Updated 10/19/10 to reflect new information, submitted by a Grameen Foundation representative, regarding encouraging developments on LAPO since mid-year. To be clear, we stand by the main message of this post, which is not about LAPO’s current situation but about its funders’ and partners’ behavior over the last several years, prior to the public controversy that occurred in late 2009 and early 2010.
We’ve recently released research aiming to identify microfinance institutions (MFIs) with a strong focus on social impact. We have chosen to focus on finding individual MFIs largely because of our concerns about large microfinance-funding charities – specifically, that their due diligence seems focused on financial performance to the exclusion of social impact – i.e., on scale and revenue rather than effects on borrowers’ lives.
A controversy from earlier this year, over a Nigerian MFI called Lift Above Poverty Organization (LAPO), provides a good example of what we’re concerned about. LAPO has been funded and celebrated by many of the big names in microfinance, yet for years there have been many causes for concern about its social (as opposed to financial) performance. From what we’ve seen, it is not clear that these concerns have been on the radar screen of LAPO’s funders and partners.
LAPO’s funders/partners have included:
- Grameen Foundation, which has partnered with LAPO since 2003 and gave it its 2006 Excellence in Microfinance Award.
- UNDP, Ford Foundation, and USAID, all of which have provided grant funding (Planet Rating 2009, Pg 2).
- The Oxfam Novib fund, a member of Oxfam International (see LAPO’s Partners page).
- Deutsche Bank (according to the New York Times)
- Two “giving marketplaces”: Kiva and Microplace (again see LAPO’s Partners page).
- LAPO’s founder also received the Schwab Foundation’s Regional Social Entrepreneur of the Year award.
Controversy and reaction
In August 2009, MicroRate was the first to hint at concerns about LAPO, stating in a press release: “MicroRate notes that the integrity of the information provided to it by LAPO, as well as LAPO’s financial disclosures since the rating, have come into question. As a result, MicroRate’s rating of LAPO is no longer valid.” (MicroRate 2009)
In December 2009, Planet Rating released a “C+” rating report for LAPO that raised substantial concerns about LAPO’s legal licensing, governance, and data integrity, as well as noting an effective annual interest rate in excess of 100%. (Details below.)
In April 2010, The New York Times published an article citing the Planet Rating report on LAPO’s licensing issues and interest rates, while also noting the expiration of the MicroRate rating. Within weeks of this article’s running, both Kiva and MicroPlace had suspended their relationship with LAPO. (See Kiva’s page on LAPO, which discusses the suspension – Kiva’s loans through LAPO appear to have ended in early May – and Microplace’s discussion.) However, the Schwab Foundation award came after the article.
Update 10/19/10: between May 2010 and the present, several encouraging changes at LAPO are reported by a Grameen Foundation representative (via this comment and a followup email on the specifics of dates):
Below we discuss some details of the concerns, and why we feel they are relevant to our concerns about the due diligence done by LAPO’s funders/partners.
Forced savings and savings without the appropriate license
These issues were a major focus of the Times article, which stated:
- LAPO, considered the leading microfinance institution in Nigeria, engages in a contentious industry practice sometimes referred to as “forced savings.” Under it, the lender keeps a portion of the loan. Proponents argue that it helps the poor learn to save, while critics call it exploitation since borrowers do not get the entire amount up front but pay interest on the full loan.
- LAPO collected these so-called savings from its borrowers without a legal permit to do so, according to a Planet Rating report. “It was known to everybody that they did not have the right license,” Ms. Javoy said.
It appears to us that LAPO has been putting off getting the appropriate license for several years and that its funders have not held it accountable in this regard (though to be clear, it seems possible to us that this failure did not literally constitute breaking the law – we are not sure based on the information we have).
- The 2005 MicroRate report stated that LAPO was planning to (and should be planning to) become licensed as a Microfinance Bank: “by law, [Community banks] will have to transform into a Microfinance Bank (‘MFB’) by December 2007 … As yet there is no deadline for the transformation of NGOs. However pressure from the central bank is expected and LAPO will have to transform sooner rather than later … The MFI is fully committed to doing so and plans are in place to convert into a private company by the proposed deadline” (page 3). Thus, at this point LAPO appears to have been targeting December 2007 for obtaining its license.
- A letter from the Calvert Foundation concerning its investment in LAPO says the license is hoped for by year-end 2009: “we have been working with the Creditor Taskforce to encourage the transformation of LAPO into a depository institution regulated by the Central Bank as soon as possible. LAPO has received initial approval by the Central Bank for their application to transform into a ‘Microfinance Bank.’ Their goal is to secure the banking license by year-end 2009.”
- The Planet Rating report, in December 2009, is clear that LAPO still did not have the license at that time, and that it planned to get one in January 2010, a plan that Planet Rating did not find realistic (Planet Rating 2009, Pg 7). Planet Rating stated that “LAPO does not have the appropriate legal structure to … disburse credit or collect savings … Although illegal, this has been so far tolerated by the [Central Bank of Nigeria]” (Pg 7).
