This is a book review I wrote for the microfinance news site microDINERO about Hugh Sinclair’s controversial new insider/whistleblower account of the microfinance industry.

Hugh Sinclair, 2012: Confessions of a Microfinance Heretic: How Microlending Lost Its Way and Betrayed the Poor. San Francisco, CA: Berrett-Koehler Publishers.

Outside of the mainstream and microfinance’s promotional campaigns, many academics, NGOs, critical journalists and also former microfinanciers have quietly criticised microfinance for years – only to be ignored or dismissed as lunatics or ideologues. The problems in microfinance, however, are very real, and Hugh Sinclair’s controversial new book “Confessions of a Microfinance Heretic” makes them impossible to ignore.

For the few independent researchers, fortunately able to study microfinance without reporting to microfinance-supporting bodies or the major research groups (which happen to be mostly funded by the same organisations which fund microfinance), the problems of microfinance are not news. They include that microfinance, by its very nature, supports only the simplest, least-productive and lowest growth-potential activities, as Milford Bateman argues. They also include the fact that most loans are simply used for consumption, which even CGAP recognises in its attempts to redefine microfinance in terms of “financial inclusion”, ignoring the problem of these loans’ unsustainability. This is linked to the risk of overindebtedness and debt traps researched bravely by Jessica Schicks, and evidenced most gruesomely in the Indian microfinance crisis. There is also the problem of microfinance building on and employing immense power asymmetries, particularly between men and women, as Lamia Karim has shown, rather than removing these asymmetries through actual processes of empowerment. These are just a few issues.

With Hugh Sinclair along comes someone who has extensive real-life experience, a fascinating story to tell – from his original belief in microfinance to his disillusionment and ultimate heresy against it – and a knack for writing. His book, as devastating as it is entertaining to read, presents a serious challenge to large elements of the microfinance industry. Sinclair adds a new problem to the list of reasons why microfinance cannot keep its promise of poverty reduction, showing that the incentives within the microfinance industry are structured in such a way that positive developmental outcomes can – at best – occur as an accidental by-product; and mostly won’t occur at all. Read the rest of this entry »