Muhammad Yunus and his Grameen Bank have received the Nobel Peace Prize on the promise of conquering poverty by giving poor people in poor countries access to debt. A whole industry of lending to the poor has developed from this. It is making its leading figures quite rich and is pushing many customers into misery and debt slavery. A recent tax-filing of the large microcredit-“charity” FINCA and an internal report tell us a lot about this business.
A few numbers say a lot. The tax-exempt microcredit charity FINCA, one of the biggest globally active players in the field, received gifts and grants of $22mn in 2014, according to a recently filed statement to the US-tax authority. According to this filing, a compensation committee saw it appropriate, after inspecting the salary of similar organizations, to almost double the salary of FINCA-CEO Rupert Scofield to $1.4mn. This puts him slightly ahead of the CEO of FINCA’s main “charitable” competitor ACCION. (This could give ACCION an excuse to raise the salary of its own CEOI again.) The second-echelon officers make less, but together, the officers take home a compensation of almost $5mn. In addition, another $2mn had to be paid for external management and accounting services.
There also remained a net-revenue of $5.1mn, which raised unrestricted net-assets to above $80mn. On a consolidated basis, according to the 2014 annual report, net assets of the group increased even more, from $297mn to $309mn. Such net-assets would be available for future increases in the compensation of Mr. Scofield and his underpaid second-echelon officers, if the compensations committee were to deem this appropriate in light of the development of salaries at ACCION and other micro-lending “charities”. Even if write-downs of bad credits should mount in the near future, which is to be expected, FINCA can continue to operate and pay out the high salaries of top management for years, just by running down net-assets. One wonders, if actress Natalie Portman, (Black Swan), who is a major celebrity-fundraiser for FINCA, knows about the salary of Mr. Scofield and its rate of increase.
Is this a case of doing a lot of good to others and a little good to oneself? Not exactly. Somebody has to pay for the Wall Street like salaries of the top brass of the “charitable” micro-lenders and the fast accumulation of their net assets. The payers are the poor people, who take loans from FINCA and pay extremely high interest rates on them. Very often, they take on new loans to be able to service these expensive old loans, sinking deeper and deeper into debt slavery.
This is not just something that critics of this hypocritical industry say. It is what affiliates of this industry came up with, for example in a report on overindebtedness in Mexico, commissioned by FINCA.
“FINCA and our colleagues in the socially responsible lending community are anxious to avoid a debt crisis in Mexico, similar to those that have caused major upheavals in other countries”,
it says in the introduction. In the credit bureau data of FINCA they found that a full 74% of loan applicants already had loans outstanding, with many having several such loans in arrears, so obviously, they needed a new loan to pay back old loans for lack of sufficient income.
FINCA branch managers reported that it is increasingly difficult to find qualified borrowers – i.e. people whose existing debt burdens would not impair their ability to repay new loans”, and mentioned that it is a “ highly competitive and growth-driven marketplace in which bad practices are commonplace.”
A big part of the success of the business model of FINCA seems to be that overstreched borrowers seem to generally be “determined to settle their accounts with their creditors and were making every effort to do so, even when they felt that they had been taken advantage of.”
The other core part of FINCA’s financial success so far, which is not explicitly mentioned in the report, but fairly obvious from the descriptions in it, is its Ponzi-scheme quality. Ever more new loans are provided to insure the repayment of old loans. This can go on for quite a while, until credit absorption capacity of the respective poor populations is exhausted. Before the scheme eventually breaks down the top brass of these micro-lenders (and their equity holders, if they are commercial), cash out as much as they can. In the case of the “charitable” lenders, the loss absorbers in case of eventual failure would be the gift and grant contributors, who would see their gift being used for the writing off of unrepayable loans.
If this was really about access to credit and banking services for the poor, the obvious institutions to support would be local and regional credit unions, not semi-commercial payday-lenders running a Ponzi-scheme on Wall-Street-level salaries. However, credit unions, which thrive in countries like Germany, but also US and Canada, are not to be exported into poor countries, even though they need them much more urgently.
A German version of this blog is available here.