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MALE SPEAKER: We've all heard the stories about the poor
woman in the third world who gets a loan for $50 and buys a
sewing machine and lifts her family out of poverty.
And who wouldn't love that story?
We all love it.
And so about 20 years ago, a lot of money started flooding
into this sector.
And maybe you wonder where it all goes.
So Hugh Sinclair is here today to tell us where it goes.
Hugh's stayed in some of the worst hotels on the planet,
eaten some of the worst food on the planet, including the
porcupine smoothie.
Make sure and ask him about that one.
So he spent about 10 years in places like Mozambique, and
Mexico, and Lagos, Nigeria, right next to the building
where all those Nigerian princes live, and gotten in
for a bit of trouble by telling the truth about where
the money actually goes and what happens to it.
For instance, ask him about Kiva.
He has some good stories about that.
So without further ado--
I always love saying that--
please welcome Hugh Sinclair.
[APPLAUSE]
HUGH SINCLAIR: Lovely.
Thank you very much.
Great honor to be in the Google headquarters.
Heard a lot about it.
Lightning introduction.
I mean, first of all, how familiar are people with
microfinance?
You all vaguely know what it is.
Has anyone done any investments in microfinance,
in Kiva, those sorts of things, funds?
Yeah, OK.
So this is probably going to be kind of sobering.
I'm an economist originally, and former investment banker.
I have an MBA from IESE Business School in Barcelona.
And I was, I believe, the last employee at Enron.
I joined two weeks before it collapsed.
So it's either totally my fault or
nothing to do with me.
I'll leave it up to you to decide.
So I then became a bit disillusioned
with mainstream finance.
You know, it wasn't going that well.
This was 10 years ago.
Let's try something new.
I'd only ever really worked as an economist and in banking.
So I figured, let's do microfinances.
It's finance-related, it's technical, all
this sort of stuff.
But hopefully I can have an impact.
So I sort of went into the sector of this naive idea of,
you know, let's try and help the poor.
So during this decade, I think I spent 8 of the 10 years
living in developing countries.
So I'm not one of these people who live in DC and fly to some
far-flung nation, take a couple of photos, and then say
that I'm working on development.
I actually live in these countries to this day.
And I guess the other thing I need to do as a instruction is
to say I'm a heretic now, thanks to writing this book.
I'm a whistleblower.
And I'm enjoying all the benefits of being fired by an
entire industry simultaneously, which is a
quite unusual feeling.
I'm going to just do a lightning summary of
microfinance.
We all know what it is, this idea of the woman with the
goat or the sewing machine.
She gets the $100 loan.
She builds up some business.
And with the income from that businesses,
she gets out of poverty.
She repays the loan, recycles the loan to the next person.
Everyone's a winner.
We're all familiar with this story.
Now, the reality is that it is actually very, very different.
First of all, it should come as no surprise that the vast
majority of people are not a budding Bill Gates
entrepreneur.
It's not so easy to actually make very high returns in
developing countries when maybe you have a very limited
education, you're operating in fiercely competitive markets.
It's actually really, really difficult.
And it should come as no surprise that, you know, is
there much evidence of people building up these huge
enterprises on the back of a $200 loan?
Absolutely none whatsoever.
How much of the capital isn't actually invested in the
business at all?
It's very difficult to find out how much money is used
simply for paying off getting a loan from one bank to pay
off the next bank to pay off the next bank to pay
off the next bank.
This sort of recycling of credit, it's very difficult to
get estimates of that.
It's very difficult to find out how much microfinance is
actually just spent on consumption.
There are estimates.
There was an estimate in the "Harvard Business Review" a
few years ago suggesting it might be as high as 90% is not
actually going into a microenterprise at all.
I think that's a bit on the high side.
But my gut feel is that it's certainly at least 3/4 of all
microfinance is going nowhere near a microenterprise.
So of course it's not having an impact.
It's not going to an enterprise in the first place.
Then there's been all the recent cases, particularly in
Andhra Pradesh in India, of really bad abuses of clients.
There's been 54 suicides so far which have been blamed by
the Indian government, published reports just that
this was at the hands of aggressive money lenders
disguised as microfinance institutions, basically.
There's been cases of women forced into prostitution.
And there's been cases of children being kidnapped as
collateral for loans.
So we're talking, in the worst cases, some pretty sordid
activities.
But oh, we shouldn't forget, child labor.
Who do you think is actually working in these small
microenterprise when they suddenly have to increase
their production by 500% in order just to cover the
interest costs?
When you suddenly go from selling 20 tomatoes to 200
tomatoes, it's labor-intensive.
Where do you get the labor from?
Your own children.
So there is also now growing evidence.
There's been a few academic papers looked into this, that
are suggesting that, actually microfinance and promoting
this informal economy might actually be resulting in
children being taken out of schools to work in what we
call microsweatshops.
And if you think about it, it would make complete sense that
that happens.
If you walk around one of these poor markets in some
remote corner of Africa or in Latin America at 2 o'clock in
the afternoon on a school day, what do you see?
Kids running around stacking shelves.
So it's not really surprising that this happens.
There's also some really fundamental
problems with the model.
If you work on the supply side of a market, if you increase
the number of people selling tomatoes, sure, some of those
tomato vendors might actually do very well.
But the total number of tomatoes being sold, the total
demand is not changing.
Microfinance is on the supply side.
So what about all those people who are being displaced,
people who used to sell tomatoes and have now been
driven out of the business?
Because there's only so many tomatoes for sale.
So that whole aspect-- they call it job displacement or
crowding out-- is completely ignored by the
microfinance community.
They only focus on the people who get the loans.
There's no discussion of the people who got displaced.
It's like if you're analyzing a national lottery and you
only interviewed the winners.
You need to talk to the million people who bought a
ticket and didn't win.
This is just a little thing that we just quietly forget.
But then, above all, the academic evidence.
There's been two really big studies.
