Why Not Regulate and Supervise Micro-Finance Investment Vehicles (MIVs) in Their Country of Incorporation?

Ramesh S Arunachalam

Hugh Sinclair’s recent book has already stimulated my interest in a topic – regulation of micro-finance investment vehicles (MIVs) - that has been much neglected. Please see previous articles that raise the issue of regulation and supervision of MIVs in a general sense (Why blame the MFIs alone?; Should not microfinance investment vehicles be judged by the same standards set for retail MFIs?; and Regulation and Supervision of Micro-Finance Investment Vehicles: An Urgent Task for Central Banks and Regulators Globally!)

Now, as noted earlier in the above articles, by its very nature, regulation and supervision of MIVs is likely to be very complex because of the diverse legal forms that MIVs assume, the vast geographies that they operate from and the diverse countries/institutions that they invest in. Anyway, let us examine the available data on the subject before we come to any kind of conclusion on the matter.

Please see data compiled from the Syminvest database[i] (http://www.syminvest.com/)

As noted from the Table above, the 142 MIVs listed in the Syminvest database are from 22 countries. 

In terms of countries with number of MIVs greater than or equal to 5 (>=5), there are seven countries – namely, Luxembourg, United States, The Netherlands, France, Cayman Islands, India and Mauritius. These seven countries together account for around 77.46% (or 110 of the 142) of the MIVs

And, these 110 MIVs control over 94.21% of the total assets (of all 142 MIVs) and 94.27 % of the micro-finance assets (of all 142 MIVs). Three other points are in order here: a) for the 110 MIVs, micro-finance assets constitute 68.87% of their total assets; b) some of the MIVs in the group of 110 have not reported their micro-finance assets to the Syminvest database (like the 5 MIVs incorporated in Mauritius; and c) some of the MIVs have neither reported their total assets or their micro-finance assets (like the 6 MIVs from Cayman Islands). The above caveats notwithstanding, the larger implications are the following:

a)   A very significant number of MIVs (110 or around 77.46% of all 142 MIVs) are incorporated in the above seven countries;

b)   These MIVs control total assets of around 6.63 Billion US $ and this number is likely to increase when the MIVs from Cayman Islands report on their portfolio

c)   These MIVs control total micro-finance assets of around 4.56 Billion US $ and this number is likely to increase when the MIVs from Mauritius and Cayman Islands report on their micro-finance portfolio

OK, the above analysis clustered countries with greater than or equal to 5 MIVs in a country and then, did the analysis.

Hereafter, we look at the total assets controlled by the MIVs in a given country and then, sort countries on the basis of their total asset value using a specified criterion (say US $ 50 Million in total assets).

As noted in Table 2 below, in terms of total assets greater than US $ 50 million, there are 6 countries – namely Luxembourg, The Netherlands, United States, Belgium, Germany and Italy. The six countries have 96 MIVs (of the total 142) and these control about 96.59% of the total assets of all 142 MIVs and 97.97% of the micro-finance assets of all 142 MIVs.

Likewise, as noted in Table 3 below, we list countries (all of its MIVs included) that have a certain minimum micro-finance portfolio and also a certain percentage of their total assets in the micro-finance portfolio. Two criterion have been chosen here for segmenting the countries: a) they must have greater than 25 million US$ as their micro-finance portfolio; and b) they must have over 50% of their total assets in micro-finance assets. There are seven countries – namely, Luxembourg, The Netherlands, United States, Germany, Belgium, Liechtenstein and Italy – having a total micro-finance portfolio greater than 25 million US$ and over 50% of their total assets in micro-finance portfolio. Again, these 7 countries have a total of 97 MIVs. These 97 MIVs, in turn control 97.29% of the total assets of all 142 MIVs and 98.72% of the micro-finance portfolio of all 142 MIVs.  

Taken together, irrespective of whether the number of MIVs (>=5) is used as a criterion or whether their total assets (>50 million US$) is used as a factor or whether the size of micro-finance portfolio (>25million US$) and its proportion of total assets (>50% of total assets in micro-finance portfolio) is used as a differentiating input, the key countries where MIV activity appears to be flourishing are the following countries given in Table 4 below:

One interesting aspect from the above table is that irrespective of the criterion chosen, the top three countries are Luxembourg, The Netherlands and The United States – these three countries account for: a) 86 (almost 60.6%) of the total 142 MIVs; b) 93.13% of the total assets of US $ 6.63 Billion US $; and c) 93.84 % of the total micro-finance assets of US $ 4.56 Billion

Therefore, as a start, it may be prudent for regulators in all of the countries - given in Table 4 above and especially, Luxembourg, The Netherlands and The United States - to start looking at the MIVs physically incorporated in their countries/territories and/or operating from there. For starters, this would result in a huge number/proportion of the MIVs being regulated and supervised. In a subsequent article, I look at data for regulating/supervising the fund managers/sub-advisors of these MIVs.

And before I sign off, I would like to humbly suggest that Parliamentarians from these countries, just as in United Kingdom, may want to start analyzing laws that: a) incorporate these MIVs, and b) regulate/supervise them - so that the kind excesses witnessed in India (in the years 2008 – 2010) and elsewhere are not traced to their shores. It is one thing to claim to fight poverty and enhance access to finance in another country; it is entirely another thing to let the investment vehicles run amok (with little or no regulation) and with little regard for what impact their investments have on the poor people (in other countries).

