Ideas to Action:

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David Roodman's Microfinance Open Book Blog


Note: the book is out and I have reviewed it.

The author sent me a draft for comment. You can see from the cover why the publisher was interested. I'll withhold final judgment on the text until I've seen the final version. The draft concerned me---as with Milford Bateman's book, at least as much for the manner of argument as the conclusions.

The title doesn't quite make sense. What would a microfinance heretic confess? That he'd fabricated his heresy? The idea is more like: Heretical Confessions of a Microfinance Insider.

Cover, Hugh Sinclair, Confessions of a Microfinance Heretic

Here's the blurb:

Part memoir, part financial detective story, and part exposé, this is the account of a microfinance insider who joined the industry in the early 2000s with a newly minted MBA and the intention to do good in the world. But over the course of eight years, he became increasingly disillusioned and alarmed. Eventually he decided to do something about it: he became an anonymous source for The New York Times, providing information for a series of stories that covered an increasing number of microfinance scandals. The author traveled the world, from Mexico to Mongolia, with Nigeria and Mozambique in between, working for several banks, agencies and institutions. He saw microfinance at all levels, from the first-world banks who called him in the night to hush up negative publicity, to the street vendors whose lives were sometimes transformed by microloans---but all too often were not. Because microcredit is largely unregulated and poorly understood by individual investors the potential for abuse is rampant. And seduced by the high pay-back rate of the loans, banks like DB and Citibank helped push the microfinance sector to bubble-like highs. The author describes his firsthand experiences of the result: rampant corruption, exorbitant interest rates, and microloans leading to fraud, child labor, and even suicide. Much of the book centers on the scandal he uncovered involving the corrupt Nigerian nonprofit LAPO and its dealings with industry darlings Kiva and Triple Jump. Microfinance can work---the author had direct experience of this too, and lays out the conditions necessary for success. But he authoritatively debunks the myth that putting the poor of the world into debt is always a good idea.

Update: Here's a longer description:

  • A deeply personal story written by a microfinance insider who was once tapped as an anonymous source for a New York Times exposé
  • Reveals the shocking truth of the industry once hailed as the miraculous solution to world poverty
  • Profiles the few shining exceptions to industry-wide corruption and offers solutions to clean up the rest

Offering inspiring success stories, the microfinance industry depends on the faith of investors that small loans can transform the lives of the poor. But as Hugh Sinclair points out, very little solid evidence exists that microloans make a dent in long-term poverty. Evidence does exist for negligence, corruption, and methods that border on extortion. Part exposé, part memoir, and part financial detective story, this is the account of a one-time true believer whose decade in the industry turned him into a heretic.

Sinclair worked with several microfinance institutions and funds as he traveled from Mexico to Mongolia, with Nigeria, Holland, and Mozambique in between. He couldn’t help but notice that even with a booming $70 billion industry on their side, the poor didn’t seem any better off in practice. Exorbitant interest rates led borrowers into never-ending debt spirals, and aggressive collection practices resulted in cases of forced prostitution, child labor, suicide, and nationwide revolts against the microfinance community.

With characteristic intelligence and biting wit, Sinclair weaves a shocking tale of a system increasingly focused on maximizing profits. The situation worsened when large banks, attracted by the high repayment rates of overpriced loans, hijacked the sector and created a microfinance bubble. Sinclair details his discovery of several scandals, one of the most disturbing involving a large African Microfinance institution of questionable legality which charged interest rates in excess of 100% per year, and whose investors and supporters included some of the most celebrated leaders of the microfinance sector. Sinclair’s objections were first met with silence, then threats and attempted bribery, a court case, and eventually led him to become a principle whistleblower in a sector that had lost its soul.

Microfinance can work—Sinclair describes moving experiences with several ethical and effective organizations and analyzes what made them different. But without the fundamental reforms that Sinclair recommends here, microfinance will remain an “investment opportunity” that will leave the poor with hollow promises and empty pockets.

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.