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Hugh Sinclair is a (self-described) whistleblower who recently published a book coming clean with the microfinance industry. Paul Lagneau-Ymonet and Phil Mader had the privilege to ask him how microfinance went astray and “betrayed” the poor, and why the public and donors are being deceived. His book “Confessions of a Microfinance Heretic: How Microlending Lost its Way and Betrayed the Poor” has been widely noted by international media and his blog follows the day-to-day antics of the microfinance industry.
Hugh, you worked in microfinance for 10 years, so you must have at least for some time believed in this as a tool for reducing poverty. When did you become disillusioned, and why?
I can’t say there was one moment of revelation. The first concerns started on my very first project. I was working in Mexico with a Grameen replica institution, and right from the beginning I noticed many of these people aren’t using the money for a productive use, and many of them aren’t actually very poor at all. But I told myself maybe I’m just in a bad institution.
I worked in Mexico for a couple of years, then I moved to Mozambique. There I discovered an even worse situation. Not only was microfinance not having much impact, but the institution that I was working at was misappropriating the savings of the clients. They were forcing the clients to make a savings deposit, and then they were using that deposit to subsidise their own operating costs, which generally involved paying high salaries to ineffective expat senior managers to fly business class and drive around in fancy 4x4s, which to me didn’t seem like a particularly good use of the client savings. It’s theft – I mean, you can’t just take people’s savings and spend them on your salary.So I thought: wow, this is a terrible institution. But maybe I’ve just been unlucky that I’ve stumbled into a few bad ones. Why don’t I go over to Europe and work at a microfinance fund, and my knowledge about the difference between a good and a bad microfinance institution will be useful to direct their money towards good microfinance.
“The problem is that [microfinance funds] have a weird set of incentives that aren’t aligned with their own investors, and also aren’t aligned with the interests of the poor.”
Over on his blog and on Indian financial news site Moneylife, microfinance expert Ramesh Arunachalam has started an interesting series of posts. They investigate the charges levied by Hugh Sinclair against microfinance investment vehicles (MIVs; or microfinance investment funds) in his recently published book, Confessions of a Microfinance Heretic. Arunachalam is approaching the questions raised by the book with his characteristic meticulous diligence; very data-driven. As usual, he raises poignant questions rather than easy answers, and I strongly suspect his detective work will remain a delight to follow.
Incidentally, some of the points raised by Sinclair’s book are very close to Arunachalam’s fascinating causal reconstruction of the Indian microfinance crisis. The two most obvious ones are: (1) lack of transparency and meaningful regulation in the microfinance industry, in Indian microfinance as well as in the global microfinance investment sphere. (2) The pressures of capital, in that agents bestowed with large amounts of easy money under these circumstances are unlikely to make wise decisions (let alone decisions truly benefitting their stakeholders). These are Indian MFIs who lend as if throwing money from helicopters, or global MIVs investing in low-quality-high-profitability MFIs because they need an easy outlet for their money.
Particularly interesting is that Arunachalam asked investors for statements or rebuttals to Sinclair’s allegations, apparently to no avail or evasive answers. Also, reports promised by the microfinance transpareny/labeling initiative LuxFLAG were not available. So it will be interesting to see if Arunachalam finds out what some investors’ explanations are for having continually invested in the evidently non-law-abiding Nigerian MFI LAPO.
Also, David Roodman at the Centre for Global Development has reviewed the book, his main contribution being to “add nuance”. He too sees the key message of “Confessions…” in its exposition of the uniquely problematic role played by MIVs in the microfinance money chain, even though he criticises it for its critical tone. No comment on Roodman’s discussion of different people’s character traits (at bottom).
Last-minue addition: Sam Mendelson, co-author of the Microfinance Banana Skins reports, concludes “Ultimately, Confessions is frustrating and fascinating in equal measure” in a similarly even-handed but more personal review on microfinance focus.
(phil)
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 »
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