David Roodman at the Center for Global Development in DC
recently summarized it very succinctly.
He said that the overall impact of microfinance on
poverty reduction is zero.
And then Maren Duvendack, the academic funded by the UK
government in Britain, she analyzed 2,836 academic papers
over the last 30 years and concluded that microfinance
had no impact on poverty reduction whatsoever.
And actually, it may have been a huge waste of time and a
missed opportunity, had we actually used the money for
something else.
So the literature is really coming down hard against the
microfinance sector, which is unfortunate.
So I tried to fix this from the inside, working in these
institutions, sort of pointing these things out.
Didn't work.
So I started leaking stories to media, hoping to attract
some attention.
I actually got a story into the front page of the "New
York Times." Momentarily interesting for a few people.
You know, oh, that's cool.
But it's called the rogue operator argument.
Oh no, there's another bad one.
Oh, there's a bad one.
But the system, microfinance overall is good.
But yeah, every now and then, there's a few exceptions.
That's the way that it's presented
to the outside world.
So what I decided to do was actually just write a book and
explain that these are not isolated cases.
This is an actual systemic flaw in the entire
microfinance sector.
So that's why I've now been fired by
everyone in the world.
What's unusual about the book?
I mean, really there's a subtle shift of focus that
I've tried to do.
There's been other books written about microfinance.
But this is the first one which is written by an insider
who's worked, often to quite high
levels, within the sector.
And it's the first one to really specifically name
individual people and individual companies very
clearly, entire total transparency.
Every single document and audio recordings, video
footage, emails, every single supporting document for the
entire book is online.
Anyone can go on to the website and check it out and
verify these things for themselves.
Because sometimes you're reading the book, you're like,
no, I don't believe that it actually got that bad, or that
someone at that level of seniority was doing these
sorts of actions.
And all I just say to the reader is, go to the website.
You want to listen to the entire phone call?
You can download the entire call.
The names, nothing is hidden.
AUDIENCE: What's the website?
HUGH SINCLAIR: Oh yeah, the website's
microfinancetransparency.com.
Yeah, so I detail who's involved, how they did it, why
they did it, and how they tried to cover it up.
And given that I was actually one of the people who did
these things and worked, to some extent, on the cover-ups,
I have fairly good information on this.
I didn't just look at the individuals MFIs, the
individual institutions.
But I tried to explain where is the money coming from.
Who are the investors?
Who is providing the money for this?
How much information did they know when they made these
certain investments?
I look at the role of the rating agencies.
I look at the role of the regulators.
And then, importantly, the PR companies, how do they take
this data and how do they spin it to the world so that we all
sort of think, oh, this is wonderful, and we open our
wallets and we invest more money?
My view of the main problem in the microfinance sector is, in
economics it's referred to as the principal-agent problem.
You've got money.
And you can't invest it directly yourself into an
individual microentrepreneur.
So you have to go through an institution.
I mean, examples in the US are Grameen Foundation USA,
Calvert Foundation, Kiva, Deutsche Bank Microcredit
Fund, Citibank, Standard Chartered.
All these people have microfinance funds.
Or they facilitate you getting your money from your pocket to
the poor people.
My basic premise is, how can we ensure that those
intermediaries are acting in our best interest and the best
interest of the poor?
In any other area of business, in any other area of finance,
the principal agent problem is considered
to be a huge obstacle.
In microfinance, apparently it doesn't exist.
It is a complete myth.
There's absolutely no reason to believe that the person who
you trust your money with when you're trying to do
microfinance investment is acting
in their best interests.
That is the only thing you can be truly sure of.
Those do not necessarily match up with the interests of the
poor or your own interests.
And then what I tried to do is I tried to provide a roadmap
for people.
So instead of just saying, well, these are good, these
are bad, what I tried to do is explain to the reader, OK,
this is how you can go and find out if the vehicle that
you're using, the intermediary you're using is good or bad.
This is how you would see a good institution, a good
microfinance bank from a bad one.
These are the sorts of questions you need to ask.
These are the kind of responses that you've gotta be
listening out for.
And if you get told things-- for example, we don't know
what the interest rate is, we can't actually tell you what
the interest rate is because of some technical reason--
these are like big alarm bells.
Be careful.
So what I tried to do is help people to be empowered to make
the right decisions.
Because at the end of the day, there are two groups of people
who are being exploited in microenterprise.
There's the poor.
And there are you guys, you guys who believe that you're
doing something useful.
And you trust it.
You have the best intentions to try and do something to
help the poor.
So in actual fact, you're being duped just as much as
the woman who signs a contract and suddenly finds out she's
paying 195% interest a year.
There's two angles to it.
Right, I'm not going to summarize the
book in any more detail.
What I'm gonna talk about is how did we get into this mess.
How did we arrive in a situation where we're making
loans to poor people at 195% interest and we're believing
that we're helping people get out of poverty?
I mean, if you think about it, it's
completely ridiculous, really.
And we sort of think, well, if this company that is charging
195% interest a year does an IPO and individual people make
multimillion-dollar packages--
Accion, on a $1 million investment in the IPO of
Compartamos, made $270 million.
That's a very, very decent return.
If you look at what interest rates the poor are paying--
195% is the maximum rates in that particular bank.
And no one's putting two and two together and saying, hmm,
maybe it's the poor people paying so much interest which
made these people make so much money.
So how did we get here?
It's actually completely ridiculous.
It's so against what Muhammad Yunus originally said.
Let's use affordable credit to help
people get out of poverty.
It's not happening.
But how did it get this bad?
So I think there are a number of reasons to explain this.
I think, first of all, it's the idea.
We love the idea.
It sounds so beautiful, that it's self-help.
It's empowerment.
It's harnessing the entrepreneurial flair.
It's the triple bottom line, bottom of the
pyramid, social business.
It touches all the right buttons that we want to hear.
And it's just a nice story.
It's compatible with our view of the world.