Here it must be noted that even reports like the recent CGAP report on MIVs (http://www.cgap.org/p/site/c/template.rc/1.9.57511/) look merely at growth or decline of investments in micro-finance and the reasons therein. There is very little (or perhaps even no) mention of what impact these investments have on the local low income (rural and urban) economy and excluded/poor people. Here are some examples;

a)   In fact, the CGAP report carries the word clients on five occasions and these are all in the disclosures page – under the heading – “Important Disclosures” (last but one page);

b)   The word impact is not there in the report and impacted is used three times with references to the following – “slightly impacted the reported volume of capital flows” (page 3), “impacted PE flows in 2011” (page 4) and “impacted by the crisis that erupted in the state of Andhra Pradesh in October 2010” (page 7); and

c)   The word poor occurs twice and it is in CGAP’s name - Consultative Group to Assist the Poor (in the copyright page)

And look at some of the conclusions drawn in the report:

a)   Investments reported in Asia mainly included deals in India (92 percent of the total volume in the region) with a few other transactions in Pakistan, Indonesia, and Cambodia. Despite the microfinance crisis in the Indian state of Andhra Pradesh, India had 19 deals closed and priced, amounting to over US$88 million compared to 10 deals that amounted to over US$45million in 2010. (Page 6 of the CGAP report)

b)   Overall, the microfinance PE market experienced stronger activity in 2011, picking up from 2010, with an increase in the volume of transactions. However, some lingering effects of the crisis remain, and 2011 saw the continued compression of valuation multiples for MFIs and LIFIs from the highs in 2009. We believe there is a wider convergence trend between the valuation of emerging market banks and microfinance providers, be it specialized MFIs or LIFIs. For 2012, we do not expect microfinance equity valuations to decouple significantly from the valuation of emerging market banks. We expect valuations to be stable in most markets, with the exception of SSA and certain countries of LAC, which could see some increase in valuations. (Page 14 of the CGAP report)

That said, now that regulation and supervision of MIVs is being debated seriously, I sincerely do hope that governments and regulators in all these countries (where MIVs tend to flourish) start looking inward as to their own system of regulation/supervision and bring in the least required regulation/supervision and minimum standards for MIVs to operate responsibly….that alone can usher in an era of responsible finance…in the host countries in Asia, Africa, Latin America and elsewhere…and then cases like LAPO will hopefully be far and few and in the distant past…

         

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[i] Usual disclaimers apply with regard to the above data from the Syminvest database, (http://www.syminvest.com/).

Deutsche Bank’s Investments in Micro-Finance Institutions (MFIs): In Tune With Its Own Global Micro-Finance Strategy?

Ramesh S Arunachalam

Folks, the last few weeks have indeed been a revelation on how investors operate in the international supply chain of micro-financing. Courtesy Hugh Sinclair and his controversial book, we have received a lot of insight into the functioning of MIVs and other investor(s) like Deutsche Bank.

In fact, commenting on Deutsche Bank’s Micro-Finance Investments, Hugh Sinclair notes[i]:

“Deutsche Bank has recently acquired 9.15% of the shares of Indian MFI SKS, which is a bank I question substantially in the book. It would be hard to defend any claim that Deutsche Bank were unaware of the claims about SKS given the adverse publicity the institution has received. Criticism involves the IPO process and personal enrichment of a few individuals and private investors; abusive debt-collection practices, leading to explicit mention in the SERP report regarding client suicides; and most recently, “massive problems” with their life insurance practices, amongst other criticisms. Deutsche presumably found such factors compatible with their ethical practices.

Therefore, I believe that there are genuine concerns about the role of Deutsche Bank in the battle to reduce poverty. I believe there are valid reasons to support the case that their due diligence is not as thorough as it could be. I believe there are fundamental contradictions between the claims made in the SMART Campaign (which Deutsche Bank endorse and support financially) and Deutsche Bank‘s subsequent actions. I believe that the MIVs are largely (not entirely) responsible for a significant part of the adverse activities of some of the less scrupulous MFIs globally, not simply in India, by providing fuel for the fire and turning convenient blind eyes when it suits them.

I also await a formal response from Deutsche Bank in this regard, and I would like to hear Asad Mahmood's defence of the claims made in this book, and his explanation of the recent SKS investment. I assumed they may be shaken into acting more ethically in response to the book, but in my personal opinion, the fact that they now invest in an institution such as SKS, and did so via a tax-efficient investing vehicle based in Mauritius, leads me to a personal conclusion:

There is little evidence of concern for the welfare of the poor; profit is the driving force (acquiring equity in SKS following a 90% fall in share price); and their actions are inconsistent either with the best wishes of the investors in their fund (assuming these wishes to be social impact rather than profit) or those of the poor. This is my personal opinion, others are free to disagree.”

What is increasingly convincing me that, what Hugh Sinclair has been saying may indeed be a “correct” representation of reality as far as investors like Deutsche Bank are concerned, is the recent investment by Deutsche Securities Mauritius Limited in SKS Micro-finance Ltd, India’s only listed micro-lender. The investment that I am referring to is the purchase of shares worth Rs. 779 Million (US[ii] $ 13.90 Million) by Deutsche Securities Mauritius Limited in SKS Microfinance. As the Bombay Stock Exchange (BSE) lists under “Disclosures under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011”     (http://beta.bseindia.com/corporates/Sast.aspx?scripcd=533228), it is indeed true that Deutsche Securities Mauritius Ltd acquired (on 25^th July 2012) through a QIP allotment, 9.5 Million Shares in SKS Microfinance Limited. The original table from the BSE site is reproduced below.

