U.K.-style tack eyed to dilute bureaucracy
The Japan Times
By ALEX MARTIN
Staff writer
Saturday, Aug. 15, 2009
When vice farm minister Michio Ide in June criticized the Democratic Party of Japan's plans to subsidize farmers' income as unrealistic, DPJ President Yukio Hatoyama quickly fired back.
"Bureaucrats need to be fair and neutral," Hatoyama said, adding that if bureaucrats in Britain had made such remarks, "they'd be sacked."
The incident highlighted the marked discord rising between the civil servants and the DPJ, which is boldly vowing to place the administrative power of the government in the hands of politicians if the opposition party takes power in the Aug. 30 general election.
But questions remain on how the DPJ plans to do this, and how the transition from a half century of governance by the Liberal Democratic Party — and its mandarins in the bureaucracy — would be achieved.
In June, DPJ Deputy President Naoto Kan took a six-day trip to Britain to hold talks with officials from the government and opposition parties about power transitions and the relationship between bureaucrats and politicians.
The trip implies that the DPJ has a strong interest in adopting Britain's Westminster system, in which power is concentrated in the Cabinet at the expense of the governing party and the bureaucracy.
In Britain, more than 100 members of the ruling party enter the government as Cabinet members or junior ministers. Policymaking is conducted based on the ruling party's platform, with policy-proposing capabilities centralized in the Cabinet.
Bureaucrats are expected to remain neutral in shaping and supporting policies in Britain, where a firm two-party system produces frequent regime change.
Upon his return, Kan published his thoughts on the topic in the July issue of Chuo Koron magazine, where he outlined his plans on how to concentrate power in the Cabinet by abolishing the customary practices that allowed the bureaucracy to accumulate its vast power over the years.
Kan, who was Lower House chairman of the foreign policy council under Prime Minister Morihiro Hosokawa's Cabinet in 1993 — the first non-LDP government in 38 years — got firsthand experience watching how regime change can go awry.
Hosokawa's eight-party ruling coalition was often beset by policy differences that erupted between its center-right and leftist wings, and he abruptly resigned after less than a year in office as a looming personal financial scandal threatened to force him out.
In the magazine essay, Kan mentions how the soon-to-be-appointed prime minister's secretary — a former bureaucrat — began arranging Hosokawa's schedule even before the Diet elected him prime minister.
A similar thing happened when Kan was health minister in LDP Prime Minister Ryutaro Hashimoto's Cabinet in 1996. As soon as he was appointed, the ministry's anonymous chief secretary quickly began arranging everything, from his personal secretary and press conference memos for the Cabinet's formation, to his role in the Cabinet's confirmation ceremony at the Imperial Palace.
Kan said in the essay that he now understands how bureaucrats begin scripting politicians' every move from the earliest stages of a Cabinet. "It was all very strange," he wrote.
To subvert that system, the DPJ has drafted proposals in its policy platform that would, theoretically at least, put administrative power in the hands of lawmakers.
The DPJ proposes appointing more than 100 members of the ruling party to Cabinet and sub-Cabinet level posts to strengthen the government. It also suggests that the chairman of the DPJ Policy Research Council double as a Cabinet member so policy decisions can be made from within the Cabinet.
By concentrating power within the government and the party, the DPJ said the preliminary review of legislation — a customary LDP practice that has allowed the vested interests of lawmakers and bureaucrats alike to influence legislation — would become unnecessary.
The DPJ plans on eliminating these processes as well as and banning vice ministers from expressing their opinions during press conferences, as vice farm minister Ide did in June.
Another plan central to the transition from bureaucratic to political rule is a national strategy office, a body under the direct control of the prime minister. This office would be responsible for compiling the budget and drafting foreign policy documents. Its staff would include both private-sector experts and bureaucrats.
In the past, for example, budgetary request guidelines were decided by the Finance Ministry. The DPJ says this authority would be handed over to the national strategy office.
The DPJ also plans on setting up an administrative reform council that would be responsible for cutting wasteful spending to secure the finances needed for developing policy.
During an interview July 31, Hatoyama said all of the party's plans should be legislated simultaneously as the DPJ-led government starts up. He said he plans to kick things off by holding an extraordinary Diet session in the fall.
However, such a drastic overhaul of the administrative system is bound to face enormous resistance from the bureaucracy, analysts say.