Competition is a good thing/ it's gonna bring about
wonderful outcomes.
We can solve all the world's problems with this kind of
free market, neoliberal economic strategy.
Not that it's doing particularly well right now.
But I think, above all, there was a sort of growing
discontent with traditional aid, which is best summarized
[INAUDIBLE], don't give the man a fish,
teach the man to fish.
It was this kind of normal aid in the last century, people
were sort of getting a bit tired of it.
It didn't seem to really be working.
It wasn't so nice.
You're just giving away money.
So they were disillusioned.
There was a sudden disillusionment with
traditional aid.
And then microfinance came along.
And it was new.
And it was cool.
And it was kind of innovative.
And it harnessed all these things.
And people were ready for something new.
So they just jumped onto the bandwagon.
The problem is that there's no transparency.
There's no regulation whatsoever.
When you make a loan in India, there is actually no one
sitting there, protecting the rights of the Indian client.
There are now, because they were committing suicide.
And the Indian regulators stepped in.
But when you make a loan in these countries, there's no
one looking over the shoulder of the poor
person, protecting them.
It's totally and utterly unregulated.
Women are signing contracts with their fingerprints,
because they can't read and write.
And in the contract, they are giving away all their rights.
You can come in, and you can take the last piece of tin off
their roof.
And they agreed to it.
There is no one protecting their interests.
In the US, who is regulating the institutions that are
taking the money from the general public?
No one.
There's absolutely no one.
If you think that because Deutsche Bank is
SEC-regulated, that that means Deutsche Bank Microcredit
Funds, someone's actually looking over their shoulder
and actually investigating what they're investing in in
India, in Mexico, in Bolivia, in Nigeria, just dream on.
There's no regulation.
So I mean, it's not really a huge surprise that we ended up
in this situation.
We then got this slightly ridiculous thing going on in
the UK right now-- you know, with the Libor scandal.
These people are tweaking the interest rates by a hundredth
of a percent.
And everyone's up in arms about this.
The whole European Union is now saying, oh, Spain's gonna
have to pay 7% interest a year.
And this is enough to actually bankrupt the entire EU,
potentially.
And yet we expect the poor to pay interest rates of 80%,
100%, 150%, 195%.
If you think about it, it's completely ridiculous.
But the reason is that there's massive profit to be made from
microfinance.
And this is the thing which people are slightly
forgetting.
We think that making profit is going to attract the new
investors, and that this is going to result in a more
competitive market, and all this sort of stuff.
We buy this ideology.
But let's not put the horse before the cart.
The bottom line is, people are being attracted to
microfinance because in a totally unregulated
environment, they can make extremely high returns.
This is the bottom line.
And I think the other reason why we're in this mess is this
kind of soundbite culture that has emerged.
There's massive marketing campaigns promoting
microfinance.
We've got people like--
I don't know if you're aware of
Burson-Marstellar, the PR company.
Rachel Maddow in her show summarized it.
She said, when evil needs PR, evil has Burson-Marstellar on
speed dial.
These are the guys who did Union Carbide, General
Pinochet, that favorite, Big Tobacco.
Who else did?
All the bad dudes, the people who did the Facebook smear
campaign against you guys, I believe, that was
Burson-Marstellar.
These are the people who are now defending the
microfinance sector.
They're working with friends of Grameen.
There's this huge kind of spin.
Oh, get images on to people's screens.
Tell them we need another 500 pictures of
women with sewing machines.
This will make it all blow over.
And people have limited attention spans.
You know, they see these pieces of bad news and they
go, oh well, it was on "The Simpsons." The
guy got a Nobel Prize.
Oprah Winfrey interviewed them, so it's probably OK.
I'll keep on giving the money.
No one's actually looking into the details.
No one's actually stopping and just saying, hang on, let me
just take stock of this.
Does this make sense?
What is the evidence?
And there's no one actually answering the one key problem,
which is, it's not working.
I mean, you'd think that that would attract some attention.
No.
Those sorts of conversations are prohibited.
We're not allowed to talk about the fact it doesn't
actually work.
So I think that sort of explains maybe how we arrived
in this worrying situation.
The sector is now estimated at about $70 billion.
It's 200 million clients now, growing at a million a week,
or a million a month or something.
And the microfinance community, particularly the
investment community, has got very clear goals.
We want to get to a billion.
There's a billion people out there.
They all need a credit card.
They're all unregulated.
And hey, we can make some decent profit out of them,
because we don't have these annoying regulators that we
have in Europe and the United States who are gonna actually
start exercising people's rights.
So we can just charge them whatever we want.
And there's a billion new people to profit from.
So whistleblowing.
What happens when you blow the whistle on an entire industry?
First of all, I can tell you, it's deeply stressful.
This has been, I think, one of the toughest six
months of my life.
The last month has been total hell.
Thank god I'm actually leaving in a few days, going home.
I can't wait to put this all behind me.
Getting fired by the entire sector--
the sector, it's slightly unusual.
Because generally what they do when whistleblowers--
there's been a couple of people who have dared to
criticize it.
Usually they come out guns blazing.
There's been a case of academics having
their funding cut.
We've had two threats.
The second threat was on our home phone number.
And we ended up moving house shortly afterwards.
You get blacklisted from conferences.
No one will reply to your emails.
And it's weird, because on the one hand, some friends, some
people that you believed were friends, actually turn around
and stab you in the back, which is a bit disappointing.
But the thing which is actually really nice is that
I've had some really great support from random people I
would never have thought of calling up and saying, OK,
what can we do to clean this up?
People that maybe I never thought would actually dare to
come out and try to clean up, they have.
I mean, it's been very surprising.
The support has come from unusual places.
And the betrayals have come from unusual places--
sometimes quite disappointing, to be honest.
But what's unusual about this one, I think partly because of
the transparency, partly because of the website,
because all the evidence is out there, this whistleblowing
exercise has been slightly different to former critics in
that the entire sector has just gone silent.