And a Times of India article[iii] commenting on the above transaction, observes that:

“Interestingly, Deutsche Securities Mauritius held 3.82% stake (27,61,174 shares) upto March 2012 but had exited the company during the April-June 2012 quarter as per shareholding data available on BSE. Deutsche Securities re-entered India's only listed MFI player through the QIP that was offered at a price of Rs 75.4 per share, a discount to the then prevailing stock price. CLSA (Mauritius) Limited too has picked up 9.15% in SKS through the QIP and was allotted the stake last week. The QIP issue had opened on July 12 and closed on July 17, with SKS mopping up a total of Rs 230 crore through the Rs 165 crore QIP issue….SKS, which was once India's largest MFI player, has been strapped for cash after it was plunged into losses by the AP MFI crisis that was triggered in mid October 2010 by the Andhra Pradesh government clampdown on MFI lending after a string of borrower suicides rocked the state due to the alleged strong arm tactics of MFI agents.”

Now, what do we know about Deutsche Securities Mauritius Limited?

According to available secondary data in the internet[iv], Deutsche Securities Mauritius Limited, is incorporated in Mauritius with Registration No. INMUFD175508 valid up to 06 - JAN – 2014. According to other information available across the internet[v], Deutsche Securities Mauritius Limited is said to operate as a subsidiary of a Singapore based company called Deutsche Asia Pacific Holdings Pte Ltd.

Deutsche Asia Pacific Holdings Pte Ltd, as a company, is said to engage in financial futures, options broking, stock broking, foreign exchange trading, and provision of related financial advisory services. Deutsche Asia Pacific Holdings Pte Ltd is said to have been formerly known by the name – ‘Deutsche Morgan Grenfell Asia Pacific Holdings Pte Ltd’.

And going further up the ladder, we find that Deutsche Asia Pacific Holdings Pte Ltd is said to be operating as a subsidiary of DB Valoren S.à r.l which in turn is said to be a Luxembourg based company. And completing the circle, we find that DB Valoren S.à r.l. is said to operate as a subsidiary of Deutsche Bank AG. Please exhibit # 1 at the end of this article which shows this relationship to Deutsche Bank AG in a clear manner

Therefore, it is clear that the purchase of shares - of SKS Microfinance Limited - was done by one the key subsidiaries of Deutsche Bank AG. Therefore, this investment can certainty be called as an investment made by Deutsche Bank AG or the Deutsche Bank group.

Okay folks, what are the key issues concerning this investment made by Deutsche Bank?

Read the following news items and it will become clearer.

First, according to a recent news item in The Hindu Business Line article[vi] (May 22^nd, 2012) –

“’We have found massive problems in insurance operations of SKS Microfinance’, Mr J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority, told Business Line. IRDA teams conducted field enquires and inspections for a long time, he said. The irregularities included receiving the cheques of death claims from its insurers on its name, which is illegal. The only listed MFI in the country, based out of Hyderabad, had also ‘collected’ higher commissions than permitted by the insurance regulator while selling the insurance policies”.

Second, according to a recent news item in Moneylife article[vii] (July 27^th, 2012) -

“SKS Microfinance has said that some of its employees have cheated the company to the tune of Rs15.8 crore in the last financial year, reports PTI. The services of employees involved have been terminated and the company has written off over Rs14 crore. The auditors of the company have reported that there was cash embezzlement by the employees to the tune of Rs2.5 crore and loans given to non-existent borrowers was Rs13.3 crore, the micro lender said in its annual report”

I am not sure that anyone would invest in a company that has been directly accused (of having massive problems in their insurance operations) by no less a person than the Chairman of a major regulatory authority covering insurance operations in India. And for the record, Mr. J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority (IRDA), is a very well respected (professional) regulator. That apart, investing in a company that self-admits increasing ghost clients and frauds[viii] in its operations is again a very serious matter.

And coming on the back drop of the (now) famous LAPO (Nigeria) case – where Deutsch Bank’s Comminty Development Finance Group (CDFG) lent money to the MFI despite publicly available information with regard to illegal savings collection and intermediation by the same MFI and presence of several other serious weaknesses in the same MFI’s operations - Deutsche Bank’s micro-finance investments certainly need good explaining by their management.  This is because of the claims that Deutsche Bank makes with regard to micro-finance and micro-finance investments:

“Deutsche Bank was the first global bank to establish a socially motivated microfinance fund more than a decade ago. Our activities in the microfinance sector are led by the Community Development Finance Group as part of the Bank's overall Corporate Social Responsibility commitment. We provide loans, investments and limited philanthropic grants to the microfinance sector towards the goal of enabling the poor throughout the developing world to access credit for self-employment as a poverty alleviation strategy. We have served over 120 microfinance institutions (MFIs) in 50 countries over the last decade, with $215.5 million in capital benefitting as many as 2.8 million poor entrepreneurs. While India is one of the largest potential markets for microfinance, Deutsche Bank currently does not have any loans to microfinance institutions there due to the rapid commercialization of the sector and concerns with pricing of the loans to poor clients.

Deutsche Bank is not active in the microfinance sector as a commercial activity to realize financial gains for the bank. However, Deutsche Bank recognizes that the success of microfinance depends upon its ability to utilize business discipline and financial techniques to achieve the goal of scale and sustainability in serving the financial needs of the un-banked poor. Deutsche Bank has developed social scorecards through which it judges the social intentions and the extent of social framework of MFIs in its underwriting. Deutsche Bank's MFI clients must meet standards of good governance, transparency, and interest rates that are reasonable within the country and regional context.

