Realities of Microfinance

I recently read an eye-opening book on microfinance, ‘Confessions of a Microfinance Heretic’ by Hugh Sinclair. To say that microfinance is a sham would be an understatement.  It is quite the Ponzi scheme. It is a front for a few chosen Microfinance institutes (MFIs) and Microfinance Fund executives to leverage the desperation and naiveté of the poor to their advantage. 

The Microfinance industry is $70 billion. At 50% interest rates, which is one of the most conservative estimates, it is $35 billion in the form of interest payments, which gets charged from the poor and transferred into the coffers of the microfinance executives and fund administrators.

This does not include upfront collateral or forced savings that a majority of the MFIs insist upon.  Because this industry operates in the gray shadows of more regulated finance, no one really calls out this illegality and even if a few rating reports mention this fact, it is never a deterrent for the Microfinance funds, which very much salivate at the prospect of profits and ignore this red flag.

Microfinance was built for the purposes of loaning money to encourage enterprise in the lowest strata of society. 90%-95% of these loans are consumption based loans, which do not further any enterprise. Again, Microfinance funds blatantly ignore this ground reality.

We know from experience that if left unregulated, the noblest of ideas in finance will morph into a monster that devours all sense of sanity and decency. In this case, the evidence is quite clear. Microfinance did not help anyone except the executives who ran these MFIs and the funds who invested in these MFIs. The poor who availed of these loans only became poorer.

With more than a few sordid tales of suicides, forced slavery, prostitution, and outright revolts coming to light, one would hope that microfinance for all of its promise and its own Nobel prize will adopt a more realistic business model and truly serve the poorest instead of outright taking advantage of them. Here is another wake up call for the governments and regulators.

In the wake of quite a few MFI IPOs, it would be intellectual and moral laziness, if we did not care about the metrics and business models of these MFIs. My next post will cover these business models and performance metrics to help us separate wheat from the chaff.

Too Big to Trust or Fictionalized International Corporate Espionage?

Is the telecom giant, Huawei, an agent of the Chinese government?

Huawei network equipment is used by one-third of the world's population and it's sales in 2012 were in excess of $35.4 billion.

The formation of the company, it's quick growth, it's financials, customer contracts, it's global reach, its core business - telecom, network and network security products, its founder, the founder's life philosophy, his life style are open now for deeper scrutiny.

Does Huawei's networking gear have the ability to cause security breaches on the world's networks? Can it glean a nation's most precious and therefore its most deadly secrets? I imagine the answer to that being a yes, at least technically.

While the details of this case and the company would be interesting, I think what would be more constructive is assessing this via a framework of international and economic affairs.

• China has been financing US debt for a while. 
• Our economies are interlinked.
• Both sides have been accused of cyber spying.
• Both sides have companies, which can wreak havoc in terms of network disruption, security breaches to gain strategic information.

Then how would we classify this particular instance and this particular company, as being a one off case, which requires that much more investigation and scrutiny and the possible refusal to a key market?

• An all pervasive product that has the potential to destroy an important ecosystem? An analogy that comes to mind is of the neonicotinoid pesticide that is suspected to destroy the bees and hence put the agricultural ecosystem at risk. 
• Suspected or proven nefarious intent on the part of the country originating the product or service.
• The product or service emanating from a country or region traditionally known to be hostile or at odds with the trading country.
• A direct competitor to a incumbent industry player with economic and political consequences, such as loss of jobs, lobbying pressures, etc. as in the case of solar panels and the dumping allegations and the anti-dumping duty . 

However, while we are talking about security, Our water treatment and distribution systems are just as vulnerable Our transportation systems up until recently have proved to be vulnerable Our state secrets might not be as safe as previously thought.

We have to be careful about invoking trade protectionism in the name of national security and economic security, especially, when the same can be done to our products and technologies.

Moral Corruption and Shiny Shoes

Today’s Wall Street Journal has an article on an Indian politician and how the US embassy cables characterize her as ‘corrupt’ and a ‘virtual paranoid dictator’. These leaked cables come to us courtesy WikiLeaks.

This did not come as a surprise to anyone. That she focused on the ‘messenger’ rather than the message also was not a surprise. A person who spends millions on erecting her own statues has some audacity in calling Mr. Julian Assange a candidate for a mental institution. This is a classic symptom of projecting one’s own problem onto others.

While there are many reasons for corruption and why it is rampant in a country such as India, I marvel at the absolute lack of common sense displayed by this corrupt politician. The article described how she once sent her private jet to Mumbai to retrieve a preferred brand of shoes.

Why would she not forgo getting a new pair of shoes, especially when she already has hundreds in her closet? Why would she have the state incur these extravagant expenses for a mere pair of shoes? I think the answer is not corruption. It is the absence of a thought process that aligns you in a world along with the rest of the people. It is also to not have known contentment, peace and above all a value system. This act speaks to her moral vacuity, leadership deficit and shameful disregard for her position of a public servant.

