To suggest that our decision to move to Mozambique was an informed one would fall short of factual accuracy.
I had met World Relief staffers in New York some months before while attending a conference. They were particularly interested in my experiences with struggling MFIs.
A few months later they contacted me to ask if I would be interested in assisting them in Rwanda, Burundi, Mongolia, or Mozambique. Neither Jessica nor I had ever been to Africa or knew much about the place: it had animals, wars, and poverty. I
remember reading something about two of the countries being particularly brutal and ruled them out immediately.
This was a major decision, and I needed to consult Jessica. I shouted upstairs:
“Those American guys have offered us work in Rwanda, Burundi, Mongolia, or Mozambique. Fancy any of those? I think Rwanda and Burundi have wars or something, might skip those.”
Jessica shouted downstairs, “What language do they speak in Mozambique?”
I searched online. “Portuguese. But don’t you reckon Mongolia would be awesome? We could go on that famous train.”
“You go to Mongolia on your own, but Mozambique sounds cool. It’ll be easy to learn Portuguese, let’s go for that one. It’d be nice to see a new continent.”
I drafted an email along the lines of “after careful consideration of the options available . . . ,” and a few months and phone calls later it was confirmed: we were going to Mozambique.
Mexico had been great, but my work there was drawing to a natural close. Walmart had arrived in our remote village. They had finally managed to build a highway to pump yet more tourists into the Chiapanecan highlands. There was an air-conditioned multiscreen cinema and rumors of a coming McDonalds. We had been there two
years, and while we loved Chiapas, it seemed better to leave on a high note.
Eventually the wonderful ancient city of San Cristóbal de las Casas would be much like any other Mexican city, with crime, pedestrianized streets for tourists, rising house prices that would drive all but the elite locals from the center into peripheral suburbs, and locals offering drugs and homogenous tourist trinkets to the endless stream of budget travelers. We chose an opportune moment to leave.
I had managed to negotiate a delay of a few months on the grounds of “tying up
some loose ends” (a holiday). I went on ahead to Mozambique to sort out a house, meet the team, and get the project started. The first few weeks are usually the most intense as one digs around, unaware of the politics, trying to piece together what is really happening. That was best done alone, and Jessica could relax in Europe a while.
The first alarm bell rang at Heathrow Airport. I approached the check-in desk of South African Airways and in a thick South African accent the kind lady asked me where I was going.
“Maputo,” I suggested.
“Where?”
“It’s the capital of Mozambique, which I believe is your neighboring country?”
She looked at me bemused, tapped away at the computer, and replied, “You’re going for two months?”
“Yes, and then I will have to go back again after Christmas, for at least another year or so.”
“Wow. Well, have a good flight, and a nice time in . . . Maputo,” she concluded, checking once again the actual name of the city.
The next alarm bell was landing at Maputo International Airport. From above it appeared a complete mess. I had never seen an African city and thus had no point of reference. There were a few tall buildings, but mostly the city appeared to satisfy the stereotype of mud huts. I turned on some music for the descent, on the advice of a friend of mine—Bob Dylan’s song about Mozambique. Already I was feeling rather gloomy—this city looked like a war-torn, dirty, chaotic dump from a few thousand feet up, and as we got closer it appeared more so. How was I going to explain this to Jessica? Dylan perked me up a little. There was certainly abundant blue sky. “It’s very nice to stay a week or two,” he suggested—I wondered what he would think of a two- year stint. I certainly ended up agreeing with him that two weeks is ample time in
Mozambique. He also mentioned that it was a romantic place with pretty girls.
Frankly, neither of these seemed particularly relevant now—we were coming in to land and the so-called runway appeared neither flat nor fully paved, and preservation of life seemed a more pressing concern. If Dylan’s first impressions of Mozambique had been the blue sky and pretty girls, I could only assume he had not taken the flight I was currently on.