Fukashi Horie, a well-versed political observer and professor emeritus at Keio University, said that although he believes the DPJ still hasn't reached a practical conclusion on how to put its plans in motion, constant maneuvering by self-interested bureaucrats bent on influencing legislation is unavoidable.
"It's already difficult enough to enact laws without loopholes," Horie said, stressing that even if the DPJ succeeded in passing such bills through the Diet, the next issue would be how to control the bureaucrats.
"What will be required from now on is the ability to pin down and control the bureaucrats — to cajole them at times, or growl at them depending on the situation, to gain their cooperation — and that is a very difficult thing to do," he said.
Jun Saito, a former DPJ Upper House legislator who teaches political science at Yale, added that it also will be important for the DPJ to establish realistic expectations among the public that it will be in power for at least the next few years, and possibly more.
"Systemic reforms take effort and time. Winning next year's Upper House election will also be an important agenda item," he said. "Because the LDP has owned the bureaucracy, DPJ politicians have lacked the resources to formulate policies. The DPJ will need to take time to get (its) policies actually enacted and implemented, but I believe (it) will get things done."
Saturday, August 15, 2009
Friday, August 14, 2009
Japan earthquakes remind investors of ever-present risk
Aug 13, 2009, 4:16 a.m. EST
By Lisa Twaronite, MarketWatch
Third strong quake in four days lead analysts to ponder worst-case scenarios
TOKYO (MarketWatch) -- The third strong earthquake in four days shook Tokyo early Thursday, reminding investors that the threat of a massive temblor looms heavily over the world's second-largest economy and leaving them to ponder the likely market impact.
The 6.7-magnitude quake that stuck at 7:49 a.m. Thursday morning local time was centered in the Pacific Ocean about 200 miles southeast of Tokyo, according to the U.S. Geological Survey. No injuries or damages were reported.
It followed a magnitude-6.5 earthquake to about 100 miles southwest of Tokyo two days earlier, which left one person dead, dozens injured and closed a major roadway connecting Tokyo with Western Japan.
Another offshore quake with an estimated magnitude of 7.1 struck the Izu Islands to the west of Tuesday's quake on Sunday evening. All three quakes were felt in the capital, though none occurred during market hours.
Japanese assets, including the yen, would be an obvious "sell" immediately after a major disaster here. Whenever the ground trembles under Tokyo trading floors, the yen tends to skip against other major currencies, and the stock market usually sheds some points.
But in the longer term, a clear directional call is impossible. The quake's magnitude, the state of the Japanese and global economies in the period leading up to the event, as well as the recent bias of yen trading preceding it, would all be factors, said Patrick Bennett, a currency strategist at Société Générale in Hong Kong.
"A huge earthquake would of course be a terrible tragedy, and as in the case of [the Japanese port city of] Kobe, would impact growth. But in the recovery/rebuilding process there will be some divergence in company performances," he said.
In the rebuilding phase that follows a disaster, winners and losers emerge. Insurers are likely to liquidate some overseas assets in order to pay claims, and that repatriation could accelerate yen appreciation.
A 2007 study by ABS Consulting Inc. and its unit EQECAT Inc. found that a large quake could lead Japan's chemical industry to suffer financial losses equal to more than two years of pre-tax earnings, while the precision machinery and petroleum industries could suffer damage equal to more than one year of pre-tax earnings.
Other industry groups that also have significant loss exposure were steel, non-ferrous metals, autos, electronics and pharmaceuticals, the study said.
Advanced preparedness
Japan is among the most earthquake-conscious societies, as it is struck by an estimated 20% of the world's earthquakes of magnitude 6 or greater.
Schools, and even some business, hold regular disaster drills, particularly on the Sept. 1 anniversary of the 1923 Great Kanto earthquake and fire which claimed about 140,000 lives in Yokohama and Tokyo.
Japan's advanced quake preparedness was likely the main reason casualties and damages from this week's strong temblors were lower than they would have been in a country without such preparations and seismic requirements in place.
Even so, companies reported quake-related disruptions. Corning Inc. /quotes/comstock/13*!glw/quotes/nls/glw (GLW 16.48, +0.25, +1.54%) said the Tuesday earthquake disrupted production at its LCD glass-manufacturing facility in Shizuoka. The plant manufactures glass substrate for Sharp Corp. /quotes/comstock/!6753 (JP:6753 1,083, +11.00, +1.03%) and other Japanese LCD panel makers.