No one has done anything.
I was in DC, which is home to some of the people most
implicated in the book--
World Relief, Grameen Foundation USA--
actually who Google supports, just to mention it--
and Calvert Foundation.
I was expecting to have eggs thrown at me.
In actual fact didn't, which was rather nice.
And I think basically now the sector is in just complete
lock-down mode.
No one's issuing a press release.
No one's answering phone calls.
No one's replying to emails.
It's just silence.
We don't want to give any more oxygen to this.
We don't want anyone to discuss this.
If we dare to actually criticize the
book, on what grounds?
And then we're going to get into a debate.
And it's going to be put on the table.
And it's going to attract attention.
So basically now the sector is just saying, we've gotta hush
this up totally.
So I don't know.
I don't know really how to explain the complete silence
of the people implicated in the book.
I actually anticipated in the book, these are the
traditional methods that they use, the smear campaigns.
This is the way they normally attack their critics.
These are the examples of individual critics who have
been blacklisted and had these campaigns against them.
And it hasn't happened.
So actually if you want to criticize the book, that's a
good point to criticize.
I was completely wrong on that one.
I don't know why it is.
I mean, the only thing that I can consume is that their
lawyers have said, you know what, there's no point in
defending this.
You're just gonna have to let this blow over.
So what can we do?
How can we solve the problem?
I think the first thing is transparency.
This is the most opaque, murky sector that I believe exists
possibly on the planet, certainly
within financial services.
When you do an investment, when you get given that
photograph of the person you supposedly invested in, when
you look at your microfinance investment fund and they give
you the glossy brochure, I mean, it's total pure spin.
There's absolutely no flow of information from
the field to you.
It doesn't even exist.
Most of these banks don't even know who they're lending to.
They don't even capture data on their own clients.
So it's absolutely ridiculous that, in America, they say, oh
yes, we've helped 2,463,914 female entrepreneurs.
They don't even know if they're female.
They don't know if they're entrepreneurs.
The evidence is that most of them aren't doing anything
entrepreneurial whatsoever.
It's just total, complete spin.
There's absolutely zero regulation, like I say.
And until that changes, there's going to be no
improvement.
The self-regulatory bodies are--
what would you call it?
Endorsement without enforcement.
If you want to get endorsed in the microfinance sector as
being an ethical person who adheres to the six client
protection principles of microfinance--
protection of the client, fair interest rates-- the only
thing you need to do to get the endorsement to the
equivalent of a fair trade coffee stamp on the back of
your coffee pot, you need to have an email
address and a name.
Soon as you can do those two things, you can then shove on
your website, we've endorsed the Smart Campaign.
And then everyone goes, oh, that's so nice.
So you must be treating your clients well, wonderful.
I'll give you another 1,000 euros.
So self-regulation is a complete joke.
And actual regulation doesn't exist.
So that's just a couple of little problems.
Now obviously the people who are resisting any form of
regulation, no surprise who they are, namely the
microfinance investment funds.
Those intermediaries that we are hoping are acting in your
best interests and the best interests of the poor are the
first people to say, no, regulation is evil.
We have to have free markets.
Any kind of regulation is gonna interfere
with the poor people.
And they're not going to get as much money.
There is a wonderful case in SKS recently.
I don't know if any of you are aware of SKS, Vikram Akula,
very large Indian microfinance institution which did an IPO a
couple of years ago.
14 times oversubscribed, the biggest IPO in
microfinance history.
Made many people many millions of dollars.
When the Indian government started regulating them, the
share price fell 95%.
And a few days ago, there was a lovely little news piece.
It said, SKS share price increases by 50% as government
relaxes regulation.
There is an inverse relationship.
More regulation, bad for investors.
It means you're not gonna be able to exploit the poor
people so much.
You're actually going to have to do some sort of ethical
treatment of them.
You're not gonna be able to charge them such
high interest rates.
And that's not very good for investors.
I mean, the correlation is quite uncanny.
There is already some increased scrutiny coming from
regulators, which is really encouraging.
I mean, I've already had regulators calling me up and
saying, what can we do?
How do we do this?
Where do we need to be focusing our attention?
So I mean, maybe there are some good signs that the
regulators are stepping up to the plate.
But until that happens, I remain fairly pessimistic.
But I think one of the things which is actually really
good-- and given that this is Google, I think it's worth
mentioning this--
is, what is the role of technology?
And actually, technology is already having a big impact in
improving microfinance, and could potentially have a much
bigger impact.
The last thing is I'm just gonna touch on some of the
areas where technology's having a good impact.
First of all, cloud-based IT systems.
The software that these banks use to operate their
operations is actually surprisingly complicated.
You've got millions, high-volume of transactions.
You've got interest and capital repayments.
And it is actually surprisingly complicated, just
because of the sheer volume.
And these people are repaying their loans weekly, sometimes
even daily.
So you can imagine the actual information flow is vast.
So IT problems in the field are really difficult, because
you can't always get good staff.
You've got problems of computer viruses.
You don't have a very high level of education in many of
the places.
So it's difficult to really manage it.
Now you've got the first cloud-based
systems are being operated.
And in fact, one of them--
I believe it's called Mambu, in Germany-- is
hosted by you guys.
So this actually gives a way not only for improved IT,
which means improved control, which means less fraud, which
means more tracking of the actual activities.
But it gives the investors in the US and Europe, it gives
the regulators, it gives the rating agencies a way to
actually look into what's really going on in the
institution much more closely.
Obviously they need permission.
But a bank can say to its investors, give us a few
million dollars.
But what we'll do is we'll allow you access to our IT
systems so you can log in remotely.
And you can actually watch what's happening.
And this is happening now.
I've been in the offices of this company in Germany.
And you actually see transactions
coming in in real time.
You see credit application process being posted.
And you can actually see who's regulating it.
Oh, that looks a bit dodgy.
