This past weekend I devoured a new tell-all book by Hugh Sinclair, Confessions of a Microfinance Heretic: How Microlending Lost its Way and Betrayed the Poor. It's a disquieting read, especially for someone like me who was deeply engaged in international microfinance especially in the early years. (I and colleagues founded the SEEP Network in 1985, and I was its first Executive Director. SEEP began as an association of U.S. non-profits engaged in microenterprise development around the world. It now has an international membership and includes the leading organizations worldwide.)
Although Sinclair states occasionally that there are effective microfinance institutions (MFIs) operating in parts of the developing world, he generally paints a picture of ineffectiveness, profit-seeking, and lack of transparency that is damning. Although he focuses mostly on one egregious case in Nigeria, he claims that this case illustrates problems rife throughout the field. His criticism doesn't just fall on the microfinance organizations that lend to poor entrepreneurs, but also on the microfinance investment funds that have channeled loans and investments to microfinance institutions as they have converted from non-profits to for-profit institutions. Although the intent of these transformations is to unleash greater flows of capital to poor entrepreneurs, they have also led to incredible financial gains on the part of those who have led these institutions and their major institutional partners. The book may not be balanced but it's certainly chilling as it moves from the case of one MFI to the revolt of a whole nation of microborrowers in Nicaragua, to reported instances of suicide by poor women borrowers in India, all of which he sees resulting from the sector's evolution from a reasonable strategy to help some entrepreneurs to the darling of the investment community.
So, what does this have to do with U.S. microlending? Interestingly, the only comment Sinclair makes about it is in his discussion on Kiva, the well-known vehicle through which people can lend to microentrepreneurs of their choosing. He notes that the average interest rates charged by U.S. microlenders are the cheapest he found on the Kiva website, consistently under 20 percent. This compares to rates ascending as high as 88 percent for developing country borrowers. In fact, our research shows that the median interest rate in the U.S. is 8 percent and the range of average interest rates is 3 to 18 percent. Although the author recognizes that it costs more to lend to the poor, he believes few organizations are working hard enough to bring rates down. It's interesting because U.S. microlenders have often been criticized by international experts for not "getting it," and for their inability to reach break even, much less profitability, in most instances. There have been serious discussions here about pricing, and how factors like fairness to borrowers and the need to achieve sustainability by lenders can be balanced. What I think Sinclair says to U.S. microlenders on this point is that the struggle to find the balance is worth it.
Other thoughts I walk away with for U.S. microlenders:
- Financial transparency is essential. Your borrowers need to know what the effective interest rate is on their loans, as do your donors. You need to be open about your performance. You can report that information on www.microtracker.org, our web portal to industry data and prove it.
- Independent ratings are a must. Sinclair talks about how developing country MFIs can claim allegiance to new consumer protection measures, but if their performance doesn't match up, there's little way to know it. Objective verification is essential. In the U.S., CARS (CDFI Assessment and Ratings System) is the independent rating system for nonprofit loan funds, and although it may need some changes to better assess the microfinance model, it's a good place to begin. Some microlenders have CARS ratings. More need to get them.
- Make sure your rhetoric and operations match. Sinclair is especially critical of the fact that most MFIs use similar "poster children" as their marketing face -- poor, entrepreneurial women who through street vending have moved out of poverty -- when in fact, he states that most international microlending is used for consumer needs. Although there are many good reasons why poor people need consumer financing -- to help manage expenses when income is seasonal, for example -- the fact that most individual donors think the money is going to aspiring entrepreneurs when it may not be will ultimately turn people against the field. In fact, I already know of one donor who, after reading another critical book on the international industry (yes, there is more than one) said he will never give again. This is not what we want to happen here. Most U.S. microlenders have "stuck to their knitting," remaining focused on entrepreneurs. A few have added other products to help people improve their credit or overall financial position. This is worthy. Just be sure that your donors know that you've expanded and why.
- "It's the business, stupid." It's okay, in fact essential, to offer technical assistance along with the financing. Sinclair notes that he has met poor entrepreneurs who really would have benefited more from business guidance than capital. But, in international microfinance he says the loan and its repayment have taken precedence over the business. In the U.S., almost all microlenders report offering technical assistance. This is a good thing, and if anything, lenders should make sure that they pay as much attention to the quality of their advising as they do to their lending.
- Finally, be modest. Microenterprise is not the solution to poverty or even our jobs crisis. Sinclair is extremely harsh about the over-selling of microfinance as the answer to world poverty when vaccinations and mosquito nets have even greater evidence of their effectiveness behind them. In the U.S., microenterprise development is clearly one part of the solution to our jobs crisis. At the very least, it has offered a survival strategy to so many who've been hurt by the economic crisis. At its best, it has offered employment opportunities to others (our newest research shows 2.9 jobs created or retained for every microenterprise assisted by programs we track), and a path towards greater economic stability for many. But, it's not the magic bullet, and it would be good if we could remember that, even without a book like this to so dramatically throw it in our face.