# LAPO (Kiva partner) and financial vs. social success

We recently looked at Kiva’s largest partner MFI, LAPO (Lift Above Poverty Organization), as part of our evaluation process for an economic empowerment grant in sub-Saharan Africa.

In brief, we found two surprising pieces of information:

• LAPO is very profitable.
• There’s good reason to be concerned about LAPO’s social impact.

As Natalie recently described on our research list, we’ve contacted a handful of individual microfinance institutions in Sub-Saharan Africa to assess whether one might be able to answer the key questions we ask to evaluate a microfinance organization.

One of the steps we took was to look at Kiva’s largest MFI partners. Because Kiva partners are both (a) relatively well-known (due to its presence on Kiva) and (b) underwent Kiva’s due diligence process, we guessed that they might be a reasonable place to begin our search.

When we looked closely at LAPO, we found the following, all of which concerned us (Note: we haven’t yet contacted LAPO as our aim, at this point, was to identify the most promising organizations, not confidently dismiss any particular organization. Because our brief review of LAPO opened several relatively large questions, we chose to move on, as we often do).

• In the last 3 years (2006-2008), LAPO had significant profit margins (23-28%).
• In its Mix Market Social Performance Report (xls), LAPO reported a 49% dropout rate. As Holden wrote in our post on evaluating a microfinance charity, dropping out of a program may indicate participants “voting with their feet” and choosing to leave a program that they don’t find beneficial. It is also possible that “drop outs” instead consist of those who “graduate” from the program, i.e., improve their incomes/credit to the point where they can access credit from elsewhere (or no longer want/need credit). However, my instinct is that it’s unlikely that close to 50% of participants are quickly moving up to access more formal sources of credit.
• LAPO’s Client Exit Study report (doc) reports that individuals need manager approvals to withdraw savings, and that managers investigate the reason for withdrawal before approving (Pg 3). This seems to undermine many of the benefits of saving, which presumably aims to help people deal with risk and unexpected situations.

Does LAPO sound like an institution that needs (or should receive) Kiva’s interest-free funding?

Its appears highly profitable, but its social impact is much less clear given the high drop-out rate, significant hurdles for depositors to withdraw savings. These facts paint a slightly worrying picture of LAPO as an organization that may be earning significant profits through relatively restrictive regulations for clients while getting interest-free funding through Kiva. Perhaps there is a special arrangement here as with Xac Bank, but it certainly raises a concern about charity-minded capital funding profits.

• Thanks for posting about LAPO and their work in the Nigerian microfinance sector. Given LAPO’s scale (200,000+ borrowers) and leader status in the local market, the importance of ensuring social impact is heightened and intelligent scrutiny is important for all involved.

I work with Kiva as the Regional Director for Anglophone Africa and South Asia and therefore manage our relationship with LAPO. LAPO has been a Kiva partner for over 3 years and has used Kiva for a special, new loan product.

In general, microfinance institutions start clients through group lending and graduate them to individual loans with more flexible repayment terms after the client has repeatedly demonstrated good performance. This often takes clients a significant amount of time and many “cycles” of borrowing to become an individual borrower.

At LAPO, a Kiva Loan allows the borrower to take an individual loan that they otherwise would not yet have qualified for. The grace period is 1 month (as opposed to the normal 2 week grace on LAPO loans) and repayments are monthly (vs. the normal weekly repayment schedule). In general, this product gives clients more flexibility and is highly valued.

Kiva can do a better job of providing this information directly on the website and we are constantly striving to perfect the product.

• Ben,

Thanks for commenting. Do you have a view on LAPO’s social impact, and particularly on the points of concern we raise?

• This comment is on behalf of Yi-An who emailed me his comment. He wasn’t able to post the comment himself.

(If anyone else has trouble posting a comment, please let us know.)

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Ben can probably answer this much better than me, but a few thoughts on the points of concern:

A 49% dropout rate sounds high, but I would want a better sense of both context in the field and what it actually means. What’s the average dropout rate among MFIs, especially good MFIs? Is that even a sensible metric to use in evaluating MFIs? I’d want to see some data on this since I’m not an expert.

My additional concern is that the reality is probably more complicated than are clients voting with their feet because they’re unhappy vs. are they moving up to access more formal sources of credit. Recent research has made it a lot more clear that the financial lives of the poor (who are LAPO’s clients based on their data) are complicated and involve juggling many financial products to meet their needs, mostly informal. See here for an example from the book Portfolios of the Poor. What MFIs offer is just one piece to the puzzle and the book paints a picture that shows how in many ways, informal products serve the needs of the poor much more effectively than what MFIs currently offer (often standardized products that have rigid payment schedules). In that light, it may not be so surprising that half of clients are transitory and it may not be the role or expectation that a good MFI attracts clients and keeps them forever.

