The sorry record of microcredit laid bare by an industry veteran

A review of Confessions of a Microfinance Heretic: How Microlending Lost Its Way and Betrayed the Poor, by Hugh Sinclair

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“Some microfinance is extremely beneficial to the poor, but it is not the miracle cure that its publicists would have you believe. Microfinance has been hijacked by profiteers, and we need to reclaim it for the poor. The problem is not with a few rogue operators, alas, but with systemic flaws that permeate the sector.”

Thus does Hugh Sinclair lay out the thesis he pursues in Confessions of a Microfinance Heretic. If you skip over this statement in the opening pages of the book, you could easily conclude that Sinclair can see no good at all in the $70 billion industry that has grown up under the impetus of Muhammad Yunus’ 2006 Nobel Peace Prize. After all, Sinclair writes — at least twice — that he wouldn’t invest a single dollar in microfinance today. Nonetheless, he insists that the “debate is not whether microfinance works, but how the inherent conflicts of interest can be managed.”

The systemic flaws Sinclair perceives are eye-opening:

• A majority of the money loaned to poor people goes not to help them launch or sustain microbusinesses to supplement family income but rather for current consumption, sometimes to buy food during a time when there’s not enough money coming in, sometimes just to buy TV sets.”Estimates for consumption loans range from 50 percent to 90 percent of all microfinance loans,” depending on the study. As Sinclair points out, citing numerous sources, the proportion of entrepreneurs among the poor is no bigger than it is among the rich. It’s naive of us to expect otherwise.
• The interest rates charged for microloans are, far too often, prohibitively high. Muhammad Yunus’ benchmark — 10 to 15 percent above the cost of money — is rarely observed. Though there are indeed many, mostly small, nonprofit MFIs (Microfinance Institutions, generally microloan lenders) that charge no more than 25 or 30 percent, the bigger institutions, and most of the for-profit banks in the industry, typically charge far more. In one notorious case, the effective interest rate runs as high as 195 percent, but there are many other instances in which the rate exceeds 100 percent.
• The amounts of money loaned by MFIs are far too small to permit businesses to grow to a size where they may employ workers outside the family. In fact, to the extent that businesses remain family-run, they frequently employ even the youngest children, sometimes withdrawn from school to work in the business. However, there’s another side to this question, as Sinclair reveals in an exchange with one businesswoman: “[W]e asked her about her future plans for the business, and whether she thought it could be built up further and be a useful business for her children to take over. ‘You misunderstand me. I don’t do this job because I like it or want to grow it into a big business. I do it so my children will never have to do work like this.'”
• In countries where local laws and a lack of government oversight give free rein to the MFIs, competition run wild among them has sometimes led to credit crises. In India’s Andhra Pradesh state, for example, “There were more microloans than poor people.” And in Nicaragua “total lending by MFIs was estimated at $420 million in 2008, in a country of about 5.5 million, not all of whom were poor (and MFIs generally don’t lend to children).” Microloan customers frequently borrowed from several of the country’s 19 MFIs — the nationwide average was four — often to be able to pay back loans to other MFIs. “One particularly ambitious client in Jalapa had managed to rack up $600,000 in micro-loans.” As Sinclair disclosed in a talk he gave in Berkeley a few weeks ago, Nicaragua was only the first of several countries where the microcredit bubble is likely to burst. Stay tuned, he said.
• The profit motive appears to have become the central preoccupation of the microfinance funds, which function like private equity funds, gathering together investment dollars and placing them in selected MFIs. Even some of the biggest and most prestigious of these funds — including the Grameen Foundation (USA), Calvert Foundation, Kiva.org, and BlueOrchard (the world’s largest) — have been tainted by longstanding investments in some of the most egregiously exploitive MFIs, brushing aside mountains of evidence that their investments were helping victimize poor people in Nigeria, Mexico, and other countries.

Despite all this, there is NO documented evidence that microfinance has achieved any reduction at all in the level of poverty. As a 2007 article in the Harvard Business Review stated, “In 1991, for example, Bangladesh ranked 136th on the UN Development Programme’s Human Development Index (a measure of societal well-being); 15 years later it ranked 137th.” And Sinclair writes, “In 2001, Nicaragua was the 106th poorest country in the world . . . Microfinance was almost unheard of in Nicaragua at this point, and there were no large microfinance funds throwing money around. By 2009, when the full Nicaraguan microfinance meltdown occurred, Nicaragua had slipped to 124th place.”

Hugh Sinclair is no cranky, slapdash journalist taking on a controversial subject for the sake of selling books. He is a ten-year veteran of the microfinance industry and has been involved as either an employee or a consultant in dozens of MFIs around the world and in several microfinance funds. He clearly knows whereof he writes, his citation of sources is extensive, and his publisher, Berrett-Koehler, is a highly respected source of books on business and current affairs.

Confessions of a Microfinance Heretic is an important book that should be must reading for anyone involved in international development.

Social Enterprise: A Resource List

Here are the books, periodicals, blogs, websites, and organizations I’ve come across in exploring the field of social enterprise. This is by no means a comprehensive list (although, so far as I can tell, it’s longer than any other I’ve found). And I haven’t read everything here or engaged with all the websites or organizations in the list — though I’m working on it.

I’ve boldfaced those items with which I am personally familiar and recommend as good sources of information and insight about social entrepreneurship. The books I’ve reviewed in this blog are linked to their reviews.