Toshiba Corp. /quotes/comstock/!6502 (JP:6502 464.00, +7.00, +1.53%) subsidiary Hamaoka Toshiba Electronics Corp. also reportedly suffered damage at their LED factory in the area.
A quake-triggered landslide also destroyed part of the Tomei Expressway between Tokyo and Nagoya, which remained closed Thursday.
Chubu Electric Power Co. /quotes/comstock/!9502 (JP:9502 2,205, -5.00, -0.23%) automatically halted operations at two reactors at its nuclear plant in Shizuoka prefecture after the quake, which briefly cut power to thousands of homes. The utility said it would temporarily use liquefied natural gas units to offset the loss of capacity.
'Bad for the economy'
Two strong earthquakes with 6-plus magnitudes caused casualties and damages in the northern Niigata region in 2004 and 2007, but Japan's most devastating recent seismic event was Kobe's 7.3-magnitude quake in 1995. It killed more than 6,400 people and caused damages estimated around 2% of Japanese gross domestic product.
In a worst-case scenario, a Kobe-sized quake originating in the northern part of Tokyo Bay could kill up to 11,000 people in the greater Tokyo area, according to a 2005 study by the Japanese Cabinet Office's Central Disaster Management Council.
"An earthquake, as with any disaster, is bad for the economy despite many commentators' arguments that the earthquake would stimulate the Japanese economy through the demand stimulus that results," economist Warwick McKibbin wrote in a 1997 policy paper for the Washington, D.C.-based Brookings Institution.
Japan's experience in 1995 followed some traditional models, he said, in which "the yen appreciates, GDP falls, the share market drops, and long-term real interest rates rise slightly."
The initial impact, he said, is "a direct negative effect of the lower capital stock on aggregate supply," which brings down share prices and, in turn, reduces private consumption.
But those lower prices eventually attract buyers, he said, as foreign capital flows into the country "in response to the higher expected rate of return. Thus the yen appreciates and the current account deteriorates, reflecting the capital inflow."
Lisa Twaronite reports for MarketWatch from Tokyo.
By Lisa Twaronite, MarketWatch
Third strong quake in four days lead analysts to ponder worst-case scenarios
TOKYO (MarketWatch) -- The third strong earthquake in four days shook Tokyo early Thursday, reminding investors that the threat of a massive temblor looms heavily over the world's second-largest economy and leaving them to ponder the likely market impact.
The 6.7-magnitude quake that stuck at 7:49 a.m. Thursday morning local time was centered in the Pacific Ocean about 200 miles southeast of Tokyo, according to the U.S. Geological Survey. No injuries or damages were reported.
It followed a magnitude-6.5 earthquake to about 100 miles southwest of Tokyo two days earlier, which left one person dead, dozens injured and closed a major roadway connecting Tokyo with Western Japan.
Another offshore quake with an estimated magnitude of 7.1 struck the Izu Islands to the west of Tuesday's quake on Sunday evening. All three quakes were felt in the capital, though none occurred during market hours.
Japanese assets, including the yen, would be an obvious "sell" immediately after a major disaster here. Whenever the ground trembles under Tokyo trading floors, the yen tends to skip against other major currencies, and the stock market usually sheds some points.
But in the longer term, a clear directional call is impossible. The quake's magnitude, the state of the Japanese and global economies in the period leading up to the event, as well as the recent bias of yen trading preceding it, would all be factors, said Patrick Bennett, a currency strategist at Société Générale in Hong Kong.
"A huge earthquake would of course be a terrible tragedy, and as in the case of [the Japanese port city of] Kobe, would impact growth. But in the recovery/rebuilding process there will be some divergence in company performances," he said.
In the rebuilding phase that follows a disaster, winners and losers emerge. Insurers are likely to liquidate some overseas assets in order to pay claims, and that repatriation could accelerate yen appreciation.
A 2007 study by ABS Consulting Inc. and its unit EQECAT Inc. found that a large quake could lead Japan's chemical industry to suffer financial losses equal to more than two years of pre-tax earnings, while the precision machinery and petroleum industries could suffer damage equal to more than one year of pre-tax earnings.
