Note: Hugh Sinclair has replied to this review.
I can't recall feeling such an acute combination of fury and delight at a book before. Hugh Sinclair's Confessions of a Microfinance Heretic is a tell-all from an industry insider. It recounts his experience working in microfinance institutions (MFIs) in Mexico, Mozambique, Nigeria, and Mongolia, and then inside the microfinance investment firm Triple Jump. Near on half the book is about a single MFI, LAPO in Nigeria, which you might recognize from the New York Times article that Hugh engineered behind the scenes or from the masked blog commentator StreetCred, whose identity Hugh may know something about.
The extended scorchings of particular MFIs sometimes obscure what is, or is meant to be, the book's main message. It is not "these MFIs are bad so all microfinance is bad," for the text states more than once that the MFIs exposed may not be representative. It is rather that there is something wrong with the readiness of intermediaries to invest in the asserted bad guys---and here the list of institutions does represent a large swath of the industry: Triple Jump, BlueOrchard, Grameen Foundation, Calvert, Kiva, and more. To document his battles with them, Hugh has posted primary materials such as internal reports and phone call recordings. I assume he says less than he knows, his lawyers providing one filter for what can be public.
What delights in this book are the stories. I felt my heart beat as I read Hugh's account of the confrontation with his superiors at Triple Jump that would turn him into a whistleblower. Earlier, he tells how a man named Sam Grottis came to lead an MFI in Mozambique called FCC that Hugh would later be brought in to try to turn around:
He was apparently a former businessman and freedom fighter in Rhodesia who had experienced a Road to Damascus moment of enlightenment and had become a fundamentalist Christian---a prerequisite for senior managerial positions at World Relief. Eventually Grottis met a suitable westerner who displayed mutual agreement regarding the imminent end of the world and promptly made him CEO of FCC.
But you sense the sardonism: we can't quite trust the book to tell the full, fair story.
Then there's the water-selling lady in the hotel Hugh stayed at while working with LAPO in Nigeria:
Every morning I would buy a bottle of water for the day ahead, clearly labeled as N25.
"One bottle of water, please."
"That is N30."
"No, the sign says N25."
"Sorry, that is N25."
I would hand over a N50 bill, the smallest the moneychangers would give, and await my change.
"Er, my change should be N25, not N20."
"Sorry, here, correct change."
Every morning the same woman tried the same trick….After a week I felt obliged to comment.
"Every day I buy a bottle of water from you, every day you try to charge me N30 when it is N25, every day I correct you, and then every day you try to give me the wrong change. I know the trick. Every time I spot it. You know that I know the trick. Why don't you stop trying to trick me and charge me the correct price and give me the correct change without this argument every morning?"
"You're right, sir….But if I do this every day for 100 days, one day you might forget, and then I get N5 extra."
To prevent theft, the hotel's towels were cleverly labeled "STOLEN FROM RANDEKHI HOTEL." Homes nearby had "House Not For Resale" painted on them in large letters so that bogus agents would not sell them while the occupants were away. These stories give you an impression of how business is done in Nigeria. Now, in Bangladesh, which vies with Nigeria at the bottom of corruption rankings, major microfinance institutions are bastions of relative rectitude. But the stories make one wonder whether in Nigeria it is quite not so. Later we learn that after investors pressed LAPO about its interest rates, it cut the monthly charge from 3.0% to 2.5% of the opening loan balance---while tweaking the terms in other ways so that the full cost went up. Not so different from the water lady playing with 30 and 25?
What riles me about the book is not the affront to the thesis that microcredit is a miracle cure for poverty but, as in Milford Bateman's book, the easy and unsupported condemnations of a class of people. The preface and first chapter drip with derision. Often it contradicts the hope professed elsewhere for the potential of microfinance. "The microfinance community often resembles a religious cult. Criticism is considered heresy and is not tolerated. Impact on poverty is dogmatically claimed but demonstrated in only exceptional cases." Microfinance today is "a poor substitute [for what it could be] that enriches a few while enslaving many with debts they can barely afford to service." "Most MFIs do not offer fairly priced loans and do not aim to achieve this goal. They have a myriad of excuses to justify this, but the outcome is the same." "Twice I have narrowly avoided being punched in conferences for daring to suggest that microfinance was in fact falling a little short of miraculous." "An almost cultlike aurora [sic] surrounds the sector." "Everyone's a winner. So how dare anyone ever criticize it?" "The problems with these crass descriptions of microfinance blurted out at dinner parties by zealous microfinance experts are numerous." "It is assumed that every poor person is a budding Bill Gates."