- LAPO still apparently did not have the license as of Kiva’s April 2010 update. This is the most recent discussion we can find of this issue.
High interest rates
The other point emphasized in the Times article is the high rates of interest charged by LAPO, which seem to contradict the stated goals of some of its partners:
- Under outside pressure, LAPO announced in 2009 that it was decreasing its monthly interest rate, Planet Rating noted, but at the same time compulsory savings were quietly raised to 20 percent of the loan from 10 percent. So, the effective interest rate for some clients actually leapt to nearly 126 percent annually from 114 percent, the report said. The average for all LAPO clients was nearly 74 percent in interest and fees, the report found.
Until recently, Microplace, which is part of eBay, was promoting LAPO to individual investors, even though the Web site says the lenders it features have interest rates between 18 and 60 percent, considerably less than what LAPO customers typically pay.
At Kiva, which promises on its Web site that it “will not partner with an organization that charges exorbitant interest rates,” the interest rate and fees for LAPO was recently advertised as 57 percent, the average rate from 2007. After The Times called to inquire, Kiva changed it to 83 percent.
We don’t have much to add on this point. The Planet Rating report specified an effective annual interest rate of 123.9% (Planet Rating 2009, Pg 6).
We have argued against reading too much into high interest rates, but funders and partners ought to be clear on what these rates are and whether the rates are consistent with their own values. We feel it is very important that anyone funding or partnering with an MFI do the full due diligence required to understand the true effective interest rate, from the beginning of the relationship.
The two issues raised by the Times article – concern over LAPO’s license and over its interest rates – are both valid issues, and both issues could be easily identified years before the controversy came up.
We note other concerns about LAPO’s impact not mentioned in the Times article:
- Integrity of governance and audits may be compromised by family relationships and other issues. The 2009 Planet Rating report states,
- “Although the Memorandum of Association states that BOD [Board of Directors] members are to be reelected every year renewed every two years (three years for the chairman), all BOD members have been in the BOD for at least four years” (Pg 4)
- “One of the [Board of Directors] members is related to the external auditor, creating a risk of lack of transparency. Family relations within the management team create another conflict of interests that have not yet been mitigated by appropriate policies” (Pg 7)
- “External auditors are not sufficiently independent and do not have enough knowledge on the risks specific to microfinance” (Pg 10)
- Data is unreliable.
- “Loan tracking and accounting systems are not integrated and the system is prone to error” (MicroRate 2005, Pg 2)
- The Planet Rating report stated that information management left room for mistakes and manipulation (Pg 8-9), and that “A sample of six branches by Planet Rating resulted in inconsistencies of up to a 6% difference in the amounts of PAR, arrears and number of clients (as of September 2009)” (Footnote 22). The report warned that “Due to insufficient data reliability, Planet Rating’s opinion on LAPO’s credit risk and credit risk coverage is subject to reserves” (Pg 11).
- LAPO may lack the tools to assess, and create incentives based on, its social as opposed to financial performance. The Planet Rating report states:
Group discipline is generally sufficiently ensured. However, for Regular Loans, the evaluation of the borrower’s capacity is not always complete and the actual use of the loan rarely formally monitored. Moreover, LAPO has not defined clear rules for the use of identification papers, which will be necessary to prevent multiple lending as the microfinance market matures and given the multiplication of MFBs … Moreover, the incentive system for Credit Officers mostly relies on their caseload, which creates a risk of excessive disbursements at the expense of portfolio quality. (Page 11)
- High dropout rates. This is the issue that most worried us when we expressed concern about LAPO in December 2009. We cited its 49% dropout rate; as early as 2005, MicroRate stated, “client attrition remains unacceptably high at around 27%” (MicroRate 2005, Pg 5).
We aren’t sure whether/to what extent
- LAPO’s funders/partners have been largely unaware of/indifferent to the concerns raised above (in some cases, possibly due to prioritizing financial over social returns).
- LAPO’s funders/partners have been aware and concerned, but have had other, positive information on LAPO’s social impact that they have felt outweighs the concerns.
- LAPO’s funders/partners have been aware and concerned, but have made a strategic decision to prioritize building sustainable, profitable financial institutions over focusing directly on social impact.
We feel there is at least some evidence for the first possibility. Two partnerships were suspended in the immediate wake of the Times article, whose major concerns could easily have been identified years ago; and the only public record of due diligence we’re aware of, USAID’s discussion from 2007 (see page 5), discusses only financial/”efficiency” indicators, with no mention of concerns like those listed above.
The possibility that social performance is essentially being overlooked seems strong and worrisome enough to us that, for the time being, we are more comfortable with the idea of giving directly to MFIs that are clearly focused on their social performance. We are open to changing this view, if and when major microfinance organizations become more open about what factors and concerns they are weighing and how they are conducting their due diligence.
- MicroRate report on LAPO – December 2005
- USAID Nigeria Audit of Microfinance Activities – November 2007
- MicroRate press release on LAPO – August 2009
- Calvert Letter regarding LAPO – November 2009
- Planet Rating report on LAPO – December 2009 (this report is not publicly available; we purchased one license and cannot post the document)