I think you also miss the nuance of how the poor may be using financial products. Flexible savings products are super useful in some circumstances since they can allow people to deposit and withdraw for daily purposes, but there’s a ton of literature on the value of compulsory savings products (think 401k) which help the poor save money for a lump sum such as school fees, weddings, or holidays. Restrictions may be inconvenient at some points, but they protect savings designated for a specific purpose from the needs of the daily grind. This might be why area managers are investigating the reason for withdrawal (e.g., is there really an emergency such as a health crisis that should override the client’s previously expressed desire to build up to $X to be withdrawn on Y date). Ben can provide more clarity on this, but I’d hesitate before assuming that this is a worrying factor. As always, I’m super appreciative of all the detail you include, making it very easy to follow the thinking. Page numbers for citations are so much better than just linking to a 30 page document! • Ben, I feel that the “special arrangements” Kiva has with LAPO, Xac Bank and possibly others raise more questions than they answer. The Kiva website makes it clear where and when the funds flow, but we have no information about the “conditionality” you’re discussing. A few questions that jump to mind: • What exactly is the relationship between the Kiva funding and the loan terms? When a donor sends$X interest-free to LAPO, LAPO must then make $X in more-flexible loans to people who would otherwise not qualify? • How was this arrangement settled on? What is the expected loss to LAPO from making these more-flexible loans and is that commensurate with the size of the benefit it’s getting from Kiva? (For the arrangement I guessed at above, with an annualized interest rate of 30%, the expected default rate would have to be ~20% on the more-flexible loan to make this a break-even deal for LAPO; at a lower default rate the interest-free loan would, it seems, be partially padding LAPO’s profits.) • How does LAPO demonstrate compliance? I have to say that I think the LAPO/Xac arrangement is very different from the arrangement implied on the Kiva site. Instead of “Loan$X to someone” it’s really “Pay [some amount in subsidy] so that this person can get a more flexible loan than they could otherwise.” I wonder how many more of these arrangements there are, and I think Kiva could be much clearer about what loans to the various partners actually mean.

Note to outsiders reading this comment: please bear in mind that none of these questions would even come up if Kiva didn’t publish its list of partners, and that many charities publish literally nothing about what they’re doing.

• To Yi-An (comment posted by Elie):

• We will soon be publishing an overview of dropout rates in the microfinance sector. LAPO’s is very high. As to the reasons for dropping out, we have some limited data on what “dropout” usually means and will be presenting that as well.
• Good point about the potential benefits of restrictions on savings accounts. I should add that investigations might be a measure against fraud.
• StreetCred on April 21, 2010 at 6:28 am said:

Having worked in the MF sector for some years, including in Nigeria, I can confirm the NYT article is largely correct. The rates are as stated. The bank does continue to operate without a legal banking license and intermediates savings. The drop-out rate is chronic. It is highly profitable.

The investors/donors to LAPO recently established a taskforce to address these issues, resulting in an independent rating by Planet Rating (www.planetrating.com). The rating resulted in a 3-point downgrage of LAPO from B+ to C+, one of the largest downgrades in MF history. MicroRate, who did the previous rating in 2007, withdrew the rating in a press release in August last year after discovering anomalies in the data provided to them by LAPO (www.microrate.com).

The recent rating highlights a number of deeply concerning new discoveries. A lack of governance and internal control; the external auditor is a brother of a board member; there is no functioning back-office IT system; they provide a specific warning as to the integrity of data; high profitability with low productivity fuelled by high interest rates…. the list continues. The rating is very sobering reading for anyone remotely involved with this bank.

In the meantime LAPO decided to increase the interest rates. The creditor taskforce is now considering its actions.

Perhaps the more disturbing aspect to this is that all this information was well known many years ago. It was published on the front page of rating reports, it was widely known by practitioners, it is not actually “news” at all. However, the intermediaries somehow managed to “miss” this data in their due diligence and reporting to their investors. Kiva recently “updated” its website to reflect the actual cost of capital, and yet this was known perhaps a year ago. ASN Bank were directly questioned about this in their AGM last year in Amsterdam, when a shareholder directly asked the board about evidence using the Deutsche Bank interest rate calculator suggested the interest rates charged by their client LAPO were well over 100%. They denied this flatly and published an article in their next newsletter stating rates could reach “as high as 30%”. The NYT, Microfinance Transparency, Planet Rating and many practitioners know this to be entirely false.

Calvert Foundation and MicroPlace (SEC regulated) quickly removed LAPO from their websites. Grameen Foundation is yet to comment on how they are able to reconcile these discoveries, but particularly the discovery of interest rates of 126%, with Muhammed Yunus’s usual stance on exploitatitve interest rates. We await a formal comment from Yunus.

There is little need to comment on the wisdom of investing or donating funds to LAPO. What is more concerning is whether we, the general public, can trust the intermediaries, such as Kiva, Calvert Foundation, ASN Bank etc. to invest our funds according to our goals in the best interests of the poor and report transparently. The call for formal regulation of the microfinance sector in developed as well as developing countries is growing louder and more credible. I applaud the recent Congressional hearing in DC on microfinance, and hope the next hearing will result in tangible improvements in this regard.