Such rhetoric begs questions, which, it turns out, the book never answers. Who are these zealots? (In the moral equivalent of passive voice, none are named; there are hardly any examples of real people claiming microcredit is a miracle cure for poverty.) What evidence is there of a cult? (I've dared to suggest at many conferences that microfinance is in fact falling little short of miraculous. The typical response has not been a near-clobbering, but "I knew that already.") Upon what besides casual observation is based the claim that there "do exist cases where microfinance is genuinely benefiting the poor"? How can one be certain that high interest rates are bad? What is the evidence that loans are "almost invariably" not spent on productive uses? (The evidence is opposite.) Or that those investments that almost invariably not made do not "generate sufficiently massive returns" to cover even high interest rates? (Ditto.) Here, the book reverses the usual dictum of good writing: it tells but doesn't show.
Certainty without evidence: how much do these passages differ in their truthiness from the microfinance-exalting rhetoric that it so disdains?
Yet other parts of the book say something important, and do so by exhibiting fresh and powerful evidence. The evidence is essentially Hugh’s story about working at one microfinance investment firm. But because it involves many players in the small world of microfinance investment, it is a story that cannot be dismissed as unrepresentative.
In microcredit, as in charity and foreign aid generally, money moves in steps from the ultimate donor, such as a German taxpayer, to the ultimate recipient, say, a tomato seller in Bolivia. Each agent along this chain faces incentives to limit and distort the information about its activities to the next agent up the chain---and to efficiently pass money to the next agent down the chain, for that is what it exists to do. For example, microfinance umbrella groups such as FINCA learned long ago that the best way to raise money was to tell stories about women who have elevated themselves through entrepreneurship, even though this was only part of the truth. MFIs too learned to "sing the songs donors wanted to hear" as Damian von Stauffenberg put it to me in reference to LAPO. Economists call such disconnects "principal-agent" problems. An agent such as an MFI investment fund will always know more about its activities than a principal such as you, a donor. With that superior knowledge comes an opportunity for the agent to advance its interests at the expense of yours.
This book has helped me appreciate how the arrival of microfinance investment intermediaries, by adding a stop to the route your money takes on its way to a microfinance user, can add to the principal-agent problems. On a daily basis, someone working at a microfinance investment fund is probably more worried about whether MFIs can repay the fund's loans than whether the MFIs' clients can repay theirs. In some cases, this priority reflects pure greed. But Hugh argues that investment funds are underpaid, which leads them to cut corners on diligence. More often, it seems, the bias toward overlooking exploitation, corruption, and illegality at MFIs arises from people wanting to keep their interesting and fulfilling jobs, advance professionally, serve their mission as they see it, and help their employers do the same.
What’s the moral call on this situation? On the one hand, the behavior I just described does not necessarily mean that microfinance promoters are all greedy and cynical. Many are doing their professional best, as they conceive it, to advance their missions by bringing in money, which sometimes means keeping things simple in communicating with investors and telling success stories. We donors and investors rewards such behavior when we give money to the people with the best stories not the best studies. As I noted in writing about Kiva, we bear responsibility for the evolutionary environment. On the other hand, principal-agent problems cannot be banished. And with superior knowledge comes moral responsibility too.
It should be said that principal-agent problems are particularly worrying for microcredit. If a school-building program (perhaps cloaked in a child-sponsorship appeal) is undermined by bad planning or embezzlement and this information never reaches the funders, probably few poor people will be directly hurt. But credit is dangerous. Pushed too hard on the basis of misleading information about its impacts, it can not only waste funds but make many clients worse off.
Hardly anyone has talked about how principal-agent perversities have played out in the microfinance investment industry. And no one has done it with anything like Hugh's power. It needed to be pointed out that despite the veneer of fighting poverty--in fact because of it---bad things could happen unnoticed.
While generally, claiming not to be attacking microfinance per se, the book does levy some charges that I want to take head-on---not to rebut but to add nuance:
- Suicides "en masse" in Andhra Pradesh. An agency helping to implement a government program suffering from competition from private microcredit identified 54 suicides it asserted were caused by microcredit. Taking that number at face value, it represents a miniscule fraction of the million or more microcredit users in Andhra Pradesh---not quite as low as one in a million. Meanwhile, microcredit may have prevented as many suicides by giving people another financial option; we will never know. I think you should view the suicide stories as an indicator of harsh collection practices, which rarely drove people to suicide, but plausibly caused real distress with greater frequency.
