Comments on: LAPO: case study on due diligence by microfinance funders

By: LAPO

LAPO — Sun, 07 Nov 2010 17:45:02 +0000

Many thanks Tony for the insights you provided into LAPO and her activities vis-à-vis the portrait by Holden. LAPO chose not to be involved in this ‘conversation. As the French would say: Déjà vu; we have seen this already. We and most actors in the international microfinance community are familiar with this campaign against LAPO, Easily discernible in the case study , is the trademark of series of past attacks on LAPO which started with an irreverent question to our CEO at Amsterdam in April 2009, through the antics of street cred, blackmailing communications and telephone calls (to our partners); to the promise few months ago, of “more to come” and even a “documentary” is to follow soon. In such situation, engagement is difficult. For example, the point you tried to make that Planet rating might have captured LAPO is transition was ignored in favour of ‘ supporters should not have been so strongly invested’
If Holden wanted LAPO to be involved, s/he would have reached us while preparing the detailed case study. As some one noted, this is likely to be the only case study on an institution without a reference to it, even if it is used to reach other targets or achieve some other objectives.
Tony, please be assured that the LAPO you know remains focused and more importantly many of our partners know LAPO much more beyond the portrait of street cred and now Holden.

By: Holden

Holden — Thu, 28 Oct 2010 17:49:05 +0000

Tony, thanks for the thoughtful comments. Broadly, my response is that you may be right about the ethicality and appropriateness of LAPO's actions, and its worthiness as a whole. As you note, we relied on the microfinance agencies' rating reports; we don't have enough information on context to know how LAPO's interest rates, savings-related practices, etc. relate to others' practices and to what is best for clients. However, the focus of this post is not on LAPO but on its funders/partners, and it seems fairly clear that there are concerns here.

Whether or not LAPO's behavior regarding savings was appropriate in context, there was a big gap between its funders' intentions and results in terms of getting the recommended license.
Whether or not LAPO's interest rates are appropriate (and like you, we are against jumping to conclusions about interest rates until the full context is understood), these rates were misstated and/or not stated to donors who became quite upset when they found out about the true rates, leading to suspensions on the part of two LAPO partners.
And whether or not LAPO's struggles with data integrity & dropout rates were excusable in the face of its transition, they seem to be a point of concern that LAPO's funders felt were worth major steps to address - but seem not to have been addressed prior to the press coverage.

There are a couple possible perspectives on the backlash against LAPO. One is that supporters jumped to conclusions and pulled their support without understanding the situation, and should have continued to support LAPO. The other is that supporters should not have been so strongly invested in the first place if they had so little understanding of the situation, context, and challenges. We lean toward the second view. Our point is not that people should not support MFIs, but that their ratio of research and due diligence to support ought to rise. I agree with you that LAPO ought to join the conversation, and to reiterate, I find your arguments regarding LAPO's positive social impact to be plausible. One question on a detail - what exactly are you saying is a "blatant lie" regarding forced savings? Are you saying that LAPO lowered its interest rate in October 2008, then raised its savings requirement in April 2009, or that it raised its savings requirement in April 2009 and then lowered its interest rate in October 2009?