Over the last decade, Deutsche Bank has been a consistent advocate and voice in emphasizing the essential social objectives of microfinance and has used its leadership position to call attention to the sector's growing risk of aggressive commercialization. Some examples of our advocacy efforts are:

a)   In early 2008, Deutsche Bank gathered industry leaders including CEOs of MFIs, academics, rating agencies, development banks, and thought leaders to discuss the challenges facing the microfinance industry with increased purely commercial investors entering the market. This roundtable discussion led to the Pocantico Declaration, which was an important historic moment in the history of microfinance, providing clarity of intentions and values for the sector in being committed to the interests of the poor.

b)  Following the Pocantico Declaration, Deutsche Bank was the early funder and one of the architects of the SMART Campaign, which focused on protecting the interests of microfinance clients by making sure that poor borrowers were not over-indebted, that there was transparency of pricing, that collection methods were not excessive, and that clients were treated fairly.

 c) In November, 2010 Deutsche Bank organized a roundtable and brainstorming session on the potential risk of multiple borrowing and over-indebtedness with in-country microfinance networks, development banks / agencies, and philanthropists.

d)  In partnership with Moody’s and leading universities such as NYU and Yale, Deutsche Bank initiated the idea and organized a large conference at its headquarters in America where a discussion of the social impact and innovation of microfinance took place. 

e)  In 2011, DB convened a meeting in New York with eight CEOs of the leading microfinance networks to discuss challenges with a view to forming an association that can collectively address issues faced by the Industry. The unprecedented meeting resulted in the formation of the Microfinance CEO Working Group comprised of industry leaders from ACCION, FINCA, and Pro Mujer, among others. Subsequently, the Group released a report “Road Map for the Microfinance Industry: Focusing on Responsible and Client-Centered Microfinance” which addresses responsibility and development of client services and products.

With more than half of the world’s population living on less than two dollars a day, there is an urgent need to alleviate poverty. Microfinance is a business approach to helping the poor build their way out of poverty, by providing the poor access to financial services, namely credit and a safe place for their savings. Microcredit, the extension of very small loans (microloans) to poor and low-income entrepreneurs who cannot access local traditional funding due to a lack of collateral, or a credit history, has proven to be a revolutionary model for enabling the poor to rise from poverty.

With capital to grow their businesses and increase earnings, the poor can invest in their families’ health and educational needs and make a significant impact on the development of their communities. By most industry estimates, less than 20% of the demand for microcredit from the world’s poor entrepreneurs is being met, a large opportunity for social investors like Deutsche Bank to make a real impact by developing funding structures to channel capital to these communities.”[ix]

To summarize, whether it is the present untimely (huge) investment in SKS (an MFI under fire from the regulator and having increasing ghost clients/frauds as per its own admittance) to supporting the illegal operations of LAPO[x] (Nigeria) some years ago and attempting to cover up the same (Mr Asad Mahmood tried to do so as per Hugh Sinclair’s book and related communication)[xi], Deutsche Bank has an immense amount of explaining to do. And going by the same transparency principle (that Deutsche Bank claims to have helped create for MFIs), it is time that Deutsche Bank comes clean on its global micro-finance investment story! Let us be clear on that!

And for the record, I must clarify that despite several e mails to Mr Asad Mahmood, the public face of the Community Development Finance Group (CDFG) at Deutsche Bank, there has been no reply what-so-ever till date from him[xii]

Some of the key questions that Deutsche Bank (and its senior management) would need to provide answers to include (but are not limited to) the following:

a.   Why did Deutsche Bank invest in SKS at a time when even the regulator (Chairperson, IRDA) saw massive problems with its (insurance) operations? 

b.   How could Deutsche Bank invest in SKS despite admittance by the company to presence of ghost clients and frauds in its micro-finance operations? It must be remembered that these have increased in absolute terms as compared to the past as an earlier Moneylife article shows (Increasing frauds, internal lapses at MFIs: Need to strengthen supervisory arrangements to protect the poor)

c.   How did Deutsche Bank invest in an Indian MFI when it (publicly claimed and) thought it unfit to even lend money to Indian MFIs? Please see statement reproduced from Deutsche Bank’s website – “While India is one of the largest potential markets for microfinance, Deutsche Bank currently does not have any loans to microfinance institutions there due to the rapid commercialization of the sector and concerns with pricing of the loans to poor clients.”[xiii]

d.   The Deutsche Bank website notes that, “Deutsche Bank's MFI clients must meet standards of good governance, transparency, and interest rates that are reasonable within the country and regional context.” If that was the norm, then, how did Deutsche Bank invest in LAPO (Nigeria), which, according to public domain information,  suffered from several weaknesses including: a) illegal collection and intermediation of savings; b) inordinately high (effective) interest rates touching 144% under specific situations; c) an illegal loan product (perhaps) because illegal savings collection was a part of it; d) conflict of interest in terms of the auditor being related to the CEO and other such issues; e) high levels of client desertion; f) lack of transparency with regard to data (which led to MicroRate’s subsequent withdrawal of its rating); and g) poor governance among other things.  

e.   Who coordinates the various Deutsche Bank investments in micro-finance? According to their focus magazine, it is the community development finance group (CDFG) that coordinates this! If so, how did the CDFG recommend SKS Microfinance despite the various on-going problems? At least, should not have Deutsche Bank waited until the enquiry by the regulator was over?

f.    And last but not the least, why did the same Deutsche Securities Mauritius Limited sell of its stake in SKS Microfinance just a few months ago (according to the Economic Times[xiv] as well as filings with the BSE) and then again buy back SKS Microfinance shares? Something peculiar is happening here!

As one of the world’s foremost global banks, the least I expect is an IMMEDIATE internal enquiry into the micro-finance operations of all its subsidiaries (and not just the CDFG) and redressal of any weaknesses/short comings so that investments made by Deutsche Bank are: a) in accordance with the law and seen to be seen as such; b) safe and sound from an investor/systemic perspective; and c) most importantly, ethical from a transparency stand point. Only time will tell whether this happens at Deutsche Bank AG …and I hope that the recently appointed (Co) CEOs of Deutsche Bank AG … Juergen Fitschen and Anshu Jain…set in motion the various processes to address these controversial micro-finance investments and issues related to these immediately…Otherwise, the image of Deutsch Bank with regard to its role in global micro-finance will continue to take a pounding…  

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[i] Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True? and Hugh Sinclair's Response to My Earlier Post - "Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?"

