Sometimes you just get a feeling inside that things aren’t what they seem. Such was the case with me when a friend invited me onto Kiva, the online microfinance website that promotes itself as bringing real connection between borrower and lender. It sounds so good, so easy - just loan $25 or more directly to a needy person of my choosing whose pictures are provided along with select personal data. Kiva’s website tells you that it works with ‘organizations in the field’ to actually disburse my loan and that I will get all of my money back (without interest) when the loan is repaid by the new friend I have made -- who is ever-so-grateful that I have chosen him/her as the recipient of my loan.
And in case you’re unfamiliar with microfinance, in a nutshell it’s a way of providing loans to poor people so they can lift themselves up out of poverty. Sometimes this means a loan to purchase goods to re-sell, sometimes a sewing machine to help increase a hand-sewer’s productivity, sometimes a couple of goats so a small farmer can sell goat milk in their community. It all sounds very simple -- the loans are usually repaid within a matter of months, all scheduled and carefully monitored by the non-profit lending institution in the field (meaning the partner institution located in the country where the loan is made).
I need to back up a bit here and say that my interest in this issue became personal years ago when a friend fresh out of college set up a non-profit microfinance institution (MFI) and asked me to donate (please notice that my friend’s org depends on donations, not loans, which makes its operating model different from most of the other players). Knowing this friend has a heart of gold, I didn’t hesitate and have followed the growth of my friend’s org from a one-person show involving repeated trips to one of the poorest spots on the planet to disburse donated funds to what is now a large, well-funded (donations, interest, and loan repayments) organization with celebrity supporters and fancy parties. My friend’s involvement has dwindled to that of adviser after holding every position imaginable over the years, and financial ‘experts’ make up a board of directors who are set "to guide the organization to the forefront of microfinance."
Uh... wait a minute. Where’s the part on the website that tells me what sort of interest rate they are charging these people? Additionally, they say there’s a “savings component” that requires each borrower to place funds in the care of this microfinance organization, ostensibly as collateral that will earn interest for these poor people. But how much funds/savings are they required to deposit? And how much interest do the borrowers earn on this savings account? How much interest does the org earn while they’re keeping it safe for them? I’m not seeing transparency here, and that makes me nervous.
And then recently I got this invite to become a lender through Kiva, an MFI based in California with a novel means to attract capital via a website ... I perused the website for answers to the same types of questions. Nothing specific (to be fair, they do post the “average” interest rate used by their many partners in the field), but plenty of photos of poor people smiling with names and locations and types of businesses they want to promote. Bingo. I have an emotional connection! And the invite said that I wouldn’t even have to loan my OWN money because some anonymous donor wants to promote Kiva by giving money to people like me so I can learn about Kiva and become a lender in my own right. Whew, how philanthropic of Anonymous!
My worst fears about microfinance were recently realized after reading Confessions of a Microfinance Heretic by Hugh Sinclair, a long-time veteran of the industry who became extremely unpopular for blowing the whistle on the dubious practices within the industry (the BIG industry). His book has only just been published, and he sees it necessary to “lay low” for awhile given the fact that his life has already been threatened for exposing some very profitable players in the microfinance sector along with some creative and unethical practices. I couldn’t begin to explain here all the schemes employed by those with fancy credentials who extort money from the poor, but here are a few highlights from Sinclair’s book:
1) In 2009 a Kiva website user discovered 2 photos of the same poor person on different pages of the Kiva website where they were given different names and profiles. One photo was cropped slightly different than the other, and they were time-stamped only one minute apart.
2) Despite all sorts of evidence of fraud and direct notification of that fraud to investors, large pension funds (yours perhaps?) continue to invest in a Nigerian MFI known as LAPO that charges up to 150% interest (even more on occasion) on loans to the poor in that country. Why would these large 1st world pension funds continue to support such blatant misuse of pensioners' dollars? Because LAPO successfully repays the investor loans at a high interest rate. And of course, it’s not really about the poor at all. As you might guess, some of these MFIs collect debts by threatening their debtors. One debtor sold her child into prostitution in order to pay up. And a rash of suicides by borrowers in India made headlines.