Within only a few minutes of arriving I was embroiled in some scam that involved my having to pay a few dollars here and there due to some anomaly of my passport, or visa, or shoes, or something that was neither fully explained nor justified the provision of a receipt. At this stage my Portuguese amounted to a few words, and I relied entirely on Spanish. My principal concern was getting out of the airport to somewhere safe, ideally avoiding robbery, murder, or kidnapping. World Relief
assured me that the CEO would meet me at the airport, and I trusted entirely that they would comply. Otherwise, I knew no one, had large bags, and would have to rely on the Lonely Planet guidebook to save me from a tense situation.
As one of the only white people on a fairly empty flight I was easy to spot, and a large American bounded over to me beaming from ear to ear. “Hugh? Hugh Sinclair?
How are you? Glad you made it.”
I had spoken to this guy by phone, once, and here he was in person. He was about a decade younger than I had anticipated, but at least he offered some semblance of safety. We got in the car, and despite his efforts at polite conversation, my focus lay beyond the confines of the vehicle. There were burnt-out cars and tires along the road, if road was the correct term; the city was dirty, with open rubbish dumps and litter everywhere; the crowds of people seemed aggressive; and the pretty girls that Bob Dylan had sung so eloquently of had presumably departed with him in the late 1960s. The buildings were run down well beyond the standard of the slums of Mexico City, and, curiously, people seemed oblivious to cars and would wonder aimlessly into traffic. It was hot and smelled rotten. Maputo bore all the signs of second-rate communist architecture left abandoned for a few decades. Streets were named after Vladimir Lenin, Mao Tsetung, Karl Marx, and even Kim Il Sung. With the exception of some vestiges of Portuguese colonial splendor, the city consisted mainly of classic communist concrete block monstrosities that lacked even the care and maintenance of suburban Moscow. Children ran about everywhere, apparently doing chores rather than playing, and in actual fact everyone seemed rather young. I was barely thirty years old at that point, but felt immediately old. The effects of crime, poverty, civil war, and an array of diseases had largely wiped out an entire generation.
Nothing a few million $100 micro-loans couldn’t sort out.
I was familiar with extreme poverty in Latin America. The people living in the
rubbish dumps around Mexico City must be some of the least fortunate citizens of this planet. The slums of Peru are not to be taken lightly. Nomadic Mongolian herders have a tough life. But my first impression of African poverty was one of simple
astonishment. The road quality alone suggested that bombs had ceased dropping only days before my arrival. Documentaries and sporadic TV news segments had not
prepared me for the reality of what lay ahead.
We arrived at the World Relief guesthouse. It was disappointing. It required no fewer than ten keys to get through the various security doors and gates, which at least provided some protection between me and the outside world, but it was in a squalid, poorly lit area up a dubious-looking alley. The rooms did have sheets and air
conditioning, which was a pleasant surprise. The kitchen was home to a number of cockroaches. In short, it was perhaps the worst accommodation I had ever had to live
in for anything more than an emergency night in a bus terminal hotel on some long- distance South American journey. Above all, two disturbing thoughts occupied my mind from the outset:
How can I get out of this?
Jessica is not going to be at all happy.
Maybe I should have done a little more research before accepting this assignment.
The place had presumably changed significantly since Bob Dylan’s vacation here, and I made a mental note to avoid Dylan’s travel suggestions henceforth.
Over the next week I had a series of meetings, read a series of reports, and began to get some idea of the assignment at hand at the MFI, which was called Fondo de Credito Comunitario (FCC). The mess was far worse than had been described to me by the World Relief head office in the USA. Local management appeared sluggish and unmotivated. I had read reports from two members of the U.S.-based World Relief team. One was written by David Park,* director of MFI development at World Relief head office. David had spent some time in Mozambique. He was aware of, and
concerned about, some of the problems at FCC, and he was highly intelligent. Park was a rare example of a professional, well-qualified practitioner with a passion for poverty reduction and an understanding of the tension between poverty reduction and profitability. The reports were not up to date, but both pointed to similar problems:
1. Appalling productivity and inefficiency spanned the entire organization, not simply when compared to other regions, or other African MFIs, but even within Mozambique.