Other industry groups that also have significant loss exposure were steel, non-ferrous metals, autos, electronics and pharmaceuticals, the study said.
Advanced preparedness
Japan is among the most earthquake-conscious societies, as it is struck by an estimated 20% of the world's earthquakes of magnitude 6 or greater.
Schools, and even some business, hold regular disaster drills, particularly on the Sept. 1 anniversary of the 1923 Great Kanto earthquake and fire which claimed about 140,000 lives in Yokohama and Tokyo.
Japan's advanced quake preparedness was likely the main reason casualties and damages from this week's strong temblors were lower than they would have been in a country without such preparations and seismic requirements in place.
Even so, companies reported quake-related disruptions. Corning Inc. /quotes/comstock/13*!glw/quotes/nls/glw (GLW 16.48, +0.25, +1.54%) said the Tuesday earthquake disrupted production at its LCD glass-manufacturing facility in Shizuoka. The plant manufactures glass substrate for Sharp Corp. /quotes/comstock/!6753 (JP:6753 1,083, +11.00, +1.03%) and other Japanese LCD panel makers.
Toshiba Corp. /quotes/comstock/!6502 (JP:6502 464.00, +7.00, +1.53%) subsidiary Hamaoka Toshiba Electronics Corp. also reportedly suffered damage at their LED factory in the area.
A quake-triggered landslide also destroyed part of the Tomei Expressway between Tokyo and Nagoya, which remained closed Thursday.
Chubu Electric Power Co. /quotes/comstock/!9502 (JP:9502 2,205, -5.00, -0.23%) automatically halted operations at two reactors at its nuclear plant in Shizuoka prefecture after the quake, which briefly cut power to thousands of homes. The utility said it would temporarily use liquefied natural gas units to offset the loss of capacity.
'Bad for the economy'
Two strong earthquakes with 6-plus magnitudes caused casualties and damages in the northern Niigata region in 2004 and 2007, but Japan's most devastating recent seismic event was Kobe's 7.3-magnitude quake in 1995. It killed more than 6,400 people and caused damages estimated around 2% of Japanese gross domestic product.
In a worst-case scenario, a Kobe-sized quake originating in the northern part of Tokyo Bay could kill up to 11,000 people in the greater Tokyo area, according to a 2005 study by the Japanese Cabinet Office's Central Disaster Management Council.
"An earthquake, as with any disaster, is bad for the economy despite many commentators' arguments that the earthquake would stimulate the Japanese economy through the demand stimulus that results," economist Warwick McKibbin wrote in a 1997 policy paper for the Washington, D.C.-based Brookings Institution.
Japan's experience in 1995 followed some traditional models, he said, in which "the yen appreciates, GDP falls, the share market drops, and long-term real interest rates rise slightly."
The initial impact, he said, is "a direct negative effect of the lower capital stock on aggregate supply," which brings down share prices and, in turn, reduces private consumption.
But those lower prices eventually attract buyers, he said, as foreign capital flows into the country "in response to the higher expected rate of return. Thus the yen appreciates and the current account deteriorates, reflecting the capital inflow."
Lisa Twaronite reports for MarketWatch from Tokyo.
Thursday, August 13, 2009
Cambodia joins microloan clean-up
Aug 14, 2009
Asia Times Online
By Stephen Kurczy
PHNOM PENH - Impoverished Cambodia has emerged as a global microfinance leader, becoming the first Asian nation to hold lenders accountable to their original mission of poverty reduction. If a new global initiative aimed at promoting greater transparency over microfinance institutions (MFIs) recently launched here gains traction, the multi-billion dollar industry could be set for a shake-out.
It has long been assumed that microfinance ventures, launched in the 1970s as non-profit enterprises to bring cheap credit to the poor, prioritize alleviating poverty over maximizing profits. In recent years, celebrities such Robert Duvall, Natalie Portman and Yeardley Smith, (the voice of Lisa in animated television series The Simpsons), became official spokespeople for different MFIs such as Pro Mujer (Pro Women), Finca International, and the Grameen Foundation.
The United Nations Capital Development Fund has in recent years channeled millions of dollars in donor funds into MFIs. The International Finance Corporation (IFC), the private lending arm of the World Bank, says it has given more than US$600 million to more than 100 MFIs worldwide and maintains a commitment to double that investment to $1.2 billion by 2010, making IFC the largest investor in an industry servicing more than 80 million people around the world.