I want to stop that one right now.
This additional scrutiny is a really good thing.
One of the things which we're doing now is we're using--
I'm originally an econometrician.
We're using some of the econometrics and statistical
analysis that is traditionally used by credit card companies
to analyze their portfolios and work out characteristics
of well-performing clients, poorly performing clients.
This kind of technology, which is well-developed, we're now
using this in microfinance.
So combining that with cloud-based IT systems is
potentially very, very powerful.
So we're able to, for example, analyze databases and see, OK,
these are the types of clients who are actually really
benefiting from microfinance.
These people are actually suffering from microfinance.
We can come up with very, very precise suggestions on how the
bank can skew its entire operations so that it's doing
more of the good microfinance and less of the bad
microfinance.
And we can do this without visiting the bank.
And if, as more institutions go into cloud-based systems,
we get a bigger and bigger data set, then we can
potentially do some very interesting analysis.
So I mean, that's one good example.
Obviously mobile technology is the big
buzzword at the moment.
Poor people do now have cell phones.
And increasingly they're actually using smartphones as
the price has come down.
And it's cool to have a smartphone.
Even if you can't afford to put food on the table,
everyone wants a smartphone.
So a surprising number of people have them.
So this originally was being used for money transfers,
M-Pesa, the virtual money in East Africa,
those sorts of things.
But actually now there's a bank called Musoni, which is
the first completely virtual microfinance institution,
based in Kenya.
And I think they do operations in a
couple of other countries.
So they're actually a branchless bank that does all
its loan disbursements, loan repayments, completely and
utterly by cell phones.
Now the good thing about these smartphones is that it's not
just that the poor can do transactions on them and that
they can do them in a much cheaper way.
The banks don't have to have big branch networks and lots
of staff running around collecting loans.
But it also is a way that we can get information to the
poor people.
So for example, we're all used to here, whenever you want to
buy something, you go on to Google.
And you compare the prices.
And you can see where you can get the best deal
for whatever it is.
Poor people need to be able to shop around for
the interest rates.
Where is actually the best place to get a loan?
And it sounds like a really simple thing.
But that information is not available to them.
Ironically, if you're sitting in the US and you know where
to go, I can find out all the information of the best
microfinance institutions in Uganda for this particular
person, for this particular purpose of loan.
I can work that out from here.
The problem is is that the poor people don't have access
to that information.
As they start using phones, they're gonna have
more access to this.
So that could potentially have quite a big impact.
The use of mobile phones and the use of improved
technology, it reduces the fraud, because fraud in
microfinance is chronic.
And the ability to actually track the flow of money right
actually from the source, right the way through to the
audited statements, it makes fraud a lot more difficult.
It doesn't make it impossible.
And accounting fraud is still a big problem.
But it's definitely cleaning up the act and holding people
more comfortable.
And one of the things which we're doing--
I work with an institution down in South America.
We're using GPS now.
So we use Google Maps.
And we can actually see, in real time, where our loan
officers are.
We can track them.
We can optimize their routes to go and visit their clients
so that they're not wasting time.
Thank you very much for Google Earth, by the way.
That was a really good invention.
And we can also track.
If we see loan officers spending too much time in a
certain region, we can literally say, hang on, this
guy's in a bar.
That's not a client.
There might be a little alarm bell ringing here.
Sometimes the loan officers get a bit annoyed when we
point this out to them.
They say that we're following them.
And we're like, yep.
And look, you can see.
You can follow yourself if you want.
It's completely open.
Anyone can log in.
Another thing is credit bureaus.
Historically, there weren't really credit bureaus in
developing countries.
Now because they can get hold of the technology relatively
easily, the software for managing this vast quantity of
data, now institutions can log in and see the credit history
of even very, very poor people who are traditionally not even
mentioned in any part of the formal sector.
And then the final thing is, what we're doing now is we're
trying to launch a kind of WikiLeaks-style support for
whistleblowers in the microfinance sector.
And this is potentially a very interesting thing.
Because people within the microfinance community, we all
know that this is going on.
But it's very difficult.
If you try to complain in the microfinance institution to
your boss-- you know, like, uh, don't you think it's a bit
dodgy treating the women this aggressively?
You just get fired.
The interest rates seem a bit high, and we're telling our
investors that we're charging 36% interest rate.
But it's actually 136%.
There's some ethical questions there maybe.
I'm not sure if this is completely transparent.
You just get fired.
So what we're hoping now is that now that there is enough
critical mass of people who are willing to stand up and
criticize microfinance that we can start capturing this data
directly from the people within the microfinance
investment funds and the people within the microfinance
institutions on the ground, where they have a way to
actually send us information.
And obviously we have to check everything.
But as we start seeing patterns emerging in certain
institutions, this can be like the fuel that will tell us,
OK, this is where we need to direct our attention.
We know journalists in these different countries.
We can direct the journalists to the right people.
And we can do this anonymously.
So this is one element where we're hoping to use technology
to actually improve the sector.
By way of conclusion, microfinance, it's not
working very well.
But it can work.
I really believe that we can fix this.
I know a lot of really good institutions.
Microfinance investment funds, I'm hard-pressed to think of
one that is actually any good.
But maybe there's one or two.
And the lending platforms, there are
one or two good ones.
But it does work.
The model is proven to be working.
If you've got the right incentive, if your goal is to
help poor people, and make a modest amount of profit, then
you can do that.
And there are hundreds of examples of it happening.
Unfortunately there aren't 10,000
examples of it happening.
And it is the minority of cases where it's working.
But I think we can fix it.
And I remain very optimistic.
But we need to start focusing on poverty and not
on return on equity.
Return on equity will always lead to high interest rates
and bad treatment of the clients.
They go hand in hand.
There's no other way.
It's not an opinion.
It's a fact.
If you want to make more money out of lending to someone, you
need to charge them a higher interest rate.
