Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Saturday, July 28, 2012

Regulation and Supervision of Micro-Finance Investment Vehicles: An Urgent Task for Central Banks and Regulators Globally!

Ramesh S Arunachalam 

Hugh Sinclair’s recent book has been controversial for many reasons but as I have said in my previous articles (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?), many of his assertions (concerning the micro-finance investment vehicles or MIVs) have solid irrefutable evidence in the public domain. Thanks to Hugh Sinclair for alerting us on how MIVs actually operate in real time!


That said, ever since I read Hugh Sinclair’s book, I have been intrigued by the MIV phenomenon. And true to my nature, I started some research on MIVs using the Luminis[i] database (https://www.luminismicrofinance.com). While the database is a good start to having information on MIVs, however, even there, I found little information on specifics regarding regulation/supervision of these MIVs. In fact, as I searched around, I realized that there is very little credible information on how (many of these) MIVs are regulated and supervised in real time. And this indeed becomes a matter of concern when you consider the fact that a significant number of MIVs (as many as 43 of the 100) are incorporated either in Luxemburg, Mauritius and/or Cayman Islands (as is evident from the data given in Table 1 below).

It must also be noted with interest that there are very few MIVs incorporated in large micro-finance markets like India. What needs to be appreciated here is the fact that most of the MIVs have registered domicile in countries that offer little potential for micro-finance -  in very broad terms, over 75% of the MIVs are registered in (home) countries that have very little micro-financing in the first place. Whether or not, this is a case of regulatory arbitrage is a question that begs an answer indeed.

This apart, it should be noted that MIVs have been incorporated as very diverse legal entities and this again raises the aspect of regulatory arbitrage. Therefore, without any doubt, the onus is perhaps on regulators in the recipient countries to understand from where exactly is the (foreign) money flowing into the micro-finance sector (in their respective countries) along with the motivations for such investment.

Table 1: MIVs and Their Registered Domicile
Registered Domicile
No. of MIVs
United States
Cayman Islands 
Kyrgyz Republic

In fact, during the Indian micro-finance crisis, I realized that India’s Central Bank (The Reserve Bank of India) perhaps did not have (in one place) all the requisite information with regard to foreign equity and debt flow into the Indian micro-finance sector. And as I have previously mentioned, (and as Mix Market has so eloquently put it), it is the unique combination of significant equity flows (and debt funds) from abroad with local banking funds and their subsequent and continuous investment as ‘micro-finance loan assets’  that created the perfect storm for the Indian micro-finance crisis. It is precisely this that regulators have to guard against globally.

So, what needs to be done in tangible terms by regulators in host (recipient) and home countries?

First, the Central Banks in the recipient (host) countries must become the focal point for foreign investment (debt and equity) flows into micro-finance. When this information is dispersed and scattered, it becomes rather difficult to gauge what is happening, what the key trends are in terms of MIVs who are investing, which MFIs attract significant investments and why and so on. Therefore, it is imperative that the Central Bank in every recipient country becomes fully aware of foreign debt and equity investment into their MFIs. And for this to happen in real time, the Central Bank must allocate specific staff (team or unit) within a department to focus on this (perhaps, even exclusively in countries like India that have a huge untapped micro-finance market).

Second, the primary work of this team (or unit) should be to help create a reliable and valid database with regard to foreign investments (equity and debt) in micro-finance.  Such a database, apart from providing statistical information on foreign fund flows, should also help to answer questions such as (but not limited to) the following:

a)  Which MIVs (or investors) are putting money into the (local) micro-finance sector? Why?
b)  What are the MIV’s antecedents in terms of ownership, governance and management? What is their primary motivation for operating in micro-finance? What is the reason for registering the MIV in a specific place (home country)? What are the implications for micro-finance in both home and host (recipient) countries?
c)  Which MFIs have received the maximum inflow and why? Is there anything with regard to their model that attracts foreign investment?
d)  What impact will these investments have on the micro-finance in the host country – in terms of over-indebtedness and related client protection issues?
e)  And so on

Third, whenever the potential for regulatory arbitrage exists, balanced coordination among regulators is necessary and this needs to be achieved across home and host countries. Together, the regulators would need to look at issues such as (but not limited to) the following:

a)  Who (in the home country) regulates and supervises the various MIVs that have significant investments in the various host (recipient) countries?
b)  What does regulation of these MIVs mean? Is it effective in terms of ensuring safety of investor funds and/or good governance and prudent management at the MIVs?
c)  Does regulation subject MIVs to minimum standards in governance, management, systems etc and are these adhered to and followed in practice? Are there key issues with regard to ownership, governance and management at MIVs that need attention?
d)  What about minimum requirements for reporting and disclosure by MIVs to their regulators?
e)  What about supervision of MIVs? Are there on-site and off-site mechanisms? How effective are these?
f)   Plus other questions