But so-called barefoot banking has come under growing criticism as MFIs reap huge profits. Reports have shown that many misrepresent their underlying loan fees, with some charging annual interest rates in excess of 100%. For instance, Mexico's Banco Compartamos, originally a non-profit institution, generated $458 million in an April 2008 initial public offering. Private investors piled into the offering because the bank charges its 1.4 million poor borrowers up to 128% annual interest.
Chuck Waterfield, a microfinance expert and Columbia University professor, has found that many MFIs, including Compartamos, advertise as pro-poor enterprises with 4% monthly interest rates but when additional hidden fees were added those rates often topped 10% per month.
Waterfield recently devised a platform for borrowers and international donors - who underwrite and provide cheap capital for many microcredit banks to on-lend - to view more clearly individual MFIs' true underlying interest rates. "Compartamos was a watershed for the industry. It takes a crisis to make you do what you should have done 10 years ago," Waterfield told Asia Times Online.
In mid-2008, he launched MicroFinance Transparency, a database of interest rates charged by individual microlenders that aims through publicity to refocus microfinance on poverty alleviation. The goal, he says, is to collect loan information from all microcredit lenders worldwide and publish their real annual percentage rates at his website, mftransparency.org.
"The organizations with the highest interest rates have the glossiest annual reports, with pictures of mothers with babies, and they talk about how they're helping those mothers while making boatloads of profits," Waterfield said on August 7 at a launch event in Phnom Penh. "So we put the prices up there and say, 'Nice annual report but you're charging twice the interest rate as anyone else to those mothers with babies'."
Waterfield hopes that all MFIs will openly join the initiative and prove they have nothing to hide. He first introduced the project in March in Peru, then in Bosnia in April, and this month in Cambodia before heading to another launch in Bangladesh. He acknowledges that he can't force microcredit lenders, many of whom bury hidden costs in the small print of their loan forms, to sign up to the initiative.
"We've got to build credibility and Cambodia helps us build credibility because it's a willing participant. The next country we go to will be a little less willing. And next year we'll go into the countries that are really reluctant to have us show up."
People over profits
While Cambodia is renowned for its endemic corruption and is often rated among the world's least transparent countries, Waterfield said he chose the country as the first Asian nation for his initiative because its registered MFIs rank among the world's top in terms of social performance, consumer protection and ethical practices.
Of the 12 Asian MFIs that have signed on to a social performance indicators program launched by the Washington DC-based Microfinance Information Exchange (MIX), a provider of MFI business information and data services, half hailed from Cambodia.
Five Cambodian banks are also included in MIX's ranking of the world's top 100 MFIs; only India, with six, claims more. In June, Angkor Microfinance Kampuchea was one of three MFIs worldwide to receive the first gold award for social performance reporting from the Michael & Susan Dell Foundation, the Ford Foundation, and Consultative Group to Assist the Poor.
"Cambodian MFIs have been at the forefront of industry reporting for many years," MIX's chief operating officer Blaine Stephens wrote in an e-mail in response to Asia Times Online questions. "My guess is that they will demonstrate as much commitment to reporting social performance as they have to reporting financial performance in an open and transparent manner."
Cambodian MFIs charge interest based on 30- or 31-day months. This may sound intuitive, but in Mexico and other developing countries most MFIs charge interest rates based on a four-week month, which effectively allows them to charge the borrower for an extra month every calendar year, Waterfield said.
The annual interest rates charged by MFIs in Cambodia are among the lowest worldwide at between 24% and 36%. While higher than normal rates on commercial consumer loans, microloans are inherently more expensive because the lender receives less return while incurring overheads and transaction costs similar to those for larger loans.
"Here in Cambodia, we are committed to making sure that the financial services provided to the poor come as tools for their empowerment rather than shackles for their exploitation," Cambodian National Bank director general Tal Nay Im said on August 7. The National Bank has recently issued a legally binding sub-decree for MFIs to advertise their real effective interest rates.
Cambodia is the only country to outlaw flat interest rate loans, a credit structure where monthly interest is paid on the total loan amount even as the borrower pays down the principal - which means the borrower is effectively paying interest on money already paid back. In comparison, every MFI in Mexico charges a flat rate and only one microcredit bank in impoverished Bangladesh, the Grameen Bank, charges borrowers a declining rate where they pay less and less interest as the outstanding amount owed is paid down.
