Much of the Indian microfinance crisis was fuelled because of the irresponsible investments made by many stakeholders including microfinance investment vehicles or MIVs. We certainly cannot have MFIs practice responsible microfinance when their investors are ‘irresponsible’
In his recent book, “Confessions Of A Microfinance Heretic: How Microlending Lost Its Way And Betrayed the Poor”, Hugh Sinclair has made several strong claims (Why blame the MFIs alone?; Should not microfinance investment vehicles be judged by the same standards set for retail MFIs?; and Does Sinclair’s Open Challenge Make His Claims True?) with regard to Triple Jump in the now famous LAPO, Nigeria case. And to try and verify Sinclair’s claims, we did some background research on Triple Jump (TJ) and also requested them for feedback with regard to the claims made by Hugh Sinclair. Here is what we found…
First, for some background on Triple Jump and then to the actual LAPO case…
The Triple Jump Annual Report 2007i, dated May 2008, (Page No.13), notes that,
“Triple Jump is convinced that growth and reinforcement of the microfinance sector is an important precondition to the socio-economic development of these groups. As such, the existence of solid and professional MFIs (microfinance institutions) is essential. A number of instruments can help MFIs realise their full potential. After the initial phase, which may involve donations, we are referring to:
Triple Jump seeks to stimulate the economies of developing countries from the bottom upwards. Helping MFIs to grow and become more professional is our way of broadening access to a whole range of financial services for small entrepreneurs in developing countries. MFIs go through various stages in their development: emerging, expanding and mature. Triple Jump supports them during all these stages. The needs and requirements vary per phase and depend on the context of the MFI, so we advocate a tailor-made approach customized to suit the individual situation of the MFI.”
Please see Figure 1 below that contextualizing various funds at Triple Jump.
The Triple Jump Annual Report 2007, dated May 2008 (Page No.15), further notes that:
“Triple Jump forms a link between the western capital markets and the financial sectors in developing countries. We manage a broad spectrum of funds specializing in microcredit and we provide a wide variety of services designed to support MFIs in the three stages of their development: emerging, expanding and mature.
Triple Jump focuses on MFIs which are committed to:
The Triple Jump Annual Report 2007, dated May 2008, Page No.18, then describes the investment process as shown in Figure 2 and 3 below
Now for the most imporatnt aspect—due diligence due by Triple Jump—and please read this carefully. As the Triple Jump Annual Report 2007, dated May 2008, Page No.19, notes
“One of the characteristics that distinguishes Triple Jump from its competitors is its thorough due diligence process. At Triple Jump, we put great emphasis on carrying out the client assessment ourselves. As such, our due diligence process is an essential part of the Triple Jump approach. It not only allows us to analyse investment risk, but also helps us to build a strong relationship with our partners and to learn from them. Our assessment focuses on the legal, organizational, commercial and financial aspects of the organization, as well as a thorough analysis of market and country risks.”
The same report (Page No.19) further notes that:
“Risk management is an important aspect of portfolio management. Triple Jump assesses risk with a thorough pre-investment analysis, disciplined monitoring, a problem-solving attitude, and the diversification of investments.
Having set this background, let us move to the facts in the LAPO Case. MicroRate’s 2007 rating report (Lift Above Poverty Organization (LAPO) Rating Report by MicroRate, December 2007) clearly mentions the following:
“‘Client savings intermediation without a license and without an appropriate structure’ as a weakness” (Page No. 1)
“Borrowings are well diversified among a large number of mainly foreign lenders. Approximately one-third of funding is provided by client deposits even though as an NGO, LAPO is not licensed to mobilize savings.” (Page No. 5)
“With a cost of only 4%-5%, savings deposits are a much cheaper source of funding than commercial credits. Recognizing this, LAPO has strongly pushed savings mobilization. In MicroRate’s opinion, this policy bears a serious risk since as a NGO, LAPO is neither authorized nor adequately equipped to mobilize savings from the public.” (Page No. 5)
“LAPO’s present policy using savings deposits to fund its operations-besides being illegal-exposes its clients to risks of which they are unaware.” (Page No.6)
The ratings and other public domain material also point to other serious issues and weaknesses in the investee (LAPO) apart from its illegal collection and intermediation of client savings: a) an illegal loan product (perhaps) because illegal savings collection was a part of it; b) inordinately high interest rates; c) conflict of interest in terms of the auditor being related to the CEO and other such issues; d) high levels of client desertion; e) lack of transparency with regard to data (which led to MicroRate’s subsequent withdrawal of its rating); and f) poor governance among other things.