The bank for international settlement (BIS) could perhaps be entrusted with this enormous task – of helping to create a coordination mechanism among Central Banks as well as facilitating the establishment and implementation of regulatory and supervisory standards for MIVs globally - as they have the ability, expertise and perhaps objectivity to get involved in something like this.
Colleagues and friends, we simply cannot afford another micro-finance crisis anywhere else in the world. Or put differently, we should neither allow MIVs to behave as irresponsibly as they did in India (in the years preceding the 2010 micro-finance crisis) nor permit them to be as indifferent as they have been in the case of LAPO, Nigeria. That they have not learnt from the past is very evident from the following news item (19 July 2012):

“NIGERIAN microfinance banks may soon be recapitalised to the tune of $30 billion about (N4.7 trillion), as nine investors have announced their willingness to inject more fund into the sector. The $30 billion fund that may come in the form of grants to the banks would be provided by Blue Orchard; Alietheia Capita, Bank of Agriculture (BOA); Patners for Development, Nigeria Capital Development fund, French Development Agency, Proparco, PlaNet Finance, and African Development Bank (AfDB).”[ii]

And the moment I saw this news item, I said it is about time that we start to seriously look into how MIVs operate with the objective of bringing in balanced and transparent regulation and supervision for these MIVs. While not an easy task, it is something that needs to be attended to with speed, efficiency and significant coordination among regulators across home and host countries! Otherwise, we will continue to debate issues with regard to micro-finance crisis situations in terms of MFIs alone – something that would be tantamount to treating the symptom rather than the real cause of the disease. Let us make no mistake about that!

To summarize, some may argue that regulation/supervision of MIVs is not important but take a look at what happened in India in 2010 (Andhra Pradesh Micro-Finance Crisis; and Lessons from the commercial micro-finance model in India). Without any doubt, the 2010 Indian micro-finance crisis provides a good basis for why there is an urgent need for balanced but effective regulation/supervision with regard to MIVs. And Hugh Sinclair’s (brave) book again clearly demonstrates a (serious) regulatory gap vis-à-vis MIVs. Therefore, given the above and also given the regulatory arbitrage aspects discussed here in this article, there is no doubt that MIVs require minimum (standards of) governance, management, systems and disclosure – through balanced regulation and effective supervision. This will ensure that they are not only accountable to end-user clients (like low income people in host countries) but also to the primary investors (in their home countries), whose hard earned money certainly needs to be safeguarded (and not-frittered away).

I sincerely hope that the powers that be in home and host countries start to attend to these issues mentioned in an expeditious manner…

[i] I do believe that there are more MIVs than those listed in the Luminis database.
[ii] Source: Quoted from Microfinance banks may receive N4.7tr grant from nine investors, by Joke Akanmu, Abuja, 19 July 2012 (http://www.ngrguardiannews.com/index.php?option=com_content&view=article&id=92748:microfinance-banks-may-receive-n47tr-grant-from-nine-investors&catid=31:business&Itemid=562)

Friday, July 20, 2012

Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?

Ramesh S Arunachalam

Hugh Sinclair has written a controversial book - Confessions of A Microfinance Heretic: How Microlending Lost Its Way And Betrayed the Poor” (2012) and published by Berrett-Koehler Publishers, Inc.

Recently, Hugh Sinclair, in a reply to David Roodman’s review of above book, has argued as follows:

“A hypothesis may be challenged by the accuracy of its predictions, and here lies a valid criticism of my book which none have picked up on. I anticipated vitriolic attacks from those named, as has occurred previously as I describe. In fact none have dared to comment – yet. Even the likes of Calvert Foundation, World Relief and Grameen Foundation failed to attack while I recently spoke in DC – the lion’s den. Deutsche and Citi have remained silent, and we eagerly await Triple Jump’s press release. Holland’s ethical bank ASN, as well as Oxfam Novib, have remained ominously silent. Blue Orchard have kept quiet, which is surprising given their vocal (but flawed) statement in response to the NYT article on LAPO when they defended their investment. As David pointed out, I dedicate substantial space to Kiva (the main face of microfinance to the typical US lender), but not a squeak from them despite their knee-jerk reactions to previous criticisms. One almost suspects they are desperately hoping this issue will blow over. Those with nothing to hide have nothing to fear.” (http://blogs.cgdev.org/open_book/2012/07/hugh-sinclair-replies.php)