The Grameen Bank was founded in the 1970s by Muhammad Yunus, who was awarded the Nobel Peace Prize in 2006 and the US Presidential Medal for Freedom this week for his efforts to provide low interest loans to the poor. While many microcredit institutions claim to take inspiration from his example, Yunus has publicly lamented the industry trend towards profit maximization over uplift of the poor.
He, for one, has strongly endorsed Waterfield's new Microfinance Transparency initiative. "Microfinance emerged as a struggle against loan sharks, so we don't want to see new loan sharks created in the name of microcredit," Yunus told BusinessWeek at the time of the project's launch.
While Cambodia's 18 MFIs have agreed to submit their loan data to MicroFinance Transparency, the Bangladeshi government is drafting a law that will require all their MFIs to submit data to the initiative. In Bangladesh, banks do not at present advertise their true interest rates, Waterfield said, and there is the risk of a consumer backlash if published interest rates suddenly appear to double overnight.
Leaky lending
Not all MFIs are equally excited about Waterfield's transparency initiative, particularly those whose reputation would take a hit through greater disclosure. One of mftransparency.org's features will show, in graphical form, the relationship between loan size and interest rates charged. That presentation will show more clearly where MFIs' priorities lie.
Many MFIs had been so profitable that hedge funds, venture capital firms, and other big private equity investors have sought ways to enter the business. In Cambodia, private equity fund Leopard Capital announced in March that "we are currently evaluating several options to invest in the sector, including participating in any pre-IPO [initial public offering, or sale of shares to the public] capital raising by a leading MFI, acquiring an existing MFI or merging an existing MFI with a smaller commercial bank."
Despite Cambodia's lead on MFI transparency, the sector has been facing financial troubles wrought by the global economic crisis. The industry-wide at-risk portfolio for the nation's 1 million microloan borrowers rose from 0.5% in mid-2008 to 3.39% in mid-2009. That's exposed flaws in previous client screening.
Mai Yop, a 55-year-old salt farmer in southern Cambodia's Kampot province, admits to having lied to get a $1,000 loan three years ago from microfinance bank Acleda. While microloans are extended solely for business purposes, such as the provision of new cattle or farming tools, Mai Yop says she used the money to pay for her husband's stomach surgery.
"I had to lie, or I wouldn't get any money," said Mai Yop, who now lives on a budget of $5 a day. In order to pay back her first loan, she took loans from two other microlenders, and finally from a high-interest charging informal moneylender who eventually seized her farmland due to non-payment.
Some borrowers say they'd be in a better situation today if they'd never taken on a microloan. "We are poorer than ever," said Oum Siv, a 50-year-old grocery vendor in Kampot. Earlier this year, she said she owed $10,000 to a private moneylender after taking out a series of microcredit loans for her husband's construction business, which failed to get off the ground amid the economic slowdown.
Cambodia's MFIs say they have since adopted more rigorous screening processes for potential borrowers. But the toll from years of lax screening has only now become apparent. The situation is similar in several Cambodian provinces, with tens of thousands of Cambodians unable to repay their microloans and now at risk of losing their homes and farmland.
Despite these challenges, Waterfield said that Cambodia remains a relative microcredit success story. Elsewhere, when it comes to openness and transparency, "some of these [lenders] say, 'We've been lying for 20 years for some legitimate reasons, so it's not so easy to start telling the truth.' Here, it was like, 'sure, what do you need, we'll give it to you.' There was no resistance, no nervousness. We'll never see that again ... anywhere we go."
Stephen Kurczy is a journalist roaming across Asia. He may be reached at kurczy@gmail.com.
(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)
Asia Times Online
By Stephen Kurczy
PHNOM PENH - Impoverished Cambodia has emerged as a global microfinance leader, becoming the first Asian nation to hold lenders accountable to their original mission of poverty reduction. If a new global initiative aimed at promoting greater transparency over microfinance institutions (MFIs) recently launched here gains traction, the multi-billion dollar industry could be set for a shake-out.