3) Due to a clause in microfinance regulations, the same fraudulent Nigerian fund recently employed an option called “transformation” that allowed it to (presto!) become a bank and disburse a percentage of their holdings to the CEO and shareholders. This option is open and available to any MFI that wants to go there.
4) Kiva’s number one partner in the field is the very same Nigerian MFI mentioned above. (Thus Sinclair reveals that those whose emotional buttons have been moved to lend may inadvertently be condoning fraud, intimidation, and absurdly high interest rates on loans made to the poorest of the poor.)
5) In 2010 Kiva held $42 million in idle cash (money waiting to be loaned or returned), none of which belongs to Kiva but from which Kiva earns a very tidy interest income for itself. Much of that money comes from Wal-Mart ($1million), Microsoft ($65,729), Visa ($1million), Google ($58,303) (figures from 2007), and from people like me who gave $4,850,507 in 2010.
6) A good portion of loans to the poor are not made to lift people up out of poverty but are consumer loans, used to purchase such things as televisions. Exact percentages are hard to come by since documentation is not usually a requirement for a loan. (There are exceptions to this, and Sinclair is quick to note that not every MFI operates so carelessly.)
Despite all this, I just might hesitate to pass along this criticism of microfinance IF there was evidence that it actually helped people escape poverty. But in fact, very little evidence exists at all to show that microlending has any effect -- though Sinclair points out that microfinance can and does work in the very small percentage of organizations that adhere to their actual mission statement. (He mentions Mongolia and Ecuador as places where he has witnessed ethical and honest lending.) But as David Korten, one of my favorite thinkers, notes in the foreword: “...many microcredit programs are nothing more than predatory lending schemes rebranded as socially responsible investment opportunities.”
Though it’s still relatively unpopular to criticize microlending, the NY Times has done it, and more and more whistleblowers like Sinclair are stepping forward. By reviewing Sinclair’s book (which is thoroughly documented in the bibliography, btw) I’m effectively adding my voice to the fray. Next time I travel to a third world country, I will look for a real person who could perhaps use a hand up and offer her/him mine - up close and in person.
And in case you’re unfamiliar with microfinance, in a nutshell it’s a way of providing loans to poor people so they can lift themselves up out of poverty. Sometimes this means a loan to purchase goods to re-sell, sometimes a sewing machine to help increase a hand-sewer’s productivity, sometimes a couple of goats so a small farmer can sell goat milk in their community. It all sounds very simple -- the loans are usually repaid within a matter of months, all scheduled and carefully monitored by the non-profit lending institution in the field (meaning the partner institution located in the country where the loan is made).
I need to back up a bit here and say that my interest in this issue became personal years ago when a friend fresh out of college set up a non-profit microfinance institution (MFI) and asked me to donate (please notice that my friend’s org depends on donations, not loans, which makes its operating model different from most of the other players). Knowing this friend has a heart of gold, I didn’t hesitate and have followed the growth of my friend’s org from a one-person show involving repeated trips to one of the poorest spots on the planet to disburse donated funds to what is now a large, well-funded (donations, interest, and loan repayments) organization with celebrity supporters and fancy parties. My friend’s involvement has dwindled to that of adviser after holding every position imaginable over the years, and financial ‘experts’ make up a board of directors who are set "to guide the organization to the forefront of microfinance."
Uh... wait a minute. Where’s the part on the website that tells me what sort of interest rate they are charging these people? Additionally, they say there’s a “savings component” that requires each borrower to place funds in the care of this microfinance organization, ostensibly as collateral that will earn interest for these poor people. But how much funds/savings are they required to deposit? And how much interest do the borrowers earn on this savings account? How much interest does the org earn while they’re keeping it safe for them? I’m not seeing transparency here, and that makes me nervous.