To set the record straight, I have already pointed out through two articles (Why Blame the MFIs alone?; and Should not microfinance investment vehicles be judged by the same standards set for retail MFIs?) the fact that some of Sinclair’s assertions have strong evidence in the public domain and the micro-finance industry must attempt to answer the key questions raised in the articles given above. That is yet to happen in any serious manner and my mails to key stakeholders have either elicited no response or a simple reply stating that ‘we have not read Mr. Sinclair’s book and we will do so and get back or we will be issuing a statement shortly’. I would also like to state that I have not seen a statement from any one (barring Triple Jump – Netherlands - who sent me a statement after I asked them for clarifications regarding Sinclair’s book and I have requested their clarification on whether the statement is a public document or was sent just to me) against whom serious charges have been leveled by Sinclair.

Now, Sinclair seems to be implying that this silence of key stakeholders - against many of whom he has made very serious charges indeed - vindicates his stand and position but I am not sure of that. I guess all of us can make claims but I think we need to be accountable and fair in our writing, speech and actions just as we want the micro-finance industry to be accountable globally in its value chain of delivering financial services to low income people. And unless, Sinclair offers tangible evidence that can be scrutinized publicly and evaluated independently, his claims will remain mere claims. Let us be clear about that. Merely emphasizing the silence of people (against whom claims have been put forth) does NOT in any way substantiate some of his (huge) claims. He needs to do much more and come out with verifiable evidence in support of his claims so that we all (in the public domain) can evaluate the same and come to our own conclusions independently.

That said, the silence of key stakeholders does in fact perplex me. Let me give you one example and there are many more. Please read the following paragraphs reproduced from Sinclair’s book:

“I realized the magnitude of the crisis permeating the sector in 2009 when I received a call from the managing director of Deutsche Bank ask­ing me to cease my criticisms of microfinance. I had been raising some awkward questions about a particularly questionable microfinance bank in Africa that appeared to be making incredible profits by exploiting the poor with extremely high interest rates. It had attracted some of the largest investors in the entire sector, including Deutsche Bank, many of whom claimed to be ignorant of the MFI’s underlying activities.” (Page No. 10 of the book)

“This is when I got the call from Asad Mahmood, managing director of Deutsche Bank. Asad is a solid, honest, hard-working guy and a longtime friend. But Asad had also made some mistakes. Deutsche Bank had a large microfinance fund and few staff, and sometimes it had had to make an investment with less than full information. The bank had done so with LAPO. Asad was aware of the situation at LAPO. We had discussed it many times, but the MicroRate rating withdrawal had presumably rattled him into action. He formed a so-called “creditor taskforce” of investors in LAPO, and they agreed to send a different rating agency, Planet Rating, to Nigeria, to provide an independent rating of LAPO. The investment funds themselves were unable to perform such a task, since they were neither competent enough nor independent. The new rating would hopefully put to rest once and for all the claims made about LAPO, the rating withdrawal and correct the two previous flawed ratings by MicroRate. Or so they hoped.” (Page No. 154 of the book)

“Asad also called me and asked me to back down. “Hugh, you’ve made your point. We accept this bank is doing something wrong, but it’s time to back off now.” (Page No. 154 of the book)

“If you pursue this, it’s going to cause us all some damage. We admit it was a mistake—let’s now just make sure not to repeat it. But please, will you back down, as a favor?” (Page No. 154 and 155 of the book)

“I’m asking you, as a friend, to back down. Please.” (Page No. 155 of the book)

“It was too late to back down, even though I have enormous respect for Asad. Terry and I had arranged a conference call with Calvert to discuss the mounting evidence against LAPO. We had begun initial conversations with some journalists investigating the sector, and complaints to regulators and other funds were in progress. Above all, to back down now would not be in the best interests of the poor. We had these investors on the run, finally, and still had a few cards to play. So with a heavy heart, I had to tell my friend Asad that it would not end here.(Page No. 155 of the book)

Folks, I neither know Mr Asad Mahmood personally, nor have I met him till date. I have heard of him and see him as an important (investment) stakeholder in the global micro-finance industry. Let me give all of you a brief background on Mr Asad Mahmood –

“Mr. Mahmood is responsible for an over $500 million loan and investment portfolio which seeks both financial and social return. As well as being responsible for Deutsche Bank Microfinance efforts globally, which now comprimise more than 100 relationships in 41 countries, he was the central force in creating a pioneering $80 million commercial microfinance fund which has raised most of its money from 13 large institutional investors in the world.

