A Microfinance Whistleblower Tells the Painful Truth

Whistleblowers are individuals who use free-speech rights to challenge abuses of power that betray the public trust. Frequently they are human wild cards who speak truth to power and change the course of history by challenging bureaucratic bluffs with reality. A new whistleblowing book by British microfinance expert Hugh Sinclair, Confessions of a Microfinance Heretic, exposes a particularly painful truth: What has been promoted as a charity structured to empower the poor in fact is camouflage for heavy-handed loan sharking that regularly victimizes its so-called beneficiaries.

The noble vision, which led to a Nobel Prize for its modern champion, Muhammad Yunus of Bangladesh, is to empower the poor, usually women, in underdeveloped countries through seed capital to start small businesses and a chance at economic self-sufficiency, both normally out of their reach.

Sinclair realistically labels himself a heretic, and he is criticizing myths as sacred but false as celibacy by Catholic priests. Indeed, the churches are major players in this popular outlet for donations within congregations wanting to help. The burgeoning microfinance industry has grown to $70 billion in loans annually and has been celebrated by celebrities ranging from Bono to Oprah (and even Lisa Simpson on a Simpsons episode).

Sinclair is a whistleblower who entered the industry 10 years ago with hardly a chip on his shoulder. Having been scheduled to start work at Enron just before it imploded, he was seeking an idealistic alternative. What he found was disillusionment as he confirmed and reconfirmed the reality gap between heavily financed and publicized promotions of microfinancing and the nightmare of hopeless debt it creates -- to the point that numerous women have committed suicide in India in response to heavy-handed debt-collection pressure tactics.

As usual, a primary problem is the middlemen. Microfinance institutions (MFIs) get loan money from churches and even financial giants such as Deutsch Bank. But the funding sources are highly lax in monitoring how money is spent, and MFI loan officers recruiting recipients frequently exercise the same level of due diligence as predatory mortgage lenders did before that disaster. As a result up to 90 percent of loans are not spent on starting businesses. Instead, they go toward loanees' consumer purchases, survival necessities, or frequently to pay back other loans. That begins a hopeless cycle, because these "good-deed" loans include interest rates frequently over 100 percent, and up to 195 percent in one example. The loan officers then switch hats to "enforcers" who threaten their victims with economic ruin unless payments stay current. The model of big-hearted economic self-sufficiency has been replaced with a heavy-handed pyramid scheme.

MFIs argue that high interest rates are unavoidable. Administrative costs are disproportionate for large volumes of tiny loans, and they cannot invest income from clients like normal banks. MFIs frequently operate as nonprofit NGOs, which means they are exempt from regulation under banking laws. But unrestrained enrichment of MFI leaders occurs without restraint. Furthermore, the NGOs have been converted to profit-making institutions in stock flotations that led to multi-million-dollar profits for favored inside investors.

Many of the MFIs require the equivalent of a tenant's security deposit for loans. While that income is supposed to be segregated, in practice MFIs often operate as banks by investing the money or using it for more loans. In short, rampant corruption is the real reason for obscene interest rates. Meanwhile, an Ecuadorian MFI that Sinclair still works with charges 24-percent interest and throws in free health insurance for its clients.

The last example illustrates Sinclair's goals in "committing the truth." His goal is not to destroy the microfinance industry but to hold it accountable. This road to Hell is being paved by those with truly good intentions, and their contributions are needed. He provides numerous examples of MFIs having made a positive difference when there was a genuine commitment. Without accountability, however, they will remain the rare exception rather than the rule. And today MFIs operate in a virtual honor system.

Whistleblowers who make a difference are those who "tell the truth, the whole truth, and nothing but the truth." Sinclair's book radiates that level of credibility. First, it is based on personal experience and expertise, so in-depth that he still has not been blacklisted by an industry that he has been steadily criticizing for years. (Some MFI leaders have threatened to punch him out at conferences, though.) He literally knows too much about how to do it right to be blacklisted by MFIs sharing that commitment. Second, the book is a treasure chest of verifiable, footnoted research, reinforced by a website with original documents and transcripts. Third, Sinclair is a master at accurately summarizing and demystifying complex economic systems and financial jargon, to the point where Harvard economist David Korten wrote a glowing foreword.

Perhaps most persuasively, unlike many financial wizards, Sinclair emphasizes the human cost of these scams. He lived in the communities betrayed by the seductive loans. He tried to make the system work. He witnessed the opposite over and over. Repeatedly, in contexts ranging from micro to macro, he protested the hypocrisy of digging the poor into deeper holes instead of pulling them out as claimed. The reactions ranged from indifference to shrilly, defensive hostility.

Sinclair's book is ambitious: one person's heresy against a $70-billion sacred cow. But like most whistleblowers, he is a risk taker. He delayed starting his subsequently aborted job at Enron, because he first wanted to earn a place in the Guinness Book of World Records by motorcycling from the tip of Alaska to the tip of Argentina -- with a friend who had never ridden a motorcycle, and despite his own novice status. They succeeded, but on the way they incurred 40 accidents, including a hit-and-run and numerous hospital stays.

The intensity of retaliation against whistleblowers is directly tied to the severity of the threat posed by their dissent. By that standard, the motorcycle trip might seem tame. Most whistleblowers start with a pebble of truth from isolated but in-depth knowledge, and hope that with solidarity, more will join, until their pebble turns into an avalanche. This book is the avalanche of facts from personal knowledge and research that cannot be ignored by global good citizens whose gifts are being hijacked by the financial world's sleaziest operators.

Tom Devine is legal director of the Government Accountability Project, a whistleblower support organization, and co-author of The Corporate Whistleblower's Survival Guide: A Handbook for Committing the Truth, which won the GetAbstract International Business Book of the Year Award at the 2011 Frankfurt Book Fair. He and Mr. Sinclair will be speaking at Politics and Prose in Washington, D.C., on July 13 at 7 p.m.