And then recently I got this invite to become a lender through Kiva, an MFI based in California with a novel means to attract capital via a website ... I perused the website for answers to the same types of questions. Nothing specific (to be fair, they do post the “average” interest rate used by their many partners in the field), but plenty of photos of poor people smiling with names and locations and types of businesses they want to promote. Bingo. I have an emotional connection! And the invite said that I wouldn’t even have to loan my OWN money because some anonymous donor wants to promote Kiva by giving money to people like me so I can learn about Kiva and become a lender in my own right. Whew, how philanthropic of Anonymous!
My worst fears about microfinance were recently realized after reading Confessions of a Microfinance Heretic by Hugh Sinclair, a long-time veteran of the industry who became extremely unpopular for blowing the whistle on the dubious practices within the industry (the BIG industry). His book has only just been published, and he sees it necessary to “lay low” for awhile given the fact that his life has already been threatened for exposing some very profitable players in the microfinance sector along with some creative and unethical practices. I couldn’t begin to explain here all the schemes employed by those with fancy credentials who extort money from the poor, but here are a few highlights from Sinclair’s book:
1) In 2009 a Kiva website user discovered 2 photos of the same poor person on different pages of the Kiva website where they were given different names and profiles. One photo was cropped slightly different than the other, and they were time-stamped only one minute apart.
2) Despite all sorts of evidence of fraud and direct notification of that fraud to investors, large pension funds (yours perhaps?) continue to invest in a Nigerian MFI known as LAPO that charges up to 150% interest (even more on occasion) on loans to the poor in that country. Why would these large 1st world pension funds continue to support such blatant misuse of pensioners' dollars? Because LAPO successfully repays the investor loans at a high interest rate. And of course, it’s not really about the poor at all. As you might guess, some of these MFIs collect debts by threatening their debtors. One debtor sold her child into prostitution in order to pay up. And a rash of suicides by borrowers in India made headlines.
3) Due to a clause in microfinance regulations, the same fraudulent Nigerian fund recently employed an option called “transformation” that allowed it to (presto!) become a bank and disburse a percentage of their holdings to the CEO and shareholders. This option is open and available to any MFI that wants to go there.
4) Kiva’s number one partner in the field is the very same Nigerian MFI mentioned above. (Thus Sinclair reveals that those whose emotional buttons have been moved to lend may inadvertently be condoning fraud, intimidation, and absurdly high interest rates on loans made to the poorest of the poor.)
5) In 2010 Kiva held $42 million in idle cash (money waiting to be loaned or returned), none of which belongs to Kiva but from which Kiva earns a very tidy interest income for itself. Much of that money comes from Wal-Mart ($1million), Microsoft ($65,729), Visa ($1million), Google ($58,303) (figures from 2007), and from people like me who gave $4,850,507 in 2010.
6) A good portion of loans to the poor are not made to lift people up out of poverty but are consumer loans, used to purchase such things as televisions. Exact percentages are hard to come by since documentation is not usually a requirement for a loan. (There are exceptions to this, and Sinclair is quick to note that not every MFI operates so carelessly.)
Despite all this, I just might hesitate to pass along this criticism of microfinance IF there was evidence that it actually helped people escape poverty. But in fact, very little evidence exists at all to show that microlending has any effect -- though Sinclair points out that microfinance can and does work in the very small percentage of organizations that adhere to their actual mission statement. (He mentions Mongolia and Ecuador as places where he has witnessed ethical and honest lending.) But as David Korten, one of my favorite thinkers, notes in the foreword: “...many microcredit programs are nothing more than predatory lending schemes rebranded as socially responsible investment opportunities.”
Though it’s still relatively unpopular to criticize microlending, the NY Times has done it, and more and more whistleblowers like Sinclair are stepping forward. By reviewing Sinclair’s book (which is thoroughly documented in the bibliography, btw) I’m effectively adding my voice to the fray. Next time I travel to a third world country, I will look for a real person who could perhaps use a hand up and offer her/him mine - up close and in person.
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