And I guess my final concluding statement is, if
you're going to invest in microfinance, be very, very,
very careful, and ask really penetrating questions to the
people that you're trusting with your money.
Because otherwise you will be duped.
Thank you.
And questions?
[APPLAUSE]
MALE SPEAKER: Hugh will be glad to take your questions.
Please step up to the mic so the people at the remote
offices and on YouTube can hear you.
AUDIENCE: Since I'm closest to the microphone.
So a couple of weeks ago, we had the founder of kiva.org
here, who gives a good talk.
And early in your discussion, you said that there were quite
a few academic studies that said microfinance doesn't work
or hasn't worked.
Did they indicate that it doesn't work because the
system is just corrupt and unregulated, but in theory it
could, as you sort of mentioned in
your concluding statement?
HUGH SINCLAIR: If you look at the academic
research, it's divided.
So there are a lot of papers that say microfinance is a
great thing.
It's the miracle cure for poverty.
And we've got all this evidence to support
that it's the case.
There are lot of other papers that say it's terrible.
It's hurting the poor.
So it's not to say that there's no agreement at all.
It's a huge spectrum.
I mean, the two people in particular, David Roodman and
Maren Duvendack, who are the people who really, really
rigorously analyzed the entirety of the sector, their
overall conclusion was that it doesn't work, which is a lot
of people are actually doing really good microfinance.
A lot of people are doing really bad microfinance.
And on average, it doesn't work.
That is the conclusion.
Now, I'm not an academic.
I haven't read the--
I mean, Maren Duvendack read 2,836 papers.
I couldn't imagine worse than getting through even 20 of
those papers.
But the problem isn't necessarily because of
microeconomic problems that are happening on the ground,
but also because of the investment funds.
The people who are channeling the money
have a twisted incentive.
They don't actually have an incentive necessarily to seek
out the microfinance that does work, because of this thing,
the principal-agent problem.
So I mean, a number of people are now saying, OK, we need to
start focusing on the flow of money.
Because just by looking down here, there's just so much
complexity.
There's just so many-- what is it?
10,000 microfinance institutions.
Each one is slightly different.
Each one's doing something.
It's very difficult to really ask why.
But common sense alone is enough.
If you go into a market and you say, OK, I'm gonna lend to
all the people on this side of the room, you're
all gonna get loans.
So you get your loans and you work hard.
And you're gonna have to work very hard, because the first
100% return on your investment is just to pay me interest.
But let's say that you work even harder, even
harder, even harder.
Well, what about these guys?
They're just getting crowded out.
They're just getting displaced, because you're now
selling so many tomatoes that these guys can't operate.
Now when you go to the academics and you say, OK, let
me have a look at what are your papers doing, until
recently, when they started doing random control trials,
they tended to look only at this side of the room, which
is, in a way, completely flawed.
I mean, where is the increase in aggregate demand?
If the total number of tomatoes doesn't increase, it
doesn't really matter who's benefiting, because it's a
zero-sum game at the end of the day.
Now obviously you can increase the demand if you lend to the
consumers, the consumer finance.
But then you're creating a completely artificial market.
You're lending money to the suppliers.
And you're lending money to the demanders.
And you create a big bubble.
And this is what we saw in the Nicaragua, for example.
The funds just flooded in.
They pumped in, I think it was $420 million.
And what was happening was the loans were just being
recycled, one after the other, after the other.
The suppliers were often also the demanders.
Everyone was operating on both sides of the market.
And this huge credit bubble was just created, and just
inflated more and more and more and more, without any
regulatory oversight, as usual.
And eventually what happened?
You had 30 people just said, two banks tried to imprison 30
people in the north of Nicaragua, in
Jalapa, I think it was.
And they put them in prison.
And they said, you didn't repay your loans.
So you're going to prison.
And their families rebelled.
Then everyone in the community rebelled.
Then everyone in the region rebelled.
And then it spread right the way across Nicaragua.
And it became a movement called No Pago--
I'm not gonna pay.
And you had just a grassroots movement of the so-called
beneficiaries of microfinance just turning around and
saying, you guys came in here 10 years ago.
You told us you were gonna get us out of poverty.
The fact of the matter is, none of us
have got out of poverty.
We were meant to be protected by the government with laws
about the maximum interest rates being 20%, 25%.
You're charging us 60%, 70%, 80% interest.
No one's actually benefiting from this.
And we're not gonna pay you anymore.
And the entire thing collapsed.
And the microfinance community was like, hmm, this is a bit
embarrassing, because it was caused by our own people, the
people that we've been slapping up on websites all
these years with sewing machines, saying that these
people are just so eternally grateful to us for us being so
generous as to give them a loan at 60% interest a year.
They've now bitten us.
That's what happens when you lend to both
sides of the market.
It's just a false market.
AUDIENCE: Can you say something about microsavings
as opposed to microcredit?
HUGH SINCLAIR: Yeah, microsavings is like the
forgotten side of the entire equation.
And I mean, I'm a big supporter of microsavings,
because the great thing is, the poor, it's not that they
just don't have access to credit.
It's also that they just have no safe way where they can
deposit their money and maybe earn a small interest rate,
just to cover inflation.
That's all that's necessary.
So there are institutions which focus exclusively in
microsavings, which is good.
And there are also institutions which are
microfinance banks.
So they do the lending.
And they also have savings.
It's more difficult with savings for two reasons.
One is that you need to be regulated.
Even in these developing countries, there are much
stricter rules about taking money from the general public
than giving money to the general public, which is good.
It should be like that.
So a lot of institutions are kind of hesitant to get into
savings, because it's really difficult.
You have to be regulated.
People are going to start asking awkward questions.
And you're gonna have to submit data to a central bank,
which is going to mean that you can't do certain
activities.
In a way, it's much easier to operate as an unregulated NGO
just doing credit.
The other problem with savings is that they're not profitable
for investors.
No one can actually make any money out of an institution
that is just taking money from the poor and safekeeping it.
