspects of the industry can help us to progress and keep us intelectually sharp.
    A book which comes close to a ‘tell all”, by the way, is David Roodman’s recent ‘Due Diligence’. I loved reading it. I would also be looking forward to some panel discussions about those books during one of the many industry conferences instead of the usual topics.

    • David Roodman’s book is not at all ‘tell all’ book but a ‘the kind folks at Mastercard Foundation and CGAP have paid me to defend microfinance and find a continuing role for the microfinance industry even though we now all know and accept that microfinance does not actually work’ book – some of the silliest points he raises in his book I point out at:
      http://www.microfinancegateway.org/gm/document-1.9.57416/Bateman.pdf

      • I am really simple minded- i research what human beings would like from banking; I dont want what wall street did to banking; i want community banks that invest in the community/people/youth producing relevant futures not models that trap people in debt. Now it happens around the world I know of about 5 banking models that do design family’s savings to invest in future productivity out of the community- i dont care what these are called, i do wish people would study these system designs fully and have the freedom to truly replicate them where they choos; however if milford bateman is saying he believes it impossible to design banks to invest in the next generation’s futures out of communities then that is either very bad news or he is simply wrong

  11. There’s an under-reported benefit of microfinance – good health than can follow, for the borrowers. Typically, they are residents of countries with poor national health systems and inadequate access to (e.g.) clean water and affordable pharmaceuticals. The under-five mortality rate is one indicator of those consequences.

    Evidence of these linked benefits has come from Professor Leatherman, a research professor at the Gilling School of Global Public Health, The University of North Carolina at Chapel Hill, a visiting fellow of the London School of Economics and distinguished associate of Darwin College at the University of Cambridge, England.

    She and her colleagues concluded last year that “Scientific evidence demonstrates that microfinance organisations can implement health programmes that increase knowledge, change health-related behaviours and improve access to health services”.

    This useful – independent – information can be found here – Leatherman, Metcalfe, Geissler and Dunford: Integrating microfinance and health strategies: examining the evidence to inform policy and practice (Health Policy and Planning 2011;1–17, http://heapol.oxfordjournals.org/content/early/2011/02/21/heapol.czr014.full.pdf)

    When I became involved in the issues of world poverty in 1986, the daily but preventable deaths of children under five were 40,000; those are now about 19,000. Progress is possible, if we keep our eyes on the prize – giving some small credit to the poorest of our world’s poor.

  12. Thanks, Douglas. I agree with you that these same dynamics apply wherever there is donated or subsidized funding. Both the one supplying the funding and the ones receiving it have strong incentives to share only good news. That’s why standards and accountability are important. It’s hard to avoid mistakes if we don’t learn how things can go wrong.

    • I could read sinclair’s book from different viewpoints. One is as an ordinary person who wonders what to donate to. I was shocked that unitus asked me to donate to its kenya office just before microcreditsummit in kenya and in a few months time closed down reportedly with much profit for unitus owners. I feel that they every funding agency named in sinclair’s book needs to write the response they would wish circulated to individual donors. I certainly wont be contributing to any who don’t. chris macrae microcredit.tv

  13. Proponents and opponents of the microfinance industry are both well practiced in the art of cherry picking to butress their arguments; Sinclair is far from alone in this fruit harvesting. Neither side has presented reliable and generalizable facts to prove or disprove that submerging poor women in more debt is effective in lifting many of them out of poverty.

    Promoting more transparency is OK, but it doesn’t get at the fundamental problem in microlending: is it an effective poverty alleviation tool? Or, as Sinclair suggests, are the main “beneficiaries” those who consult for, promote, and manage the microlending industry?

    • Dale, it’s always interesting to hear from you. Good question on who benefits the most. It’s amazing that 40 years into this movement we haven’t answered it yet.

      I recently participated in a meeting at CGAP where Tilman Ehrbeck summarized RCT studies of microfinance. He described a 4 x 2 matrix, with the rows being different types of finance (credit, savings, insurance and payments) and the columns being the uses (for consumption or for investment). He said that RCTs were showing positive results in all of the boxes except credit for consumption. He also cited RCTs of BRAC-style graduation programs that show very strong benefits for clients. (And Tilman, if you’re reading this and I quoted you wrong, please correct me.)

      So maybe a better question we could be asking is which financial products and services provide those most benefit for various groups of people living in poverty?

  14. It’s always difficult to deal with criticism and I applaud Larry’s positive approach. In reviews of our software we always get some points that could be improved and I use that as my ‘To Do’ checklist.
    Nothing is ever perfect but we must keep our focus on doing better next time!

    • I like your analogy to software, Eamon. Subjecting ourselves to public scrutiny, and actually having our shortcomings pointed out in a public way, is one of the best motivators for getting better.

  15. Larry, it seems to me that the reluctance to paint the true picture including ‘warts and all’ (as attributed to Oliver Cromwell) is not restricted to MFIs alone but to any organization dependent on donor(s) for funding. While the donors also have a responsibility to ensure that they are receiving honest descriptions, integrity counts; and measures like the ones you’ve described in your blog provide the means to escape the temptation. Thanks.

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