By Milford Bateman
In a recent Project Syndicate publication entitled The Microfinance Catalyst, Harvard University Professor Tarun Khanna, and social entrepreneur, Jayant Sinha, argue that two of the most high-profile microfinance institutions in the world – SKS and Compartamos – are important catalysts for positive change. I was quite shocked to read about such a claim. This is because the authors appear to completely misunderstand, if not deliberately seek to misrepresent, the very negative contribution that both SKS and Compartamos have actually made to their respective economies and societies. It is perhaps telling that one of the authors (Khanna) happens to be a Board Member of SKS.
The reality is this: even long-time microfinance supporters, notably including Muhammad Yunus and Malcolm Harper, now pretty much accept that SKS and Compartamos are two of the chief architects of all that has gone seriously wrong with microfinance this last decade or so. These two institutions are, in fact, the global microfinance industy’s equivalent of the now defunct US-based financial company Countrywide Financial, a once powerful and independent financial institution which was bought by Bank of America Corporation in 2008 at the height of the global financial crisis.
Countrywide Financial’s key mover was a certain Angelo Mozilo, a famously ambitious and aggressive individual who clambered his way to stratospheric wealth through pressure-selling expensive housing mortgages to the very poor. Mozilo was eventually brought to account for his actions in June 2009, and charged with civil fraud and insider trading by the Securities and Exchange Commission (SEC). He was forced to repay $45 million in ill-gotten profits and $22.5 million in civil penalties as part of a settlement with the SEC in which he admitted no wrongdoing. Thanks to his willingness to push the poor into massive over-indebtedness, Mozilo is very widely seen as one of the key figures behind the global financial crash that began in 2008.
SKS and Compartamos are very similar to Countrywide Finanical in so many ways. First, like Countrywide Financial, both SKS and Compartamos were very early on ‘captured’ by their top managers, and thereafter operated mainly as vehicles to promote these top managers’ own private enrichment, and quite irrespective of the huge damage being done to the poor through overindebtedness. Like Countrywide Financial, both SKS and Compartamos are egregious profiteers in their respective countries, effectively transferring valuable resources up and out of poor local economies thanks to very seriously high interest rates. Both institutions have significant foreign shareholders, so value created in India or Mexico is often channelled straight out of the country into the hands of wealthy shareholders abroad.
According to some analysts supportive of microfinance, Compartamos has been quietly charging interest rates just over 195% on its microloans given to its poor Mexican women clients. Although it is routinely claimed that such very high interest rates are necessary to cover the high costs of tiny microloans, on closer inspection it turns out that the major component in the very high operating costs in Compartamos is actually accounted for by the very high salaries and bonuses Compartamos’s senior personnel chose to reward themselves with since at least 2000. SKS appears to be a little less rapacious than Compartamos, given that its interest rates are between 27% and 31%. Nonetheless, its top managers have also managed to turn themselves into some of the highest paid managers in all of India. Who – apart from perhaps Angelo Mozilo! – could have envisaged that ‘working to help the poor’ would turn out to be such a hugely lucrative activity for a few key individuals?
Like Countrywide Financial, both SKS and Compartamos have been the key drivers behind an actual (in Andhra Pradesh state of India) and a forthcoming (in Mexico) individual overindebtedness crisis. SKS and its main competitors (Spandana, BASIX, SHARE) clearly played the pivotal role in precipitating the hugely destructive overindebtedness episode that erupted in Andhra Pradesh state in 2010. SKS actually started the ball rolling in 2006, after a first ‘mini-crisis’, by adopting an aggressive ‘growth at all costs’ strategy. This strategy helped to bring about major financial rewards for the top managers, including for Dr Vikram Akula, the main promoter behind SKS. However, SKS’s strategy was quickly followed by all of it main competitors, whose top managers made no bones about also wanting to become as seriously rich as Dr Akula carefully planned for himself. Quite predictably, the state of Andhra Pradesh was soon awash in microcredit. It became increasingly hard to sell a new microloan without adopting some rather nasty ‘hard-selling’ techniques. And even though the poor had no desire nor any productive use for yet another microloan, they were nevertheless pressured into taking out yet more new microloans and into continually ‘topping-up’ existing microloans.
Getting as large as possible was also important to SKS and it competitors in terms of maximising the likely financial rewards come the inevitable IPO. As it happened, only SKS itself was able to undergo an IPO before the 2010 microcredit crisis dramatically intervened to put a stop to all such transitions. Dr Vikram Akula was able to earn $12.9 million for the sale of 25% of his share options in SKS, and he will obviously make more (depending upon the share price, which has slumped in recent months) when he eventually offloads his remaining 75%. This is not quite as much as Angelo Mozilo made during his time in office, but it is not bad at all in a state where the average yearly agricultural wage hovers around $550. The other microfinance promoters in India now have to wait to see if they can also enrich themselves as much as Dr Akula. In Mexico, the key senior employees of Compartamos also became fabulously rich when in 2007 their own IPO went ahead, netting the two most senior managers several tens of millions of dollars each.
Meanwhile, there is the small problem that there is simply no evidence that either SKS or Compartamos have played a positive role in poverty reduction or local development. In fact, the evidence shows that such microfinance institutions have played a very negative role in sustainable poverty reduction and local development. In Latin America in general, for example, the IDB’s 2010 flagship report ‘The Age of Productivity’
shows that the local financial system, now increasingly dominated by aggressively commercialised microfinance institutions like Compartamos, has seriously undermined the local economic structure and society. It has done this because it inevitably led to far too much ofLatin America’s scarce capital resources (especially savings and remittances) being channeled into low-productivity informal microenterprises and self-employment, and far too little has going into the much more productive, innovative, and job-creating formal SME (small and medium enterprise) sector. InMexico, this destructive primitivisation process is known as ‘changarrisation’, a term derived from the word ‘changarros’ which in Spanish roughly translates as ‘mom and pop store’.
Similar debilitating primitivisation dynamics have been identified in India by such as Aneel Karnani, who demonstrates that India’s main problem is its ‘missing middle’ – that is, its pronounced lack of a productive SME sector to fill the gap that exists between India’s massive ‘survivalist’ sector and its still quite tiny high-tech manufacturing sector.
Importantly, the indebtedness crisis in Andhra Pradesh has severely undermined the slow economic and social progress being made in many rural and urban communities, not least by having destroyed important reserves of solidarity and social capital in the face of egregious profiteering, aggressive loan collection techniques and suicides.
All told, like Countrywide Financial and its now discredited promoter, Angelo Mozilo, SKS and Compartamos and their respective promoters have very clearly been important catalysts for catastrophe. One can only wonder why individuals so close to at least one of these institutions – SKS – chose not to see what was actually staring them in the face.