- "Eye-watering" interest rates of 100% or more. This really is the book's main charge against microcredit: some rates are so high that they are obviously bad for the poor. And since microfinance funds invest in and profit from MFIs charging such rates, there is something wrong with them too. Yet the definition of usury has bedeviled philosophers for millennia and the book devotes zero attention to the complexities. It implies that rates that high must be bad for the poor. In my book, I give up on drawing a line between fair and unfair prices; I point out that eliminating profit in microfinance would allow rates to be cut by only a sixth; I suggest that one look instead at the trend in rates; I observe that the trend is downward in mature markets; and I report with awe that in South Africa, four-month payday-style loans with interest compounding to 586%/year did reduce poverty. I do not dismiss high rates as a concern. But their impact is an empirical question, one in which the book evinces no interest.
- The outrage of LAPO. The book builds a strong case against the Nigerian MFI. It has high interest rates, in the 100—200% range depending on how you run the numbers, along with high profits and a high client desertion rate. It was using clients’ deposits to make new loans, which was both illegal and immoral from the point of view of keeping savings safe. Hugh discovered that a brother of a board member did the audits. There were ample signs of embezzlement and weak management. Accosted by Hugh, I considered blogging LAPO last year. I decided not to. I recognized that helping poor people sometimes requires choosing the good over the unachievable perfect. In a place like Nigeria, your options may be working with and hoping to improve groups that are not squeaky clean and not working at all. The call is often tough. Perhaps even tougher is for someone with less information, like myself, to second-guess those calls. So I did not blog. Perhaps I was too cautious. At any rate, Hugh knows LAPO better than just about any other outsider, and so is better positioned to judge.
After pounding the industry for 200 pages (did I mention the 10-page diatribe against Kiva, much of it disconnected from the question of what helps the poor?), the author offers surprisingly little guidance on how to do better: "I don't know how to embark on this massive cleanup." Now, I don’t have a detailed reform plan either, but I don’t imply that most people in the movement are fools are worse. I think that the more you put down others the more you raise the bar for yourself.
In fact, for all the bomb-throwing, the book's recommendation are almost laughably conservative. Microfinance investors, perhaps such as you, should ask tough questions. (Which, is not said.) You should "make sure the answers are compatible with your view of what actually helps the poor," even though armchair theorizing about what reduces poverty is a big reason microfinance overshot. You should "complain if you suspect that your money is being invested in unsavory activities." Noted! Investment funds should be regulated in some unspecified way. Poor people are reminded (in case one picks up the book) to think at least twice before taking a loan, a bit of advice that evinces no appreciation for the [ingenuity of most poor people in managing their finances]. "If you are ill-treated or threatened, don't commit suicide." (Is that a joke?)
In sum, everyone should stop being evil and start being more diligent. Now, given, as I've argued, that all along the chain bear responsibility for how things work, this focus on behavior makes sense as far as it goes. But I go farther:
If the microcredit investment industry cannot be run in a way that minimizes harm to the goals of responsible lending, safe deposit-taking, and healthy institutional growth, it probably should be shut down altogether, save for a catalytic role in developing new MFIs through seed capital and training grants.
In defense of the light recommendations, Hugh might protest that he is merely offering his story, not trying to review the research the way I do or draft a full plan for reform. That would be a valid argument if the premise were true (as I wish it were). But the book does more than tell a story. It also paints an entire professional class as a zealous cult.
I wish we lived such a post-publishing world that I could circulate a mash-up (smash-up?) of this book consisting of the parts that delight me and the parts that I believe are important. But I can't. As I often observe, we are each packages of odd traits, traits that are both strengths and weaknesses. Myself, I need to hear out all sides, think things through, write with care---probably too much at times. What gets my back up is people who do not take the same care---and then condemn. Hugh is not me. He has a strong sense of justice, perhaps too quick to see the worst in others and the best in himself. His work bugs me in some ways. But if he were not who he is then he would never have become the angry whistleblower and never given us this valuable insider’s view of an industry that deserves scrutiny.
Other reviews: Phil Mader; Ramesh Arunachalam; Sam Mendelson; Tom Devine.