2. Senior management in the USA and Mozambique were aware of the problems but had failed to take corrective action.
3. The entire institution was running dangerously low on funds and would shortly face tough decisions regarding future operations. It was already closing a
number of branches.
4. There were a number of references to client savings being used for other purposes. At the time I did not realize the magnitude of this, but one haunting comment in a presentation from 2003 did make me realize that this was a total restructuring of a bank whose future was by no means certain: “Until FCC is able to tap into additional funding sources, FCC will need to use cash from client savings to maintain the continued growth of its operations.”1
This was a delicate point and stated explicitly in a report provided by World Relief head office. Not all MFIs are allowed to take savings from the general public—this is usually a regulated activity. Anyone can risk their own capital making loans to people,
although this is somewhat regulated, particularly in terms of usury laws and unfair practices toward borrowers. But to actually take deposits from the general public is much more strictly regulated, and for good reason. If a rogue operator takes savings from the poor and fails to return them, not only is this theft from the poor, but it can also have consequences for the broader banking sector. The moment the public loses faith in the ability of financial institutions to return their savings, their natural
tendency is to remove money as soon as possible, a so-called “run on the bank” that would instigate the collapse itself.
Governments rightly fear such panics and thus regulate who can take deposits from the general public. This is not a fear unique to poor African countries: consider the recent collapse of Northern Rock in England during the financial crisis, with queues of people withdrawing their funds from the bank, and the government doing
everything it could to persuade the rest that their savings were safe. Or of Argentines queuing up for days outside banks in 2001.
I needed to find out if FCC was allowed to take savings, and what it was doing with these deposits.
Some MFIs are essentially full-fledged banks. They take savings from some customers and make loans to other customers, just like Deutsche Bank, Bank of America, or Barclays Bank in developed countries. This is so-called “financial
intermediation.” Such MFIs make money by charging interest to borrowers at greater rates than the interest they pay to savers. However, in exchange for this margin, the bank has to manage its reserves in such a way that it can return funds to the savers when required. Even if the bank’s borrowers do not repay the funds to the bank, the bank is still legally obliged to return savings to the general public, and thus the bank must assume and manage this risk. And naturally, the banks have to cover their operating costs from this margin. This is a risky business and is regulated. All commercial retail banks across the planet operate on variants of this model: take
money from A, lend to B, manage the risk and operating costs efficiently, and hope to make a profit in the meantime.
Most MFIs do not engage in such financial intermediation, since most are not allowed to take deposits. Their business model is fairly simple: get money from investors, usually incurring some interest charge, lend money to clients at a higher interest rate, cover all administration costs and costs of defaults of borrowers who do not repay. What is left over is profit for the MFI and its owners.
However, there is a third type of MFI that is somewhere between these two
extremes, and here occurs much of the abuse: MFIs that make loans and take some savings, known as forced guarantees, or forced savings.
The MFIs argue that they require clients to provide some form of collateral by way
of a forced savings deposit to secure loans. They argue that such forced savings serve two main purposes. First, they encourage a savings culture among the poor.
Particularly in regions where the poor do not have reliable institutions for securely holding their savings, this is a genuine service to the poor. The second purpose, of far greater importance to the MFI, is that in the event of a client defaulting on a loan, the bank can dip into these savings to cover a portion of the loss. This reduces the risk to the MFI of lending to the poor, so by capturing such savings the bank is better able to offer reasonably priced loans to more poor people.
The problem surrounds what these MFIs do with these savings captured from their clients. In theory, the funds are deposited in a separate bank account, usually at a
reliable commercial bank. The MFI merely acts as an agent, administering the
collection of the forced savings while depositing them elsewhere. Since the savings do not actually belong to the MFI, it is reasonable that they be deposited in a separate bank. If the MFI collapses, the clients’ savings remain intact.