Mr. Mahmood sits on the Board of the Microfinance Information Exchange (MIX), the Editorial Board of The Microbanking Bulletin, is chairman of the ASA Foundation USA, a member of the Steering Commitee for PRI Network and sits on the Steering Committee for Private/Public Partnerships for the World Economic Forum. Mr. Mahmood is also the founder of the Microfinance Club of New York, which is active in Paris, Frankfurt and London and brings microfinance leaders together to present their work and hold discussions.” (Source: Managing Risks and Rewards for Institutional Investors in Microfinance Ensuring Financial Returns while Meeting Global Social Objectives, 29 & 30 October 2008 | Millennium Knightsbridge Hotel, London, UK, Page No.2, http://www.responsible-investor.com/images/uploads/resources/research/11216994808794F09-Microfinance.pdf)

Mr. Mahmood is someone who has always argued for transparency as evidenced by this quote

"Transparency is the root of every healthy industry. It is fundamental to good business practices." (Source: What the World is Saying About Pricing Transparency by MF Transparency, Page No.1, http://mftransparency.org/wp-content/uploads/2010/11/What-the-world-is-saying-about-MFTransparency_Oct2010_ENG.pdf)

And I personally have a great deal of respect for Mr. Mahmood (as I have known him through his speeches, statements and writings). Therefore, it baffles me as to why (as yet) he has not responded to claims that Sinclair has made about him in the book? I have written to Mr. Mahmood several times and also sent him the relevant portions from the book and there has been no reply from him for over two weeks now.

So, my first set of questions are:

  1. Why has Mr. Asad Mahmood not yet responded to such serious and devastating charges levelled by Sinclair?
  2. Did he in fact call Sinclair and ask him to back off? Did he say the things that Sinclair claims he did? (e.g., look at page 155 of Sinclair’s book - “If you pursue this, it’s going to cause us all some damage. We admit it was a mistake—let’s now just make sure not to repeat it. But please, will you back down, as a favor?”)
  3. Why, on earth, should a whistle blower do a favour to someone he is exposing? Why did Mr Asad Mahmood expect Sinclair to do him a favour?   
  4. If indeed Mr Mahmood had requested Sinclair to back off, why did he want Sinclair to back off? And did he admit (to Sinclair) as alleged that investing in LAPO was a genuine mistake?
  5. Going by Mr Mahmood’s own statement on transparency (given above), is he being transparent and practicing what he has often preached?

I am also particularly interested in knowing more about the following:
  1. What relationship did Deutsche Bank (DB) have with LAPO in terms of various investments made as per different timelines?
  2. Was Deutsche Bank (DB) aware of the problems that LAPO had been facing when they had made their investment? If so, how did Deutsche Bank (DB) get into LAPO knowing the problems,
  3. If not, how did their due diligence miss the public domain reports (ratings) which clearly state this in 2005, 2007, 2009 and so on?  This is indeed surprising for an institution of the repute of Deutsche Bank
  4. If the due diligence had indeed missed these public domain reports, what did subsequent internal audits at Deutsche Bank have to say about all of these?
Now, investment decisions can go wrong and there is a need to reflect on that, using appropriate mechanisms and systems. But asking someone (Sinclair) to back off is very serious (if it is true). And coming from a person of the stature of Mr Asad Mahmood - who has argued that transparency is at the core of his work in micro-finance - it is indeed very shocking. I sincerely hope that Mr Mahmood comes (fully) clean with regard to what Sinclair has written in his book as the ramifications are certainly huge - both for him personally/professionally as well as for the global microfinance industry.

A final aspect that deserves strategic mention – there are similar claims made by Sinclair against some of the key personalities of global micro-finance and like Mr Mahmood, they will all have to come clean and preferably soon…Otherwise, the already battered image of global micro-finance will continue to take a further beating. Let us make no mistake about that! And a question that begs the answer here is whether indeed the global micro-finance industry will take on the challenge thrown by Sinclair who, in my humble opinion, has dared them to comment and respond to the claims made in his book. Only time will provide the answer… my friends…and until then…have a great week end…

Tuesday, July 17, 2012

Should not microfinance investment vehicles be judged by the same standards set for retail MFIs?