[ii] The exchange rate on 25^th July 2012 was Rs.56.0465 = 1 US $. This would mean that the total investment was of the order of over US $ 13.90 Million (Source: http://www.oanda.com/currency/converter/) 

[iii] http://timesofindia.indiatimes.com/business/india-business/Deutsche-Securities-mops-up-9-15-in-SKS-via-QIP/articleshow/15169644.cms

[iv] http://www.sebi.gov.in/FIIIndex.jsp?fiiIndxName=D

[v] http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=36660922

[vi] Source: Quoted from http://www.thehindubusinessline.com/industry-and-economy/banking/article3446545.ece

[vii] Source: Quoted from http://www.moneylife.in/article/sks-microfinance-employees-swindle-rs158-crore/27247.html. The Moneylife article was based on the SKS annual report and so, the annual report must have been released earlier than the date of the news item.

[viii] Increasing frauds, internal lapses at MFIs: Need to strengthen supervisory arrangements to protect the poor

[ix] https://www.db.com/usa/content/en/1077.html

[x] Please see the following articles in this regard: 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 (to the Global Micro-Finance Industry) Make His Claims True?)

[xi] Please see the following articles in this regard: Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?

[xii] Please see the following articles in this regard: Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?

[xiii] https://www.db.com/usa/content/en/1077.html

[xiv] http://articles.economictimes.indiatimes.com/2012-07-26/news/32869385_1_sks-microfinance-deutsche-securities-stake

Hugh Sinclair's Response to My Earlier Post - "Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?"

Hugh Sinclair's Response to My Earlier Post - Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?

Hugh Sinclair's Response

Silence is not necessarily indicative of guilt. The right to remain silent is imbedded in the human rights of an ethical nation. In the context of my book the fact that an entire industry is remaining silent is unusual, indicative, even mysterious, but it does not necessarily constitute guilt. Kiva were asked to attend a radio interview at KALW which focussed on the peer-to-peer market and declined the offer. Two callers, who openly state their CEO positions at other MF operators, did call in and support the claims of the book (Zidisha and Opportunity Network).

However, with regards the claims of Deutsche Bank, there are at least two additional angles to consider, one of which was edited from the book for brevity, and one which has occurred subsequently:

1) Asad Mahmood asked to speak to my wife after the original call (pages 154-155) to urge her to persuade me to back down. He had previously called her privately with the same goal. His desire to cover this up was clear and repeated. To what extent this was for genuine concern for my welfare, and to what extent this was to protect the interests of Deutsche Bank and the creditors to LAPO will never be able to be proved concisely. Intent is hard to prove. Facts speak for themselves.

2) Deutsche Bank has recently acquired 9.15% of the shares of Indian MFI SKS, which is a bank I question substantially in the book. It would be hard to defend any claim that Deutsche Bank were unaware of the claims about SKS given the adverse publicity the institution has received. Criticism involves the IPO process and personal enrichment of a few individuals and private investors; abusive debt-collection practices, leading to explicit mention in the SERP report regarding client suicides; and most recently, “massive problems” with their life insurance practices, amongst other criticisms. Deutsche presumably found such factors compatible with their ethical practices.

Therefore, I believe that there are genuine concerns about the role of Deutsche Bank in the battle to reduce poverty. I believe there are valid reasons to support the case that their due diligence is not as thorough as it could be. I believe there are fundamental contradictions between the claims made in the SMART Campaign (which Deutsche Bank endorse and support financially) and Deutsche Bank‘s subsequent actions. I believe that the MIVs are largely (not entirely) responsible for a significant part of the adverse activities of some of the less scrupulous MFIs globally, not simply in India, by providing fuel for the fire and turning convenient blind eyes when it suits them.

MIVs are caught between a rock and a hard place: if they admit they knew what was going on, they may be accused of acting unethically or in contradiction to their claims and assurances made to their own investors. If they did not know what was going on, they are simply incompetent and may be failing in the fiduciary duties to act in the best interests of their investors, the poor, and to obey the principles they claim to espouse. The allegations I make in my book amount to both.

Performing due diligence is a fundamental task of an MIV. Their most rational course of action given this tough decision is to remain silent. Innocent until proven guilty may be their only remaining defence, and silence is the ideal vehicle to maintain this favourable verdict.

I also await a formal response from Deutsche Bank in this regard, and I would like to hear Asad Mahmood's defence of the claims made in this book, and his explanation of the recent SKS investment. I assumed they may be shaken into acting more ethically in response to the book, but in my personal opinion, the fact that they now invest in an institution such as SKS, and did so via a tax-efficient investing vehicle based in Mauritius, leads me to a personal conclusion:

There is little evidence of concern for the welfare of the poor; profit is the driving force (acquiring equity in SKS following a 90% fall in share price); and their actions are inconsistent either with the best wishes of the investors in their fund (assuming these wishes to be social impact rather than profit) or those of the poor. This is my personal opinion, others are free to disagree.

However, I would like to add that in the grand scheme of the questionable activities of MIVs, I do not find Deutsche Bank to be the worst offenders. Similarly penetrating questions need to be asked to Triple Jump, ASN Bank, Oxfam Novib, Blue Orchard, Citi, responsAbility, Incofin, Calvert Foundation, Grameen Foundation USA and Kiva, amongst others. I eagerly look forward to any denials or rebuttals they may have about the book, but none have been forthcoming. We cannot help but wonder why. Naturally they do not wish to draw more attention to the claims against them.

