FINALLY, I finished this now famous Sinclair’s book yesterday. I thought it is a very easy and captivating read overall, especially that I recognized many of the names and organizations he mentioned in his book ( I confess I smiled at how he describes some of them).
Hugh Sinclair whistle-blowing story started in Amsterdam, working in the advisory department of a Dutch Micro-finance Fund, so the reference to the Dutch players is quite obvious. Being myself in the Hague, and working at the Dutch development bank, I can tell you that it created some waves and generated some serious discussions around here (and hence my interest in reading it in the first place). However, this booking is nothing like Confessions of a Wall Street Analyst (that’s what I though of when reading the title at first). The latter is a must-read book about the telecom bubble, the huge conflict of interests across Wall Street that resulted to billions worth of losses. The scale here is much smaller! The book is in fact mainly about a “bad” microfinance institution in Nigeria with lousy IT systems and outrageous rates, to which many “social” investors kept flooding , despite Sinclair’s warnings and reports. Hence the question how “socially driven” this sector is? Similar accusation are made to Kiva and Accion and other visible leaders of the sector.
Working already in the sector for more than half a year, I have not learnt anything new frankly. I know there is lot of people BSing (read my previous post). I have already went through dozens of reports about “abuses”, “overheating markets” and ” over-indebtedness” in Microfinance, and this is something we keep in mind very seriously. Every investment proposal undergoes the close scrutiny of the Investment Committee, which cannot be easily deceived by a nice story of a woman who bought a sewing machine. Investment revolves around numbers, rates, balance sheets and market reports that promise an equitable profit as well as a demonstrated development impact.
Indeed, Microfinance reaps real benefits in smoothing out entrepreneurs’ cash flows and in improving the life of the poor, though it does not totally eradicates poverty as some fundraisers wanted everyone to believe. For me, Microfinance is an established BoP industry that has to be developed and financed like water, education and energy.
Nonetheless, Hugh Sinclair did mention interesting trends that I have seen during my short but dense Microfinance experience:
– Funds (and this is not in Microfinance only) tend to over promise. With a high incentive to push down their costs, they prefer to make large deals with familiar clients (and hence many investors running after the same usual suspects) with minimal due diligence and impact measurement;
– The social mission of Microfinance investors tend to make some clients and partners forget they are basically financial instruments and vehicles with different incentives than those of the local non profit at the neighboring school. They deal with millions, hard-hitting competition and serious returns on investments. They can have very short-term views and rarely care about developing the financial infrastructure or the supervision;
– Microfinance is full of people truly caring about the financial inclusion, and I regularly meet them (see my previous post). Hundreds of organizations are working on developing the regulation, the standards and the best practices. Large percentage of MFIs are run very well, with genuine care about the end client, and Sinclair does aknowledge this as well.
I guess the book had the effect of any book written about a “nice cause” that reveals some serious flaws. A quick google search will show similar books written about Greenpeace, WWF, about the CSR industry, the Gates foundation, Fair Trade etc. That does not imply that everything in what Gates Foundation or Fair Trad sucks. Such books can however only help improve, if not the industry, the understanding of how complex such “good causes” are.
Sinclair’s Blog here