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.