To examine a comparable case in slightly more detail, Citi were well aware of the underlying situation at LAPO prior to the appearance of Robert Annibale (CEO) in front of the House of Representatives, a hearing I discuss in some detail (pages 164-166). This raises some uncomfortable questions that one might expect Citi to respond to. But they haven’t. Kiva clearly knew about the situation at LAPO some years prior to their eventual withdrawal of the MFI from their website, and yet have failed to comment on why it took so long to respond, and only did they do so when the NYT finally published their name openly (Kiva having taken $5m of funds from the predominantly US general public and lent these, interest-free, to LAPO). Calvert Foundation defended their investment in LAPO repeatedly, and steadfastly stuck to their decision to invest in LAPO, and yet withdrew LAPO some weeks later when the NYT contacted them – why only then? BlueOrchard invested in LAPO after all information was clearly in the public domain and corroborated by two separated rating reports and the NYT, and then issued a press release defending their investment that appeared contradictory to known facts – why? There is little scope for BlueOrchard to claim ignorance, as not only was most information publicly available by the time of their investment, but a former staff member of Deutsche Bank microfinance (Chuck Olson) who was closely involved with LAPO had recently moved to BlueOrchard. The CEO of Blue Orchard was recently replaced without explanation, and some have speculated that this may have been as a consequence of the book. And, perhaps the key question of all, is how do Grameen Foundation USA reconcile the interest rates charged by LAPO (whom they invested in and guaranteed the loans of Citi and Standard Chartered) with the traditional rhetoric of their board director Mohammad Yunus regarding exploitative interest rates? The questions abound – and these only concern one single investment. How many more such cases are there? Is it any surprise these folk are hesitant to open this can of worms?

In the book I discuss the principal-agent problem. The vast majority of investors in the US and Europe have no means to directly invest in microfinance, and thus are obliged to invest via an intermediary: the P2Ps or the MIVs. There is an implicit assumption that these P2Ps and MIVs act in the joint best interests of their own investors and those of the poor. However, economically speaking, there is no a priori reason to assume that this is the case - they will act in their OWN best interests. They largely control the flow of information from the field to their investors, and are unregulated in practice. Therefore it should come as no surprise that such atrocities occur. The principal-agent problem is a well-known problem in Economics, and yet ignored in the MF sector, including in the case where an MIV invests in debt and equity (where conflicts of interest are rampant). In developed countries, where the citizens of those same countries may suffer, this is dealt with by strict regulation (albeit not entirely effectively, so-called Chinese Walls). In the microfinance sector such regulation is absent. Therefore my joint hope in writing the book is a) to restore the interests of the poor to the centre of the equation, and b) to regulate those that facilitate such atrocities.

However, a word of warning: while the call for regulation of this sector may appear sensible to the vast majority of readers, it will be fiercely resisted by those who stand to lose the most were genuine scrutiny applied to their actions, the MFIs and the MIVs. They will attempt to fob the public off with claims of “self-regulation” (i.e. regulation by loyal insiders – see Indian promises of self-regulation after the first, 2006, suicide wave, or the SMART Campaign for a superb example of this; SMART’s main funders: Deutsche Bank and Accion), and issue statements along the lines of “we take the interests of clients very seriously and are striving towards a world without poverty”. Do not be so easily fooled by such spin.

So, a simple message to the P2Ps and MIVs mentioned in the book: have the courage to defend yourselves: we are waiting for you with sturdy, verified evidence and more up our sleeves. Although silence does not prove guilt, the longer you wait the more questions are raised about your true motives and actions. Mine are clearly published for all to read. Now let’s see yours.

Hugh Sinclair's response to Triple Jump’s document “Facts about a book and its author” dated July 2012

Given BELOW is Hugh Sinclair's Response to My Earlier Triple Jump Post

Hugh Sinclair's Response:
 
Interestingly this is the first comment released by an institution implicated in my book, 6 weeks after its release. The facts I present speak for themselves and the reader is the best judge of the truth. The act of placing all supporting evidence on the website enables the reader to perform his or her own investigation. The book is complete, and I do not seek to enter into a diatribe of exchanges with those mentioned. However, if they wish to comment on the book, I reserve the right to respond, and this is a brief summary of the factual content of the aforementioned document. As usual, the facts serve as the basis of knowledge. I discuss only their most pertinent claims here (italicised).

Paragraph 3:

"Triple Jump allegedly tried to bribe the author to silence him" - The dismissal letter is reproduced in full on the book website. Triple Jump's lawyer raised the offer before proceeding to court. The letter, only 2 sides of A4, contained no valid grounds for dismissal, a pay increase, additional confidentiality clauses, and a 7-day ultimatum. I leave it to the reader to determine whether my summary of their letter is accurate: "It appeared they were firing me, offering me a job, threatening to take me to court, were very nervous about confidentiality, and issuing me with an ultimatum, all in a single letter." (page 124).

According to Triple Jump, "the judge approved the dismissal and awarded him less than the standard compensation applicable in the Netherlands". Once again, the court ruling is available on the website (excerpts on pages 131-2). The judge stated quite clearly that Triple Jump's refusal to discuss the pertinent matters created an unworkable situation; noted that Triple Jump did not actually dispute the negative findings I had raised; and awarded compensation, the details of which are clearly laid out in the document itself for the reader to form his or her own opinion. Beginning at the initial moment Triple Jump wanted to end the contract (mid-February 2008), the total compensation in the last resort amounted to 6 months salary, all translation expenses and all legal fees, for an employee with under two years of service. This was almost the maximum possible under these circumstances. Triple Jump’s statement appears at odds with the facts.