So there's a kind of incentive to not get into it.
Now there are people doing it.
An I applaud it.
I think it's the way ahead.
AUDIENCE: Yeah, I guess from the perspective of, if you
wanted to help the poor, then it sounds like
microsavings is better.
And if you're willing to do, like, matching funds or
something like that, it seems like that--
if you're OK with losing money, essentially, if you
were going to generate the money anyways, then
microsavings seems like a better option.
HUGH SINCLAIR: Yeah.
Yeah, definitely.
AUDIENCE: So you mentioned about this data on the
website, Microfinance Transparency.
How is a process starting to collect this data?
I assume that at some point, you have to start recording
phone calls and so on.
So when did that get started?
When did you start thinking about it?
HUGH SINCLAIR: Yeah, I sort of describe it in
the book to an extent.
I saw a couple of pretty nasty frauds.
And then when I tried to actually do something about
it, I realized, you know what, damn, I don't actually have
the data, the proof.
And now that I've raised the alarm bell, now it's too late
for me to go in and try and get the data.
So what I did, when I was working at this investment
fund in Europe, when I started realizing, uh-oh, hang on,
there's some nasty stuff going on, I learned from the
previous mistakes.
And I basically just kept quiet and just started
secretly gathering all the data over, yeah, it was about
a year, I guess.
And then when I confronted the management of this
institution, I was fired, went to court, won a court case
against them.
And then I was working as a consultant.
But to an extent, that was still kept
relatively hushed up.
People didn't put two and two together.
So I was still able to work with a number of these
institutions, bizarrely, because the communication in
the sector was pretty poor at the best of times.
So I was able to lure them into conversations.
And we were able to do things like, for example, we would
make an investment in one of these funds in the EU.
So we were protected by a European regulator.
Do an investment simply to then be
protected by the regulator.
[INAUDIBLE]
investment bank, issue a formal complaint to the
regulator, and then go to the AGM.
This was another good trick.
Do an investment.
It doesn't matter.
Even if you've just go $1 invested in the company, the
company, by law, has to invite you to the AGM.
You have the right to go to the AGM.
So then you can go to the AGM.
And you can stand up and you can ask a really
embarrassing question.
So it was all planned.
It was just a long strategy of, OK, let's for this one,
then this one, then this one, then this one.
And there was a group of people.
I mean, I didn't work on my own.
I had a lot of support.
AUDIENCE: What was it?
How long did it take?
How long did this process take?
HUGH SINCLAIR: Well, I mean, it wasn't like, OK, now I've
finished gathering the data, now we
start blowing the whistle.
But I mean, really, it started in about 2007.
And I guess the book doesn't really go beyond 2011.
So it was about four years.
But I was individually blowing the whistle in certain ways
during that period.
But only now I can't get any phone calls.
Now I can't get any more data.
Now it's over.
AUDIENCE: I wanted to ask, how are the mechanisms enforced?
How do they enforce repayment of loans?
And another question is, how do you actually
estimate risk in this?
I mean, typically when you make an investment, you're
balancing risk versus reward.
And I think the 2008 fiasco showed us that nobody was able
to estimate risk.
And in this particular case, it seems even more difficult
to estimate risk.
So what kind of work is being done on that?
HUGH SINCLAIR: Yeah.
The enforcement of loans, yeah, there's 1,000 different
ways that people do it.
The famous one is the group lending, so group liability.
So if one person defaults, the other people in the group have
to step up to the plate.
You also have forced savings, which is pretty unethical.
But a lot of institutions do it, where in order to get a
loan, you're forced to make a deposit.
So effectively, you're collateralizing your own loan.
Then also, just in the contracts, they'll just have
clauses which say, we can come and take away your pots and
pans and your whatever.
In the case of India, what you had in terms of getting loans
repaid was such aggressive and threatening practices that,
actually, in the 54 suicide cases--
actually it was 53 suicides and one ***--
you just had women who they just were in total despair.
The loan officers would hound them, hound them, humiliate
them, sit outside their houses and embarrass them in front of
their neighbors, and just keep on, just keep driving them
down, driving them down, driving them down, until
eventually, once they've given up all their assets and
they've got nothing left, eventually they just killed
themselves.
With regards to risk, I mean, there's all sorts of different
levels that you have to look at.
I mean, are you talking about the risk for an investor?
Also has additional risks, in addition to just
non-repayment of loans--
you have things like foreign exchange risk.
You have capital controls.
Maybe you invest in a country.
Say, for example, you had invested in Argentina.
Now what you're seeing is it's getting very difficult to get
money in and out of Argentina.
So you've got the additional risks from an investor's
perspective.
But on the ground level, one thing that is true is when
people talk about the credit risk of the poor.
It's actually really good.
I mean, the statistics of the 98% repayment rates are true.
They are true.
I mean, it tends to be quite extreme.
It's either 97%, 98%, 99% repayment rates, very, very
good repayment rates.
Or it's a meltdown.
There's not a lot really in between.
So when you get to Nicaragua, suddenly you get
30% repayment rates.
But in general, the poor repay.
In fact, when you look at who's the better credit risk,
I haven't seen any data, but I think it would be rather
interesting to see, what is the repayment rate of Mali
compared to the United States right now?
I wouldn't be surprised to see that there are a number of
developing countries that are actually less risky than the
US and Europe.
MALE SPEAKER: Hugh, we talked about this
a little bit before.
A lot of people here are interested in Kiva, including
some very wealthy people that I know.
Could you say a few words about that?
HUGH SINCLAIR: Yeah, Kiva gets 10 pages in the book.
I particularly focus on Kiva.
I can't go into all the detail here, because it's very subtle
things that are happening at Kiva with regards, did the
money actually go to that particular person?
There are a lot of question marks about that.
There was the issue in the "New York Times" about Kiva
post-financing transactions.
So when you lend on Kiva, your money isn't actually going to
that person.