Ramesh S Arunachalam

While much has been mentioned globally with regard to governance, systems, management and transparency for retail MFIs, the time has now come to apply the same yardsticks to MIVs and all other stakeholders who invest in microfinance

It was early the 1980s and I happened to have a fascinating meeting with a fine gentleman (a noted British academic and practitioner) in the development sector and he said a lot of things that have stayed in my memory and I relate one such statement here – ‘it is ironic that we sit from where we do and preach to others on what they should do at the grass-roots. And it becomes even more ironic when we do not practice what we preach’.

Viewed in this context, governance, systems, reporting and transparency are key words that I have heard a lot in the microfinance sector (from bi-lateral and multi-lateral donors, global funds, banks, investors and others) over the last two decades and especially, in the last few years. At many conferences, I have heard these (high and mighty) stakeholders literally ram these ideas into the heads of MFI practitioners. While much of this has been mentioned globally with reference to RETAIL micro-finance institutions (MFIs), I think that the time has now come to apply the same yardstick to Micro-Finance Investment Vehicles (MIVs)[i] and all other stakeholders who invest in micro-finance (be it multi-laterals, bi-laterals or others).

Without question, MIVs and other investors must subject themselves to the same scrutiny and standards that they expect of retail MFIs that they invest in. And you will appreciate this fact more when you read Hugh Sinclair’s recent book, Confessions of A Microfinance Heretic: How Microlending Lost Its Way And Betrayed the Poor”

Sinclair essentially talks about the case of a few MIVs and other stakeholders who invested in LAPO despite knowing LAPO’s serious limitations (Please see previous Moneylife article Why blame the MFIs alone?). Indeed, MIVs and global banks have a lot of explaining to do with regard to why they invested in LAPO (in the first place) despite public domain material that pointed to serious weaknesses in the investee: a) illegal collection of savings; b) inordinately high interest rates; 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.

Without any doubt, the sanctity of these MIVs investing in LAPO can indeed be questioned on the basis of evidence available in the public domain. That said, I am however unable to accept Sinclair’s (implied conspiracy) argument that the investors (some MIVs and banks) did this on purpose as there is no serious evidence in the book that permits me to come to such a conclusion independently. I would certainly prefer to give these MIVs and banks the benefit of the doubt. Perhaps, sloppy due diligence (including inadequate scanning/reading of publicly available material) and/or short cuts adopted (cut paste presentation of credit proposals to different investors) may have resulted in this failure caused primarily by lack of appropriate systems, governance and management. And to be fair to these 1st round investors, many of them pulled out after the lid was blown on LAPO (and its illegal operations/other weaknesses) - which is perhaps a tacit acknowledgement by them of their mistake and/or error of judgment in the first place. However, the later (round) investors in LAPO – like responsAbility and Blue Orchard – still have a lot of explaining to do indeed.

That said, there is a larger point that I get from Sinclair’s book. It is the fact that even large and LuxFLAG labeled MIVs (emphasis added) like responsAbility invested in LAPO when a lot of this information was available in the public domain. Please see investments by responsAbility in LAPO as per timelines given below:

Amount (USD)
Type and Date
responsAbility Global Microfinance Fund
Debt, September 2009
responsAbility SICAV Mikrofinanz-Fonds
Debt, September 2009
Source: CGAP Microfinance Dealbook Quarterly Review
- Third Quarter 2009, Page No.3 and 4, www.microcapital.org/downloads/Dealbook/Dealbook_3Q2009.pdf

Perhaps there were more investments by responsAbility but I have no idea as data is scarce. The Planet Finance rating report (2011) says that the “Main international funders include responsAbility (transaction advised/organized by PlaNis[ii] –15% of total funding), Blue Orchard (7.5%), and Microcredit Enterprise (4%).”(Lift Above Poverty Organization (LAPO) Rating Report by Planet Rating, February 2011, Page No.5)

The key question here is how did responsAbility and Blue Orchard make this investment decision when public domain material on LAPO - being involved with illegal intermediation of client savings and having several other serious weaknesses - existed at the same time? Why did these funds invest in LAPO when others MIVs and stakeholders were pulling out? And how were the interests of primary investors in responsAbility and/or Blue Orchard safeguarded?