There are two main ways MFIs use to manipulate this system. First, they can
quietly use the client savings for other activities. This may involve lending the savings to other clients, who in turn are obliged to make forced deposits in an ever-growing pyramid. Or the MFI may simply use the savings to cover its own operating costs.
Both strategies are usually prohibited for MFIs not licensed to engage in full financial intermediation, but local regulators are often not sophisticated enough to detect this or fail to enforce the rules.
The second way MFIs can manipulate this system to their advantage is by blurring the difference between forced savings and voluntary savings. The MFI is able to justify capturing forced savings as a guarantee, but then may also discreetly capture voluntary savings, which are deposited into the same account. Capturing voluntary savings is often prohibited, while forced savings may be permitted, but regulators may not be able to distinguish between the two in practice. A dollar deposited voluntarily looks remarkably similar to a dollar deposited as a condition to obtain a loan.
An MFI needs capital to grow, and its capital often comes from foreign investors.
Funding is laborious to obtain, competition for such funds is fierce, and they are not free—the MFI must pay handsomely for such capital. The funds provided by foreign investors may also be denominated in foreign currencies, so the MFI also assumes exchange rate risk as well.
Thus MFIs have a great incentive to capture funds locally, and client savings are an obvious choice. The MFI can pay paltry interest on these savings, avoid any foreign exchange risk, and avoid dealing with the relative sophistication of the microfinance funds. Far easier, and very tempting.
The final issue with forced savings is that they effectively increase the cost of the
loan to the client, but in a hidden fashion that MFIs rarely publish and investors turn a blind eye to: forced savings are not simply advantageous to the MFI, but also to its investors. If the MFI can confiscate client savings in the event of a default, this cushion makes the MFI less risky, and thus more likely to repay the loans to the investors. Everyone is a winner . . . except the poor client.
Voluntary savings are a different matter—the forgotten half of microfinance. The poor often have no means to guard their savings, and they often live in insecure
environments where robbery is common. A means to save anonymously is also useful
—a woman may not want her husband or extended family to know she has $500 under the mattress to save up for her child’s education for fear of it being used less wisely. But equally, she should have access to these funds and assurance that they are protected by the institution, which appeared not to be the case in Mozambique. At group loan repayments a woman would occasionally rummage around in her bra and proudly whip out some small crumpled bills, usually not even a single dollar. How dare an institution use such funds inappropriately?
Almost from the outset, it appeared that something untoward might be occurring at FCC—with the knowledge of the parent company, World Relief.
“Until FCC is able to tap into additional funding sources, FCC will need to use cash from client savings to maintain the continued growth of its operations.” The comment haunted me. An unproductive, inefficient MFI with a stagnating or
shrinking portfolio of clients would naturally find it hard to attract external funds.
Perhaps World Relief had limited additional funding to pump into FCC, and it was not an institution that large investors would consider an attractive investment
opportunity. This could quickly become a spiral—more dipping into savings would further reduce the likelihood of anyone wishing to invest in FCC, requiring further dipping into savings. Client savings, however obtained, and whether forced or voluntary, could be used to meet such a shortfall, but whether this was legal or not was a valid question. And even if legal, it was no free lunch: the cash may be
accessible for use in other areas, but the obligation of the MFI to return these funds to clients did not vanish.
In a sense such practices can be likened to Bernie Madoff’s recent Ponzi scheme.
For as long as new investors keep pouring money in, there are funds available to return to early investors, and no one need know quite how the underlying portfolio is doing for as long as the dance maintains its momentum. The more recent investors are locked in for some period before they can extract their profits, by which point more investors have been found. This is remarkably similar to a microfinance loan—clients cannot withdraw their savings until they have fully repaid their loans, by which point new clients have provided new savings to be available for such withdrawals.