By: Tony

Tony — Mon, 25 Oct 2010 12:38:57 +0000

Holden, I will quickly make few declarations:
i. I sufficiently know LAPO, Nigeria enough to make some comments and observations, though I do not have specific data or the authority of the organization to speak for it.
ii. I am an active actor in the microfinance sector in Nigeria, first as a technical service provider and now as an observer.
iii. I have to a reasonable extent followed the controversy over microfinance in the recent times.
The assumption of yours in my understanding is that lenders and partners of LAPO had all along known about the gaps highlighted by New York Times and Planet Rating reports and they did not do anything about it ( obviously they did not abandon LAPO) as some did after the reports. This also forms the basis of my comments
The issues you (Holden) harped on to make your case against LAPO’s partners and supporters are mainly on high interest rate, savings mobilization with out final approval, integrity of data, conflict of interest and lack of concern for social performance. These I will comment on.
i. Various interest rates were presented by you with references to other reports, to make case against the MFI. Even level of cash collateral (savings) was used as the major element for the calculation. Neither Planet Rating nor NY Times gave prominence to (a) the cost profile of LAPO and (b) the prevailing rates in the local environment and why? These to my mind are critical to interest rate setting. Rates of interest are never universal and never static. If NY Times and Planet Rating (and user of their reports, including yourself had done the above, their findings would have been (i) LAPO has the lowest interest rates in the entire Nigerian microfinance market, (ii) that relative high interest rates in the local industry are linked to the challenging operating environment as absence of local portfolio financing opportunities (which are cheaper) and operating cost. Large MFIs like LAPO and others acquire and maintain electricity generate sets in all their branches.
Motive is also important in assessing interest rates. Planet Rating and NY Times did not provide much information on this. As a not-for-profit organization, I do not think anybody appropriates the surplus of the MFI privately. The exemplary life style of people at the MFIs especially the founder, is well known to every one in the sector (practitioners, technical assistance providers) and indeed anyone close enough to the LAPO.
ii. On savings mobilization, I doubt if Planet Rating and NY Times bothered to find out about the place of savings in community development microfinance practice in Nigeria and indeed West Africa. If they did, they would have found that:
(i) all non-profit community development MFIs require beneficiaries/members to make cash collateral (savings) in the absence of any form of security. This has been a part of the traditional microfinance practice dating back to over hundred years. This is very easy to verify.
(ii) (ii) LAPO requirement of 10% or 20% is the lowest in the entire industry. Some microfinance institutions and banks require 60% (this would have been easy for Planet Rating or NY Times to find out and mention in their reports). In the commercial banking sector, the required value of collateral is up to 150% of the request loan amount.
It appears it helped the NY Times and Planet Rating to validate their position (of ‘forced savings’) by LAPO to indicate that LAPO decreased its interest rates and at the same time increased its savings requirement from 10% to 20%. From my interaction with LAPO, this is not true. And you ( Holden) used this blatant lie. The position, I know, is that ,when the international crisis started in 2008 and one or two lenders re-scheduled their planned visits to LAPO, the MFI reasoned that the crisis could have negative effect on their funding and plan and then decided through consultations with Branch Councils( by the way ,a branch council in LAPO is a body of all leaders of Credit Groups supervised a branch , it is led by a an elected client and it meets quarterly-this was an attraction to me when in 1996 I first visited LAPO) raised the requirement to 20% in April 2009 . When it was obvious that the impact would not be much, the MFI reduced the requirement to 10% and reduced its rates in October 2009. There are 5 clear months between April and October!
iii. Planet Rating attributed the time lag between provisional and final approval by the Central Bank to lack of seriousness on the part of LAPO. This is ridiculous. Most actors in the industry know that transformation could take long time and major causes are institutional review, legal consideration and meeting capital requirement rather than not being serious. It was a common knowledge that LAPO wanted to meet the initial minimum capital requirement from its own accumulated surpluses. I do not know if NY Times and Planet knew this or LAPO provided this information. It is obvious that when the capital requirement was met, LAPO got approval just after 7 months after Planet Rating’s report of un-seriousness and 2 months after it was re-echoed by the media and 4 months before it was re-echoed by you (Holden). Meeting the requirement also influenced reduction in interest rates and charges by LAPO.
iv. There is obviously much ado about integrity of data, drop-out rates and governance. When a lending institution as large as LAPO is undergoing two major forms of transformation ( i. from manual processing of over 10 years to automation ; ii. transformation from a community development non-profit institution to a regulated entity) there are bound to be some operational and management challenges. Data errors are not strange to situation of migrating manual operations in over 140 branches to automated processing mode. Client attrition is not also unusual.
I feel Planet Rating, NY Times and you (Holden) would have highlighted some of these challenges LAPO contended with during the transformation. For instance LAPO’s board membership reported by Planet Rating was a) in transition, b) was not so before period of transition and c) has changed at the conclusion of the transformation/transition process. Planet Rating reports should have reported this. I am of the sense that the reports (NY Times and Planet rating’s) which you relied on, took advantage of the challenges of LAPO’s transition. To blame LAPO’s partners for not recognizing the challenges of a particular period is to my mind unfair and mischievous.
v. On social performance, I feel this is the area LAPO has been most mis-represented from what I know and most supporters or lenders know or must have known about LAPO. I do not know if Planet Rating , NY Times or you (Holden) know that:
 There exists LAPO Development Foundation implementing the mandate of social empowerment of female clients of LAPO. Its activities go back to many years.
 LAPO has one of the most innovative HIV/AIDS prevention, care and support programmes in rural Nigeria. It serves its clients and others. LAPO forms support groups of persons infected or affected by the virus and provides supports (medication, food supplement and loans to members of these support groups.
 LAPO has a scholarship scheme for children of its clients for secondary/High education (a level many poor children always drop out). The seed fund for the scheme was the cash prize of an Award won by LAPO some years ago. I know the Scholarship Board is led by a respected female professor of economics
 LAPO organizes annual quiz competition for secondary /High school students for some years now.
 LAPO has a Legal Aid Unit which defends its female clients who are often victims of injustice. I know many women have benefited from this support
 LAPO delivers GELT (Gender , Environment and Leadership Training) which sensitizes rural women on customs and traditions which constrain women’s actualization of their potentials
 LAPO produces and airs a 30-minutes television programme called ,
‘Bridging the Gap’ which creatively brings the issues of women especially gender inequity to public domain
 LAPO has LARDI( LAPO Agricultural and Rural Development Initiative) which provides loans and extension services to people in remote communities
In conclusion, I like Holden, feel microfinance must be made to work for the poor. I however want to note that:
 The continued support of donors and lenders for LAPO might be because they knew about the above and other strengths of LAPO which Planet Rating, NY Times and you (Holden) did not know or ignored to know. For instance going through Planet Rating report while space was giving to virus infested computers, no mention was made of the incredible and creative manner and structures by which the MFI reaches large number of poor clients in remote rural communities and urban slums of Lagos! Nothing was mentioned about the commitment of over 2,000 young Nigerians (staff) delivering billions of naira monthly to poor women.
 I do not think putting off donors or supporters for microfinance is the best way to make microfinance work for the poor. Those supporters that suspended support for the MFIs on the strength of Planet Rating and NY Times reports obviously acted in haste and in the face of sustained campaign to the point of blackmail. It is for this reason one and actors in the industry should salute the courage of the Grameen Foundation above. Others should demonstration such courage and follow suit. It is not about LAPO it is about the industry and the ultimate beneficiaries the poor.
 I feel that a better way to achieve your objective is to reach out to these lenders and MFIs for the purpose of ensuring responsible practices. For instance, thousands of poor clients loose out in stances of suspension of support by donors or lenders.
 I feel LAPO should also join this conversation.
Obakpolor T

