By retelling his experiences working in the microfinance field, Hugh Sinclair tells the story of a sector that – he believes – has become corrupt and focused on profit. However, he does believe in the potential of microfinance and sees the light at the end of the tunnel by offering a number of concrete advice to a range of stakeholders in the industry.
The hopeful idealist
Hugh Sinclair writes about his personal experiences working with both Microfinance Institutions (MFIs) and microfinance funds. He started his microfinance career as a hopeful idealist, believing that microfinance was how the poor would be launched out of poverty. As time went by, however, the book explains how he lost faith in what he saw as an industry that had been taken over by greed. This lead to exploitation of the poor through exorbitant interest rates and unfair loan terms. According to Sinclair, microfinance has gone from being the emancipator of the poorest, to a tool for exploitation of the weakest. In the book he tries to explain the main problems with the industry as he sees it and what can be done about them, because he still believes that microfinance has the potential to relieve people from poverty.
The middlemen are the bad guys
Starting with his main critique of the sector, he claims that the main problem with microfinance does not lie in either its basic idea, the capital providers (MFIs) nor the poor; instead it lies with the intermediaries. The intermediaries are the funds who pool money bound for microcredit, and those they invest their capital in are the MFIs. He claims that these players have become driven by making a profit rather than achieving social impact. This has led to MFIs offering loans with unfair terms and without collateral or proper screening. The reason for this is basically that the more loans they distribute, the more money they make. The incentive scheme becomes a recipe for failure and irresponsible microlending.
Fumbling in the dark
Next in line for criticism are the microfinance funds, such as Blue Orchard and responsAbility, where Sinclair also places P2P lending services. These institutions want to lend as much as possible of their client’s money to the MFIs to maximize their own profits, and are thus blind to the poor ratings and warning signs they receive about the MFIs they invest in. Sinclair claims that they keep their investors in the dark as long as possible concerning the interest rates the end-user is charged, all to keep up the facade of offering social impact loans while maximizing their own profits. Microfinance has simply become a way for people looking for an easy buck to trick well-intended investors to invest their money in high risk loans, while collecting usurious interest rates.
There is still hope
Nevertheless, Sinclair has not written a book that is without hope. He does believe in the idea of microfinance, his claim is simply that to a large extent it has not been executed properly. He mentions a number of MFIs, funds, and P2P-lending sites that do have good practices. He ends his book with a number of concrete advice to the different actors in the sector – investors, funds, MFIs, regulators and borrowers. In short, he recommends stricter regulation, increased transparency regarding interest rates and loans terms, and finally always keeping in mind the importance of having social impact at the top of the priority list.
The risk of misreading conclusions
When Sinclair wrote this book, I imagine that he was frustrated with what he saw as an industry with the potential to seriously achieve change being used in all the wrong ways. He therefore wanted to change this industry by writing a book which enlightens the general public, who in turn might put pressure on the major microfinance funds and MFIs to change their practices. However, in making this book available to a wider audience, he simplifies, and when he simplifies, people make simplified conclusions. Thus a likely result of this book is that some people might use his personal experiences to dismiss the whole idea of microfinance, even though his book revolves around his personal experiences working with microcredit. It’s therefore important to point out that there’s a substantial difference between drawing soft conclusions based on a case-study, and by generalizing these conclusions to the whole sector.
The lender-borrower symbiosis
Nevertheless, Sinclair does bring to light a number of very important issues to keep in mind when working with microfinance. The heart of the matter is that a good investment is good for both lender and borrower. Profiteers in the microfinance industry with little regard for the well-being and development of the borrower are shooting themselves in the foot. Their profits may come quick, but they will not be sustainable in the long run. Wise loans give a stable yield and increase the productivity and well-being of the borrower, enabling him or her to take another loan to grow further.
Weeding out the bad seeds
Whether or not to invest in microfinance opportunities is ultimately up to the sources of capital: the lenders. If lenders refuse to hand their money to microfinance funds who collaborate with irresponsible MFIs and are not honest with how much they charge, these entities will slowly but surely be excluded from the market.
Let’s weed out the bad seeds! Say no to APRs above market rates, say yes to transparency. That’s (more or less) Sinclair’s conclusion, and we can only agree to that.