Microfinance Focus, December 14, 2012: Note: This letter is Hugh Sinclair`s response to the recent article written by Daniel Rozas in Microfinance Focus website on December 10, 2012. 

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Dear Mr. Rozas,

An excellent piece highlighting some flaws at yet another darling of the MF sector. May I be so bold as to suggest you may still have over-estimated the competence of this fund?

First, you suggest BlueOrchard (BO, a suitable acronym) was a pioneer. Of what? Private, return-focussed commercial microfinance – an arena that has received broad criticism from Yunus down. The very question of whether commercially motivated and yet largely unregulated capital should flow to microfinance, where the lives of vulnerable poor people are directly affected, people who enjoy few social safety nets or consumer protection, is itself under the microscope. A case could be made, in the current backlash against microfinance, that BO were key players deviating the sector from its original goals and contributing to the current wave of criticism.

You mention that Dexia collapsed. Did the European tax-payer funded bail-out, directly impact the BO redemptions? One may assume that investors were concerned by the similarity of names, and that Dexia might look to increase its own liquidity and reduce risk.

You suggest BO could have anticipated problems in AP – sure, the ability to read the WSJ would have sufficed. But look at Nicaragua where they were one of the largest investors, lost substantial sums, were caught with their trousers firmly around their ankles, and learned little from the experience, moving from one crisis to the next. BO sunk $46million into Nicaragua in the build-up to the crisis, the largest single investor in the country, including to the ill-fated Banex.  More interestingly, what did they tell their investors? They were signatories to the open letter to the Nicaraguan Government, police, judiciary etc. offering their unwavering support to the country. What happened to BOs commitments to Nicaragua after the crisis?

Then we have the fascinating element of PGGM investing $41million in BO. In the recent KRO-Reporter documentary, Jos Slats interviewed Else Bos of PGGM:

Else Bos: “Originally we had planned to invest around 200 million... We are talking about 2008. In the end we were able to invest 40 million. By now we have taken out a big chunk of those investments, only about 10 million now remains.”

Jos Slats: “Why so little?”

Else Bos: “That is because we struggled to find sufficient good investment opportunities. To find those players that showed sufficient stability, transparency, clarity in their processes which gave us the sense of trust that we were finding the kinds of investments that we were looking for in such a way that we wanted.”

Jos Slats: “So initially PGGM started off feeling very confident but in practice it turned out to be a bit more tricky?”

Else Bos: “Yes, we started off full of confidence and ambition, and this ambition moreover we still have, but it was, we found it very tricky, yes.”

So, it appears that BO was the majority of PGGMs foray into microfinance, was not entirely successful, and the reasons were: poor investment opportunities, instability, lack of transparency and murky processes. And this is from the so-called blue chip MIV on the planet – it makes one wonder what the others are like. Was it only governance issues that were creating a slight odour around BO?

But PGGM weren’t the only bright kids in the room. Norway decided to pull out of microfinance (with the exception of Sudan), but one of the few large Norwegian investors in microfinance is NMI, a fund of funds, and who did they invest in? You guessed it – BO. Their website suggests they’re still invested ($7m, highest equal investment size, along with Symbiotics). 

Then we have the mother of all silly investments: LAPO. The head of risk management at BO, a guy by the name of David MacDougall, asked me to do a course at BO on “how to spot a fraud”. We had the course prepared, using LAPO as the case study, unbeknown to BO. They never did the course, and after the whole LAPO case hit the press (NYT front page, endless other references, devastating rating reports etc.), BO waded in and invested in LAPO, as other investors such as ASN Bank, Triple Jump, Kiva, Calvert were pulling out. LAPO was the talk of the town within the sector, privately – talk which either didn’t reach BO, or they ignored. Which is more concerning?

The Klumpp departure was interesting for its timing. This is not a guy I saw eye-to-eye with, after an “incident” at a conference some years ago which I won’t reiterate here, but David Roodman speculated this could have been related to the publication of my book. I think the main cause lay elsewhere (governance being an obvious candidate that you raise), but my book hardly helped the cause. I demonstrated succinctly that not only did BO clearly do inadequate due diligence of their investment in LAPO (whom they didn’t even bother visiting on-site), but they attempted a feeble cover-up to their investors, suggesting they had not even read a rating report, nor the front page of the NYT. The question remains – how many more LAPOs are there in BO’s portfolio? And what can we conclude about BO’s heartfelt concern for client protection following this investment?

So, as you point out, in the spirit of any fair-weather banker, at precisely the moment BOs clients needed loans rolled over, BO was no longer offering capital. Beware MFIs from taking funds from such players.

But my only fundamental concern with this article is that you discuss good governance (demanded of MFIs, rarely present in MIVs) but not transparency. BO and the likes are avid supporters, apparently, of transparency. They endorse things like Smart, but where’s the transparency over their own activities? Who is regulating them in practice? Where can I see a list of BOs investments, or a rating of BO? What interest rates do their MFIs extract from the poor? What due diligence do they actually do in practice? 

Transparency is all the rage when it suits them, but applied to other people, not themselves. So, I would like to end with a classic quote from an industry veteran, 

Damian von Stauffenberg, when asked whether sector-wide risks could lead to a crisis:

“This is indeed a concern we have, not that we are seeing that microfinance funds are 

crumbling, but we see the potential, because basically the microfinance funds on the whole, with some exceptions are not terribly transparent, if you go into their websites you will find beautiful pictures of what’s going on in Bangladesh or in a poor country but you will not get the kind of information that you would take for granted in any fund that you invest in here in the U.S., and that’s worrying, if people invest because its microfinance and microfinance is good and Muhammad Yunus is for it, that is sowing the seeds for trouble, and so I think yes, a lot more transparency is needed in the field of microfinance funds” [emphasis added].

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