The court ruling also succinctly summarised the quality of my work: "Both parties [Triple Jump and Hugh] agree that Hugh in this sense was doing an excellent job.... Hugh had received a good appraisal and there was no indication that he would not complete the term of his contract."

Paragraph 4:

"Our principals [Calvert] have at the time all confirmed to have been correctly informed and still are very satisfied with the services Triple Jump provides them." Calvert subsequently removed LAPO from its website when the NYT contacted them, and both ASN Bank and Oxfam Novib ceased investing in LAPO shortly afterwards. Whether or not Calvert was fully informed of LAPO's actual operations is described in some detail in the book. The most transparent way for Triple Jump or Calvert to clarify whether the documents presented to Calvert did reflect a full and accurate description of LAPO according to information known at the time would be for either company to publish this document, and the original document presented to ASN Novib, which they have failed to do.

On a related point, Citi and Standard Chartered also invested in LAPO under guarantee from Grameen Foundation USA. I have not seen the information presented to these two banks by GFUSA. If a full and fair description of LAPO was presented to them, genuinely reflecting the information available at the time, then this may raise questions about why they invested in LAPO in full knowledge of its activities. If, however, an incomplete picture of LAPO was presented to them, this may raise questions about the validity of the documents. Until these documents are published there is no way to clarify this, but in some regards the issue is comparable to that of Calvert and Triple Jump. Calvert, Citi, Standard Chartered and GFUSA have remained silent on this topic.

Paragraph 5:

"Mr. Sinclair suggests that Triple Jump profits from interest rates that microfinance institutions charge to their end-clients." Alas it appears that Triple Jump have not read the book carefully. Pages 72-74 explain quite clearly the operations of an microfinance fund, where it is clearly stated "The microfinance fund then makes loans to MFIs, for which it earns a management fee, typically in the region of 1 percent to 4 percent; 2 percent is probably typical. As a manager of other people’s money, it disburses funds from this pot and all repayments and interest return to this same source." (page 73). I clearly state that interest and repayments (i.e. capital) return to the investors "pot", rendering their response "Triple Jump’s income is neither related to interest rates charged by any microfinance institution, nor to any other client revenue model" as both irrelevant and redundant. If this was not clear enough, on pages 173-174 I analyse the cost/profit structure of Triple Jump and compare these to those of Kiva. This is clearly stated in the book and source documents are available on the website.

Interestingly this tactic, of claiming I wrote something which I did not and then refuting it, is the same method employed by the Friends of Grameen when attempting to refute the claims made in Tom Heinemann's documentary, described on page 210. Usual operating procedure when facts cannot be refuted, and once again, not entirely consistent with facts.

Paragraph 6:

"Triple Jump, together with other international investors, has advocated for a reduction of interest rates at the Nigerian microfinance institution LAPO. LAPO is currently one of the most respected microfinance institutions in the area and has reduced its interest rates in recent years."

The issue of LAPO's apparent interest rate reduction, combined with an increase in forced savings resulting in an overall increase in the cost of capital to the poor is discussed on pages 180 - 181. The Effective Interest Rate increased from 114.3% to 125.9%, as cited on page 157 and referenced from page 6 of the 2009 Planet Rating report of LAPO, also available on the website. Whether LAPO is one of the most respected institutions in the area is a subjective comment. This may suggest the other institutions are even less ethical or more expensive, or this may refer to the Grameen Foundation USA logic that they are cheaper than the evil moneylenders and therefore “a bargain”, as Alex Counts suggests (see page 183). Regardless, Triple Jump are no longer listed as investors in LAPO.

Final paragraph:

"Part of Triple Jump’s mandate is to specifically target small entrepreneurs in difficult African countries to provide them with affordable credit." Would Triple Jump be able, or willing, to explain the portion of their portfolio that is directed to entrepreneurial activities at all, versus that directed to consumption loans and repaying loans to other institutions? I see no evidence of them acknowledging the common finding that much microfinance is not used in any entrepreneurial activity whatsoever. See "Beware Bad Microfinance" in the Harvard Business Review, also on the website and discussed in the book. Whether the rates are "affordable" is a subjective matter as the microfinance community is unwilling to define unaffordable, exploitative or extortionate interest rates. As Chuck Waterfield's analysis of the interest rates charged at LAPO demonstrates, rates could reach as high as 144% (page 181, quoted in the Planet Rating report of LAPO). In the absence of a definition of "affordable" this question cannot be answered objectively, and therefore I leave it to the reader to form a subjective decision as to whether such rates are “affordable”.

Conclusion

If this is the strongest defence Triple Jump has, this is an interesting observation alone. It is also worth stating that this document was not a public press release, but provided privately to Ramesh who then posted it in the public domain, an act of transparency which I applaud. If and when Triple Jump does issue a public press release (there has been a notable decline in news posts on their website since the book was released), I assume they will do so on the basis of having actually read the book carefully. The likely reason for the continued public silence of those mentioned in the book is that they wish to neither dig their graves any deeper, nor draw additional attention to their activities. The purpose of publishing all evidence on the aptly named website is to enable the reader to form his or her own opinion of the claims made in the book. Analysing the Triple Jump document posted by Ramesh reveals that almost every sentence contained within it is flawed. If they have valid concerns about the factual contents of the book, I look forward to debating them publicly. Indeed, if the other players mentioned in the book would care to refute any of the findings, I will do likewise. Alas, silence appears their wisest strategy now. Analogies to ostriches are too obvious to state explicitly.