That being the case, the key question that arises here is:
How did Triple Jump’s unique due diligence process (as claimed in its annual report of 2007, dated May 2008) allow investment in LAPO when there was so much (potentially damaging) public domain information available with regard to illegal collection and intermediation of client sabings by LAPO as well as other weaknesses?
This question needs serious and transparent answers from Triple Jump and its statement (sent to the author by e mail and shown as Exhibit 1 below) hardly provides any answer with regard to the serious issues at hand.
In fact, a look at Exhibit 1 shows that Triple Jump has made a number of statements and one of them is given below:
“The book speaks of Triple Jump misleading and angering its principles fiver year ago. Again, this statement is demonstrably false. Our principals have at the time all confirmed to have been correctly informed and still are very satisfied with the services Triple Jump provides them. In fact, all have increased the amounts entrusted to Triple Jump significantly over the years.” (4th Paragraph, Page 1, Triple Jump’s Response, Dated July 2012)
This statement has very serious repercussions and let us gets into this further by looking at the ASN – Novib Fund annual report 2007ii, dated 19 March, 2008, (Pages No. 8 and 9) which notes the following under the head, LAPO, Nigeria:
“In February the ASN-Novib Fund approved a loan of EUR 1 million to LAPO in Nigeria. LAPO is the second microfinance institution in Africa to which the ANF has provided a loan. Various studies have revealed that Nigeria is one of the poorest countries in the world. For more than 30 years Nigeria has been rocked by unrest and military regimes, with the result that the country has barely developed. The majority of the people have had to rely on income from their own small-scale activities which lend themselves exceedingly well to micro-funding. Although micro-credit is still in its infancy in Nigeria, with a loan portfolio of $7.5 million and 84,000 customers LAPO is the absolute epitome of micro-lending in that country. LAPO has made the leap from receiving a loan from the Oxfam Novib fund for less developed organisations to one from the ASN-Novib Fund for more mature organisations. LAPO services the poorest population groups in Nigeria. LAPO’s internal surveys of its customers have revealed that their circumstances have improved by 80% compared with the situation prevailing before they had received a loan from it. In conclusion LAPO is actively involved in the development of Nigeria’s national regulations governing microfinance institutions, which will provide legal protection for any savings which poor people hold with such organisations.”
Now given the facts that existed with regard to LAPO in the public domain and its illegal collection/intermediation of client savings, several key questions arise:
These are unanswered questions indeed and they certainly merit an answer from the ASN Novib Fund as well as Triple Jump. In fact, when I asked Triple Jump to prove Sinclair’s assertions as false (as they had said in their response that his claims are DEMONSTRABLY FALSE), I just got an answer saying that
“Mr Sinclair’s assertions in his book regarding Triple Jump are incorrect. The assertions pertain to an episode of five years ago and are neither relevant for the industry as a whole nor for the way Triple Jump operates. The passages you refer to are at best moderately readable fiction that we think best left for account of the author.” (E Mail sent to author by Triple Jump, Dated 9th July 2012)
I am sorry but I have to disagree with the above response from Triple Jump because MIVs (microfinance investment vehicles) can neither operate above the law not be seen to operate above the law. Without any doubt, they need to be made as accountable and as responsible as MFIs—make no mistake about that! In fact, much of the crisis in India was fuelled (perhaps) because of the irresponsible investments (debt and equity) made by many stakeholders including MIVs. And let us therefore understand that the first dictum of responsible microfinance is RESPONSIBLE INVESTING. We certainly cannot have MFIs practice responsible microfinance on the ground when their investors are ‘irresponsible’. That needs to be understood and appreciated by the global microfinance industry!
And before I sign off, I want to state that my purpose in doing this research and analysis is not just to provide support for Hugh Sinclair’s claims. More importantly, I think that if there are real issues in what he has said, we must address these in fair and square manner. That is the hallmark of a learning industry that desires to bring about (lasting) change in the lives of the poorest people.
Also, often times, when issues like this crop up, the normal response is to change CEO or management or do something equivalent. That, in my opinion, is not the right approach. People/institutions could make genuine mistakes and they need to be given a fair opportunity to: a) reflect on what went wrong and why; and b) also, set in motion, the necessary changes. But, when given such an opportunity, they must certainly bring in corrective (systemic) changes to their strategic and operational processes so that PAST mistakes do not get repeated. And that is something that I hope that the ASN Novib Fund and the mutual fund regulator in Netherlands would like to ensure has happened at Triple Jump as well as other fund managers—so that the primary investor (s) in microfinance are indeed well protected…
(Ramesh S Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)
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