BOOKS

Bryan Bell, Editor, Good Deeds, Good Design: Community Service Through Architecture (2004)

David Bornstein, How to Change the World: Social Entrepreneurs and the Power of New Ideas, Updated Edition (2007)

—, The Price of a Dream: The Story of the Grameen Bank (1997, 2005)

— and Susan Davis, Social Entrepreneurship: What Everyone Needs to Know (2010)

Ben Cohen and Mal Warwick, Values-Driven Business: How to Change the World, Make Money, and Have Fun (2006)

Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven, Portfolios of the Poor: How the World’s Poor Live on $2 a Day (2009)

Jim Collins, Good to Great and the Social Sectors: A Monograph to Accompany Good to Great (2005)

Leslie R. Crutchfield and Heather McLeod Grant, Forces for Good: The Six Practices of High-Impact Nonprofits, 2nd Edition (2008, 2012)

J. Gregory Dees, Jed Emerson, and Peter Economy, Strategic Tools for Social Entrepreneurs: Enhancing the Performance of Your Enterprising Nonprofit (2002)

Cheryl L. Dorsey and Lara Galinsky, Be Bold (2006)

John Elkington and Pamela Hartigan, The Power of Unreasonable People: How Social Entrepreneurs Create Markets That Change the World (2008)

Vijay Govindarajan and Chris Trimble, Reverse Innovation: Create Far From Home, Win Everywhere (2012)

Adam Hochschild, Bury The Chains: Prophets and Rebels in the Fight to Free an Empire’s Slaves (2006)

Tracy Kidder, Mountains Beyond Mountains: The Quest of Dr. Paul Farmer, a Man Who Would Cure the World (2003)

Paul Charles Light, The Search for Social Entrepreneurship (2008)

Kevin Lynch and Julius Walls, Jr., Mission, Inc.: The Practitioner’s Guide to Social Enterprise (2008)

Johanna Mair, Jeffrey Robinson, and Kai Hockerts, Social Entrepreneurship (2006)

Pavithra Mehta, Infinite Vision: How Aravind Became the World’s Greatest Business Case for Compassion, (2011)

Alex Nicholls, Editor, Social Entrepreneurship: New Models of Sustainable Social Change (2006)

Jacqueline Novogratz, The Blue Sweater: Bridging the Gap Between Rich and Poor in an Interconnected World (2009)

Paul Polak, Out of Poverty: What Works When Traditional Approaches Fail (2009)

C. K. Prahalad, Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Revised and Updated (2004, 2009)

Beverly Schwartz, Rippling: How Social Entrepreneurs Spread Innovation Throughout the World (2012)

Rupert Scofield, The Social Entrepreneur’s Handbook: How to Start, Build, and Run a Business That Improves the World (2011)

Cynthia E. Smith, Design for the Other 90% (2009)

Social Enterprise Alliance, Succeeding at Social Enterprise: Hard-Won Lessons for Nonprofits and Social Entrepreneurs (2010)

Jane C. Wei-Skillern, James E. Austin, Herman B. Leonard, and Howard H. Stevenson, Entrepreneurship in the Social Sector (2007)

Wilford Welch, Tactics of Hope: How Social Entrepreneurs Are Changing Our World (2008)

Muhammad Yunus, Creating a World Without Poverty: Social Business and the Future of Capitalism (2008)

PERIODICALS

Stanford Social Innovation Review (Stanford University), http://www.ssireview.org/

Innovations: Technology, Governance, Globalization (MIT), http://www.mitpressjournals.org/loi/itgg

BLOGS

Evan Carmichael’s Top 30 Social Entrepreneurship Blogs to Watch in 2012, http://www.evancarmichael.com/blog/2012/04/10/the-top-30-social-entrepreneur-blogs-to-watch-in-2012/

Skoll Foundation Social Edge, http://www.socialedge.org/

WEBSITES

World Resource Institute’s NextBillion.net, http://nextbillion.net/

CSRWire, http://www.csrwire.com/

Alltop’s Social Entrepreneurship Coverage, http://social-entrepreneurship.alltop.com/

Catalyst Fund’s Social Business blog, http://www.clearlyso.com/

Dowser.org, http://dowser.org/

E-180’s Top  25 Social Entrepreneurship Websites, http://blog.e-180.com/en/2009/02/our-top-25-social-entrepreneurship-websites/

ORGANIZATIONS

Institute for Social Entrepreneurs, http://www.socialent.org/

Ashoka: Innovators for the Public, http://www.ashoka.org/

Echoing Green, http://www.echoinggreen.org/

Skoll Center for Social Entrepreneurship (Oxford University), http://www.sbs.ox.ac.uk/centres/skoll/Pages/default.aspx

Social Venture Network, http://svn.org/

Social Enterprise Alliance, https://www.se-alliance.org/

Net Impact, http://netimpact.org/

University Network for Social Entrepreneurship, http://bit.ly/KwqWgz

BUSINESS SCHOOLS

Bainbridge Graduate Institute, http://www.bgi.edu/

Center for Responsible Business, Haas School of Business, University of California Berkeley, http://responsiblebusiness.haas.berkeley.edu/

Center for Social Innovation, Graduate School of Business, Stanford University, http://csi.gsb.stanford.edu/

Presidio School of Management, http://www.presidioedu.org/

Babson College, MBA in Entrepreneurship,  http://www.babson.edu/graduate/Pages/landing-graduate.aspx?gclid=CPm_1YL37rACFUQaQgodizXjug

Marlboro College Graduate School, MBA in Sustainability, https://gradschool.marlboro.edu/academics/mba/

Fuqua School of Business, Duke University, http://www.fuqua.duke.edu/student_resources/academics/concentrations/social_entrepreneurship/

Also see Aspen Institute rating of top 30 SUStainable MBA programs,  http://www.topmba.com/mba-rankings/sustainability-mba