By: Holden

Holden — Tue, 19 Oct 2010 10:50:38 +0000

Osa, the purpose of this post is not to discuss LAPO’s current situation, but to discuss the extent to which its funders and partners have used available information to hold it accountable for its social impact over the past several years, prior to the NYT article.

Therefore, we wrote the post using as much publicly available information as we could find, but did not discuss with LAPO itself. We have now updated the post to reflect information about new developments at LAPO since mid-year (information which was submitted in a comment on this post), but stand by our concerns about the state of microfinance due diligence and the behavior of LAPO’s funders and partners over the last several years.

By: Osa Edosomwan

Osa Edosomwan — Sun, 17 Oct 2010 16:54:13 +0000

I live in Benin City (this is different from Republic of Benin) which the Head Office of LAPO is. I have known LAPO for over 15 years and how it has grown into a national organization providing loans to poor women mainly.
I do not know much about other issues raised by Holden, but I know that LAPO has obtained an approval from Central Bank of Nigeria as a microfinance bank. I feel this case study was done with out-dated information. Holden did you get in touch with the people at LAPO while preparing this rather detailed case study? I think it is only fair you consider doing an up-date fast
Osa Edosomwan

By: Holden

Holden — Fri, 15 Oct 2010 07:03:47 +0000

Camilla, thanks for this information – it is very encouraging. We would like to edit this update into the post above; would you mind giving approximate dates for when LAPO reconstituted its Board of Directors, hired Deloitte & Touche and retained Microfinance Transparency?

By: Camilla Nestor

Camilla Nestor — Thu, 14 Oct 2010 21:42:41 +0000

Grameen Foundation remains committed to LAPO because it is one of the leading (and few) MFIs serving Nigeria’s poorest people. We chose and continue to work with LAPO because we support its mission of providing affordable financial services to rural and urban poor in an efficient and sustainable manner. It is because of this shared commitment that we have chosen to support LAPO in addressing the concerns that have been raised.

Though you have done an excellent synopsis of the key issues, I think readers will benefit from having more current information. This past June, LAPO received its license from the Nigerian Central Bank and also hired a new Chief Financial Officer, with extensive experience in microfinance management, through the UNDP Africa Management Services Company (AMSCO). It has reconstituted its Board of Directors, which now comprises seasoned microfinance, banking and economics professionals from Nigeria and Benin. It has hired Deloitte & Touche to audit its 2010 financials and review the audit that was conducted in 2009. Finally, it has retained the services of consulting firm MicroFinance Transparency (headed by noted expert Chuck Waterfield) to review its interest rates and related policies.

Like many MFIs operating in the challenging environment of Sub-Saharan Africa, LAPO has a number of areas for improvement. We believe that it has made positive steps in that direction and we will continue to constructively engage its leadership, to ensure that it continues to serve its clients – Nigeria’s poorest – fairly and responsibly.

-Camilla Nestor
VP, Microfinance Programs
Grameen Foundation

By: Holden

Holden — Thu, 14 Oct 2010 10:34:11 +0000

We are not and have not been associated in any way with LAPO.
We are not sure that LAPO has not yet received the appropriate license. The post gives all the information on this topic we are aware of; the last update we have is from April of this year.
The reason we refer to so many old sources is to emphasize that information raising major concerns about LAPO - including concerns that appear to be behind two partners' suspensions of their relationships with LAPO in 2010 - has been easily available for a long time.

By: Microfinance_Africa

Microfinance_Africa — Thu, 14 Oct 2010 10:24:26 +0000

Dear Holden, I always read the blogs on givewell with interest. However, I wondered as to why you are referring to reports as old as 2005 and 2007 in a blog towards the end of 2010? Does your blog have some other motives?

I checked on the internet about LAPO and on the website of Kiva, clients of LAPO seemed to be quite satisfied with the services of LAPO. In the list of microfinance banks on the site of CBN, LAPO appears as a microfinance bank – are you sure that LAPO has not received the licence of a microfinance bank?

While I haven’t had chance to go through the reports/sources that you indicate in your blog, the SPM report on the MIXMARKET website indicates the social performance of LAPO.

Perhaps the partners of LAPO couldn’t look on the issues as you have looked at! Are you or have you been, in any way, associated with LAPO?