It has long been assumed that microfinance ventures, launched in the 1970s as non-profit enterprises to bring cheap credit to the poor, prioritize alleviating poverty over maximizing profits. In recent years, celebrities such Robert Duvall, Natalie Portman and Yeardley Smith, (the voice of Lisa in animated television series The Simpsons), became official spokespeople for different MFIs such as Pro Mujer (Pro Women), Finca International, and the Grameen Foundation.
The United Nations Capital Development Fund has in recent years channeled millions of dollars in donor funds into MFIs. The International Finance Corporation (IFC), the private lending arm of the World Bank, says it has given more than US$600 million to more than 100 MFIs worldwide and maintains a commitment to double that investment to $1.2 billion by 2010, making IFC the largest investor in an industry servicing more than 80 million people around the world.
But so-called barefoot banking has come under growing criticism as MFIs reap huge profits. Reports have shown that many misrepresent their underlying loan fees, with some charging annual interest rates in excess of 100%. For instance, Mexico's Banco Compartamos, originally a non-profit institution, generated $458 million in an April 2008 initial public offering. Private investors piled into the offering because the bank charges its 1.4 million poor borrowers up to 128% annual interest.
Chuck Waterfield, a microfinance expert and Columbia University professor, has found that many MFIs, including Compartamos, advertise as pro-poor enterprises with 4% monthly interest rates but when additional hidden fees were added those rates often topped 10% per month.
Waterfield recently devised a platform for borrowers and international donors - who underwrite and provide cheap capital for many microcredit banks to on-lend - to view more clearly individual MFIs' true underlying interest rates. "Compartamos was a watershed for the industry. It takes a crisis to make you do what you should have done 10 years ago," Waterfield told Asia Times Online.
In mid-2008, he launched MicroFinance Transparency, a database of interest rates charged by individual microlenders that aims through publicity to refocus microfinance on poverty alleviation. The goal, he says, is to collect loan information from all microcredit lenders worldwide and publish their real annual percentage rates at his website, mftransparency.org.
"The organizations with the highest interest rates have the glossiest annual reports, with pictures of mothers with babies, and they talk about how they're helping those mothers while making boatloads of profits," Waterfield said on August 7 at a launch event in Phnom Penh. "So we put the prices up there and say, 'Nice annual report but you're charging twice the interest rate as anyone else to those mothers with babies'."
Waterfield hopes that all MFIs will openly join the initiative and prove they have nothing to hide. He first introduced the project in March in Peru, then in Bosnia in April, and this month in Cambodia before heading to another launch in Bangladesh. He acknowledges that he can't force microcredit lenders, many of whom bury hidden costs in the small print of their loan forms, to sign up to the initiative.
"We've got to build credibility and Cambodia helps us build credibility because it's a willing participant. The next country we go to will be a little less willing. And next year we'll go into the countries that are really reluctant to have us show up."
People over profits
While Cambodia is renowned for its endemic corruption and is often rated among the world's least transparent countries, Waterfield said he chose the country as the first Asian nation for his initiative because its registered MFIs rank among the world's top in terms of social performance, consumer protection and ethical practices.
Of the 12 Asian MFIs that have signed on to a social performance indicators program launched by the Washington DC-based Microfinance Information Exchange (MIX), a provider of MFI business information and data services, half hailed from Cambodia.
Five Cambodian banks are also included in MIX's ranking of the world's top 100 MFIs; only India, with six, claims more. In June, Angkor Microfinance Kampuchea was one of three MFIs worldwide to receive the first gold award for social performance reporting from the Michael & Susan Dell Foundation, the Ford Foundation, and Consultative Group to Assist the Poor.
"Cambodian MFIs have been at the forefront of industry reporting for many years," MIX's chief operating officer Blaine Stephens wrote in an e-mail in response to Asia Times Online questions. "My guess is that they will demonstrate as much commitment to reporting social performance as they have to reporting financial performance in an open and transparent manner."
Cambodian MFIs charge interest based on 30- or 31-day months. This may sound intuitive, but in Mexico and other developing countries most MFIs charge interest rates based on a four-week month, which effectively allows them to charge the borrower for an extra month every calendar year, Waterfield said.
The annual interest rates charged by MFIs in Cambodia are among the lowest worldwide at between 24% and 36%. While higher than normal rates on commercial consumer loans, microloans are inherently more expensive because the lender receives less return while incurring overheads and transaction costs similar to those for larger loans.