Many MIVs are endorsers of the SMART Campaign, MFTransparency etc., - the transparency initiatives of the sector. If they adhere to such principles, where is the transparency now? Deutsche Bank, Triple Jump, BlueOrchard, Calvert Foundation etc. endorsed the SMART Campaign, and client protection principle number 3 discusses transparency and number 4 discusses responsible pricing. Presumably they will be delighted with the current discussion surrounding precisely the topics they endorse? Interestingly Grameen Foundation USA did not endorse the campaign. It appears these players enjoy transparency only when it suits them.

Regarding Triple Jump’s claims of a rigorous due diligence, they fail to describe this in any detail. Who actually visited LAPO? How much time was spent on-site? How many branches did they visit? Did this due diligence analyse the interest rates, the extent of forced and voluntary savings, or the family connections within the institution, its board and its external auditor? Indeed, did the due diligence report contain repeated spelling mistakes including, at one point, actually getting the name of the institution incorrect (see pages 116-117)? What claims did they make about the integrity of the internal control and Management Information Systems at LAPO? Did they compare, or even detect, the stated interest rate with the interest rate openly used to generate the actual loan repayment schedules? Did they bother to find out if the software LAPO was apparently using was in fact pirated (confirmed by the former CEO of the software company in a recent Amazon review of the book)? Did they even do a site-visit for the Calvert “due diligence”? In short, I believe their due diligence was sloppy at best.

Likewise, in the call with Calvert they explained in detail the proprietary method of due diligence they performed, which appeared to amount to little more than taking funds from the US general public predominantly, and hand these to Triple Jump to lend on their behalf, and accepting a minimal due diligence report littered with factual errors and spelling mistakes. According to Triple Jump the likes of Calvert are in fact satisfied with the service they received – one can only speculate as to what would constitute an unsatisfactory service in their opinion.

While I admire Ramesh’s rigorous analysis of Triple Jump in this case, let’s not assume that Triple Jump is the only MIV that does minimal due diligence, nor that LAPO is the only such case. BlueOrchard (who’s CEO was replaced recently without explanation) admitted to not having even bothered with a site-visit. How many of Deutsche Bank’s investments have they historically visited? Which MFIs has Calvert visited? How thorough were the due diligences of Citi and Standard Chartered of LAPO, which were done under the protection of guarantees from Grameen Foundation USA? Kiva pumped $5m into LAPO – on the basis of what information? Kiva explicitly announced that they were “comfortable” with LAPO, and yet withdrew all funding to LAPO two weeks after this announcement – how come they were so comfortable only a fortnight earlier?  And as Ramesh points out in the context of Triple Jump - but the argument applies to all MIVs involved – these investments were done either with prior knowledge of the nature of LAPO (publicly available information), or with so little due diligence that even publicly available documents did not reach their rigorous due diligences. Either way they face tough questions. Let’s also not forget that the MIVs and P2Ps mentioned in the book represent a substantial proportion of the entire MIV sector.

Triple Jump are keen to brush this under the carpet, by stating that this is no longer relevant because the events took place some years ago (and we are therefore to assume that this was a one-off, isolated case that has never occurred subsequently?); and that the claims I make in the book are fictitious despite being rigorously documented. Their modest efforts at denying my claims are trivial and clearly refuted above, but in actual fact the astute reader will observe that the substantial claims made in the book have not actually been denied, even by Triple Jump. As the Dutch judge also pointed out explicitly – they haven’t actually denied anything – for one rather obvious reason.

The MIV sector is a total mess. I am hard-pressed to think of a single MIV that I would entrust my money to, having worked directly or indirectly with many over the last decade. One cannot generalise, but one can state an opinion. In my opinion the probability of an investor in an MIV being deceived is extremely high, and the probability of their funds being deployed for the tangible benefit of the poor is extremely low. I believe the MIVs are a principal menace of the sector, and in urgent need of regulation. But, let’s not hold our breath. Political protection and support of the microfinance sector as it currently stands extends to the highest levels. Ab Engelsman, for example, is the head of the Netherlands Platform for Microfinance, a former senior manager at ASN Bank, board member of both the Foundation of ASN Investment Funds and the Oikocredit Nederland Fund, and president of the Board of Triple Jump. Princess Maxima of Holland is closely associated with the Dutch microfinance sector. Not a single newspaper in Holland has run with this story, although the Dutch investigative documentary show “Reporter” is airing a documentary in September precisely on this topic, which will be worth watching. Muhammad Yunus is a board director of Grameen Foundation USA. The political connections in the US may stretch higher still. The point is not that the microfinance sector is run by cronies (although that is the case to some extent), but that those with an interest in preserving its present structure can mobilise political support to protect their interests.

I anticipated fierce retribution from those implicated in the book. I was wrong. They have remained entirely silent. Triple Jump’s weak and not openly public response is, in my opinion, pathetic. I expected they would at least read the book thoroughly. Wrong again. Ramesh reproduces Figure 1 from the Triple Jump 2007 Annual Report (Dated May 2008) to contextualise the funds at Triple Jump. However, an interesting additional fund has subsequently been added to this list: MicroBuild.This is financed by Habitat for Humanity and OPIC (the US Government's development finance institution). Thus Triple Jump is investing funds provided by Habitat and the US taxpayer. What controls are in place to ensure these are invested wisely? Although the US regulators seem relatively uninterested in regulating the MIVs, do they take any additional precautions when US government funding is involved? What does Habitat think about the findings in my book about the fund manager they selected? What due diligence did they do when selecting their fund manager for this fund?

Expect a lot more “no comments” – it’s their only defence. Those with nothing to hide have nothing to fear. I believe these guys are hiding because they have a lot to fear.