That person has already had a loan six months ago.
Essentially what you're doing is you're buying the
loan off the bank.
You're post-financing it.
Now obviously you take the full credit risk.
And for all you know, the person is already in default,
which raises an ethical question there.
Maybe I would like to know at least if the person is already
defaulting on the loan.
But then the other question is, what are the interest
rates that--
not Kiva.
Kiva doesn't charge interest.
Kiva gives the money to the microfinance institutions.
They then take this interest-free capital that
they don't take any of the credit risk, and they go and
lend it out to institutions at rates which some people would
consider extortionate.
Because the microfinance sector doesn't dare define
extortionate, you can never say that it is extortionate,
because there's no definition.
The highest one at the moment is BRAC in
Sudan, which is 88%.
In Mexico, they tend to be in the 80s.
And if you say to Kiva, just answer me one question.
You've given me the photo of the woman.
I know she's getting a goat.
You told me about her children, her little story,
her hopes and aspirations, and how much money she wants, and
how long, and what's she gonna do with it.
And you can give me all this information.
It can come from the other side of Mongolia all the way
to my little computer in California.
But there's no interest rate.
Could you tell me what the interest rate is?
They can't tell you.
They can't or they won't tell you.
I believe it's that actually they can't.
So they'll fob you off with a thing called the portfolio
yield, which is the interest rate that the institution, on
average, charges last year or the year before.
And they get that data from a place called the MIX Market,
which is self-submitted data.
So the bank gives the data.
A couple of years later, it gets into the Kiva website.
And Kiva say, that's a kind of rough proxy of the actual
interest rate.
That's as close as they get to it.
Now the problem is is that portfolio yield is one of the
easiest statistics to manipulate, legally manipulate
under the accounting laws of most countries, because of the
subtleties of how it's actually calculated.
And I have personally manipulated portfolio yields,
I'm ashamed to say.
It's a really easy one to go for.
It's also the one statistic that all the microfinance
institutions are very sensitive about.
They want to get that down as low as possible, because they
know that people raise an eyebrow when you see portfolio
yields of 125%.
It's such an emotive topic that they just do everything
they can to reduce it.
And it's very easy to reduce it.
So if you just ask one question to Kiva, for me,
that's the question to ask, is why won't you tell me the
interest rate of the loan that I made to that person?
But the fundamental question about Kiva for me is-- and in
the book, I go through all the 990 reports.
And you can see the buffer accounting Kiva, which is, I
think, currently it's about $40 million sitting in an
account in California, in Wells Fargo, California.
And who earns interest on that money?
Remember when you clicked I Accept on the user acceptance
thing, and you forgot to read paragraph 89 of page 412,
subsection E9?
All the interest earned in the buffer account accumulates to
Kiva, of course.
Now is $42 million a large buffer account to have for a
company that's actually doing about $60 million to $70
million a year?
I don't know.
I think it sounds like quite a big buffer to me.
But I don't pass any judgment.
I just say I could do it on a smaller buffer.
But the question is this.
Who is Kiva for?
Who are the beneficiaries of Kiva?
This is my question to them, is Kiva
trying to help the poor?
Or is Kiva trying to give a nice feeling to people in
America, to feel like I've done something?
It's like the child sponsorship.
It's like, here I am in California.
There's all this suffering in the world, I believe in free
markets and entrepreneurship and everything.
But what am I gonna do?
I can't do anything.
So huh, I can just do $25 on my Paypal account.
And I can get this nice fluffy feeling inside that I helped
this woman buy a goat or a sewing machine.
I've got a photo to prove it.
And then I just feel better about myself.
So my question is, who is the beneficiary of Kiva?
I don't think it's the poor at all.
I think it's you guys.
AUDIENCE: There was big news in the last year that Facebook
had an IPO and raised a tremendous amount of capital,
presumably, to fund future development of their business.
I recently heard from two googlers about that principle
being applied at a smaller scale, where very small
startups can raise on the order of $100,000 or $250,000,
which sort of resembles the difference in microfinance
that we would typically refer to.
But there's also the scale of, say, someone who wants to open
a pizza shop in the US.
And they want to raise $20,000 in order to
get started on that.
So I'm wondering, what is the difference between raising
capital at the very large level versus this
microfinance level?
How should we think about the difference in these to
accomplish a social good of prosperity for a group of
individuals?
HUGH SINCLAIR: Well, first of all, I would say that this
label, "microfinance," is actually ridiculous in a way.
Microfinance is just banking.
It's nothing more sophisticated than banking.
We're just doing it in bigger volumes to poorer people at
higher interest rates.
So I don't think that you can say, here's the formal banking
sector of developed countries, and now we've
got this new thing.
It's not new at all.
The difference what you're referring to is
this debt and equity.
Those are two very
fundamentally different things.
Now when you start raising equity, it has a whole
different risk-reward profile.
So I think that saying that microfinance could be used for
equity, maybe here that could happen.
But the idea of having shareholder agreements and all
this sort of stuff in the developing world is, in
practice, probably not going to happen for 100 years.
But I don't know, sorry.
I mean, does that answer your question?
I'm not sure if I--
AUDIENCE: Yeah.
MALE SPEAKER: I think I need to interrupt.
AUDIENCE: Basically, it's banking.
HUGH SINCLAIR: Yeah, it's banking.
This is just banking, good-old fashioned banking.
We've been doing it for 1,000 years.
Now we're just doing it to the poor.
There shouldn't be this aura about microfinance.
And actually, when you get the mainstream banks doing a thing
called downscaling and moving into the microfinance area, in
a way that might be one of the most sensible ways to do it.
Instead of setting up dedicated microfinance
institutions, actually just saying, let's just get the
banks to go deeper into the market.
And that is happening already.
MALE SPEAKER: Let's thank Hugh for coming here.
HUGH SINCLAIR: Thank you very much.
[APPLAUSE]