One may argue that responsAbility is LuxFLAG labeled but that hardly provides any comfort as when I tried to get to LuxFLAG (http://www.luxflag.org/) and look at if any documents of responsAbility were available, I found none for the specific period (when the investment in LAPO was made). So much for the labeling and associated comfort that it is said to provide with regard to MIV operations. Please see Exhibit # 1 below that provides tangible evidence in this regard and I have print screens with regard to the non-availability of all these specified reports given in the Exhibit.
And if you look at the luminis database (https://www.luminismicrofinance.com) – which is a good start to having publicly available information on MIVs, the pressure to invest may have been huge for responsAbility as shown in Exhibit # 2 (sourced from luminis database at https://www.luminismicrofinance.com)

Much of the same argument goes for the Dexia Micro-Credit Fund (Blue Orchard Finance) which is another large LuxFlag labeled MIV. Apart LAPO, Blue Orchard invested in MFIs like Sahayata Micro-Finance in India, whose operations did come under a cloud, especially after the 2010 Indian micro-finance crisis. Please see previous Moneylife articles in this regard (i) Award winning Sahayata Microfinance is the latest to go astray; and (ii) What is said at conferences is very different from what is implemented in practice

Amount (USD)
Dexia Micro-Credit Fund (BlueOrchard Finance)
Debt and August 2009
Source: CGAP Microfinance Dealbook Quarterly Review - Third Quarter 2009, Page No. 3, www.microcapital.org/downloads/Dealbook/Dealbook_3Q2009.pdf

Blue Orchard’s other investments in India are also of questionable nature, became they were made in MFI(s) that were directly linked to the irresponsible and phenomenally high (portfolio) growth that caused the 2010 Andhra Pradesh (AP) micro-finance crisis in the first place. Therefore, it appears that investments decisions of MIVs (like responsAbility and Blue Orchard) need not necessarily be aligned to grass-root reality.

That is a very critical point that needs emphasis and it certainly deserves attention of key stakeholders in the global micro-finance value chain – so that MIVs acquire the governance, systems and management necessary to invest appropriately and thereby protect their primary investors. Some may argue that LuxFlag’s attempt to certify MIVs is a step in that direction. Probably yes but a lot more needs to happen on the ground. And indeed, if the LuxFLAG label is to be taken more seriously, we also need transparent and accountable information with regard to the entire process of certification – so that we can judge for ourselves the quality of due diligence applied prior to certification, information so collected and so on.

Friends, in short, for me, Hugh Sinclair’s book was indeed a revelation about how MIVs operate in the international supply chain of delivering financial services to low income people. And after reading the book, I am searching for answers to questions such as (but not limited to) the following:

a)      How do MIVs make investment decisions? What systems do they have to ensure that the pressure to lend/invest does NOT result in poor investment? Should not MIVs have minimum governance standards and internal audit requirements just as RETAIL MFIs do? (Please see previous Moneylife articles (i) How to make the boards of large NBFC MFIs implement corporate governance norms in practice? (Part I); (ii) Corporate governance: What boards of large NBFC MFIs can do on the ground? (Part II) and (iii) Independent internal audit is the key to implementing responsible microfinance in MFIs)

b)      How do MIVs protect the overall interest of their primary investors? What systems do they have to ensure this in real time? What else may be necessary given the experiences narrated in the LAPO case?

c)      What standards of governance, transparency and reporting are MIVs currently subject to? Who sets these standards and who enforces them? How adequate are these?

d)      Given the huge diversity in legal form, location (place of incorporation), products, what can be said about the regulation and supervision of MIVs in an overall sense? And specifically, who regulates these MIVs? Who supervises them? What is the role of central banks in all of this? And does this regulation/supervision afford any protection to the primary investors in these MIVs?

e)      Last but not the least comes the question of whether (or not) there is any regulatory arbitrage? That is a very key issue indeed and will be dealt with in a separate article.

I do hope that bodies (like CGAP) in the global micro-finance industry play a constructive role in looking at issues such as the above and facilitating the necessary changes on the ground. And if that happens, I am sure that Hugh Sinclair’s book would have made a significant difference to the practice of micro-finance globally…   

[i] “MIVs, also known as microfinance funds, are entities that invest in MFIs. For a fund to qualify as an MIV, it must meet the following criteria: (i) The investment vehicle must be an independent legal entity (i.e. independent of the MFI being funded); (ii) Multiple private investors must be present, or the vehicle must be open to such investors; and (iii) The investment vehicle must focus on investing in microfinance” (Source: http://www.microrate.com/)
[ii] Disclosure statement: PlaNis and Planet Rating are two distinct legal entities, operating in a strictly independent manner. Planet Rating does not disclose to PlaNet Finance any information that is not publicly available to all other investors or fund providers. Planet Rating’s internal Rating Committee is fully independent, private, and confidential.