"Here in Cambodia, we are committed to making sure that the financial services provided to the poor come as tools for their empowerment rather than shackles for their exploitation," Cambodian National Bank director general Tal Nay Im said on August 7. The National Bank has recently issued a legally binding sub-decree for MFIs to advertise their real effective interest rates.
Cambodia is the only country to outlaw flat interest rate loans, a credit structure where monthly interest is paid on the total loan amount even as the borrower pays down the principal - which means the borrower is effectively paying interest on money already paid back. In comparison, every MFI in Mexico charges a flat rate and only one microcredit bank in impoverished Bangladesh, the Grameen Bank, charges borrowers a declining rate where they pay less and less interest as the outstanding amount owed is paid down.
The Grameen Bank was founded in the 1970s by Muhammad Yunus, who was awarded the Nobel Peace Prize in 2006 and the US Presidential Medal for Freedom this week for his efforts to provide low interest loans to the poor. While many microcredit institutions claim to take inspiration from his example, Yunus has publicly lamented the industry trend towards profit maximization over uplift of the poor.
He, for one, has strongly endorsed Waterfield's new Microfinance Transparency initiative. "Microfinance emerged as a struggle against loan sharks, so we don't want to see new loan sharks created in the name of microcredit," Yunus told BusinessWeek at the time of the project's launch.
While Cambodia's 18 MFIs have agreed to submit their loan data to MicroFinance Transparency, the Bangladeshi government is drafting a law that will require all their MFIs to submit data to the initiative. In Bangladesh, banks do not at present advertise their true interest rates, Waterfield said, and there is the risk of a consumer backlash if published interest rates suddenly appear to double overnight.
Leaky lending
Not all MFIs are equally excited about Waterfield's transparency initiative, particularly those whose reputation would take a hit through greater disclosure. One of mftransparency.org's features will show, in graphical form, the relationship between loan size and interest rates charged. That presentation will show more clearly where MFIs' priorities lie.
Many MFIs had been so profitable that hedge funds, venture capital firms, and other big private equity investors have sought ways to enter the business. In Cambodia, private equity fund Leopard Capital announced in March that "we are currently evaluating several options to invest in the sector, including participating in any pre-IPO [initial public offering, or sale of shares to the public] capital raising by a leading MFI, acquiring an existing MFI or merging an existing MFI with a smaller commercial bank."
Despite Cambodia's lead on MFI transparency, the sector has been facing financial troubles wrought by the global economic crisis. The industry-wide at-risk portfolio for the nation's 1 million microloan borrowers rose from 0.5% in mid-2008 to 3.39% in mid-2009. That's exposed flaws in previous client screening.
Mai Yop, a 55-year-old salt farmer in southern Cambodia's Kampot province, admits to having lied to get a $1,000 loan three years ago from microfinance bank Acleda. While microloans are extended solely for business purposes, such as the provision of new cattle or farming tools, Mai Yop says she used the money to pay for her husband's stomach surgery.
"I had to lie, or I wouldn't get any money," said Mai Yop, who now lives on a budget of $5 a day. In order to pay back her first loan, she took loans from two other microlenders, and finally from a high-interest charging informal moneylender who eventually seized her farmland due to non-payment.
Some borrowers say they'd be in a better situation today if they'd never taken on a microloan. "We are poorer than ever," said Oum Siv, a 50-year-old grocery vendor in Kampot. Earlier this year, she said she owed $10,000 to a private moneylender after taking out a series of microcredit loans for her husband's construction business, which failed to get off the ground amid the economic slowdown.
Cambodia's MFIs say they have since adopted more rigorous screening processes for potential borrowers. But the toll from years of lax screening has only now become apparent. The situation is similar in several Cambodian provinces, with tens of thousands of Cambodians unable to repay their microloans and now at risk of losing their homes and farmland.
Despite these challenges, Waterfield said that Cambodia remains a relative microcredit success story. Elsewhere, when it comes to openness and transparency, "some of these [lenders] say, 'We've been lying for 20 years for some legitimate reasons, so it's not so easy to start telling the truth.' Here, it was like, 'sure, what do you need, we'll give it to you.' There was no resistance, no nervousness. We'll never see that again ... anywhere we go."
Stephen Kurczy is a journalist roaming across Asia. He may be reached at kurczy@gmail.com.
(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)
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