That we have such politicians and that they have even an ounce of power is what is most offensive. That they are in a position to harm others because of the corrupt manner in which they govern is such a tragedy.

Since this sorry excuse for a politician hurled accusations at Mr. Assange, he has responded in the very same tone. He has vouched for the authenticity of the cables and even offered to bring a range of the finest British footwear were she to send her private jet for him in England. [Complete article can be found here.]

Electricity Tariff Hike - A Symptom of a Sector in Disarray

Delhi Electricity Regulatory Commission (DERC) announced a 22% hike in electricity tariffs effective September 2011. Was DERC trying to one up South Africa’s 25% hike or were they trying to look better in contrast to Maharashtra’s 100% tariff hike not too long ago?

After all is said and done about the reasons for this tariff hike, here is the bottom line. The revenue requirement for the FY 2011-12 at Rs. 3899.11 Cr. Vs. the revenue gap at existing tariff is Rs 800.21 Cr. DERC has considered removing the cross- subsidization in tariff structure and has also considered the actual cost of service.

As part of the Electricity Act of 2003, an expert Appellate Tribunal for Electricity (ATE) was formed to hear appeals against State and Central Electricity Regulatory Commission orders. This is potentially a great mechanism to provide a grievance redressal but also hopefully, to encourage investor and public activism.

There was a hearing held last month on tariff determination and a few grievances were brought up, including fast meters and distribution companies’ poor response system.

I hope the consumer bodies will be able to influence the hearings and direct the Commissions’ and ATE’s attention to these very pertinent issues.

• Electricity theft and revenue loss
• Effect of tariff hike on overall economic growth
• Distribution companies’ lack of ability to purchase power from private companies, creating a bankruptcy situation inspite of the demand (Case in Point: Monnet Ispat has been forced to sell power for as low as 1c/KwH as demand has plummeted. This has happened despite Indian customers facing power blackouts even after paying more than 10c/KwH for power)
• Overall analysis of financials of distribution companies
• Analysis of distribution companies’ operational efficiency levels

For India’s benefit, this is another reason for the use of renewables and for doing so quickly. Meanwhile, I hope the consumers will be provided some sort of subsidy relief if not an outright reversal of these hikes.

Requesting a Couple of Improvements from Microsoft on Outlook

After Microsoft complied with my request of pre-scheduled e-mails, I have a couple more. I am also letting Microsoft wake up to the idea of crowdsourcing.

• I want to have the ability to attach a note to an e-mail or a meeting invite. This is following the paper concept of scratching in a couple of lines as notes on printed documents to either direct your attention to something or serve as a memory refresher. If we could just drag these electronic versions of ‘Post-It’ Notes onto the Outlook items. I want the ability of these notes to be for my personal viewing instead of getting transmitted with any Meeting updates or outgoing mail to which these might be attached.

• My other request constitutes the ability to designate certain invitees as key stakeholders for meetings and for the calendar to show their unavailability separately from all the other users. For example, Outlook now shows me how many people are available at a certain time slot. Let’s say it’s 6 out of 12. If those 6 participants are not key stakeholders, I would be better off rescheduling.

Odds of Success

I read a recent comment by the former President Bill Clinton today, wherein he said that there is a fifty-fifty chance that the current peace talks would result in peace between Israel and the Palestinians. I am both amused and appalled at the statement. All the money, influence and good will in the world that we have thrown at the Middle-east conflict issue and all we get is a fifty-fifty chance at peace.

If this was a consulting company and they offered a fifty-fifty chance at success to their client, how far do you think they would go? I doubt very much they would get past the front door, forget the Board Room.

And, this brings me to the point of risk. If someone predicted a fifty-fifty chance of rain, would you carry an umbrella? If someone offered you a fifty-fifty chance of winning the lottery, would you bet your life savings? Getting caught in a downpour is not a life threatening condition for most people so the risk acceptance is much higher. Losing your life savings on the other hand can be very uncomfortable so the risk acceptance might be lower for most rational people.

So, why is it that when the odds of a peace deal are fifty-fifty, do we accept the risk? Because as human beings we are inherently hopeful. Having accepted that the human spirit drives us to hope when no reason can be found, fight even when the odds of victory are slim, we still deserve leaders who will work tirelessly to increase the odds of success in our favor rather than it being just a toss up in the air.

Performance Metrics and their Incomplete Story

This post is going to focus on performance metrics and why they never tell the complete story.

Recently, I was talking to a friend about the awesomeness of the ubiquitous ‘Coke’ brand in light of his visit to the Coke factory in Atlanta, GA. He mentioned that the CEO of Coke was at one point in time reconsidering growth targets for his team. He was dissatisfied with the customary 2-3% YoY growth and wanted to serve up stretch goals for his team.

He ended up changing the denominator from it being the market cap of all aerated drinks to all liquids that go down a human throat. That opened up the playing field and fueled much envied growth at Coke and changed the performance metrics.

Contrast this with a recent performance metric that we have all been reading about in the news – the ratings issued by the three rating agencies, Moody’s Investor Service, Standard & Poor’s and Fitch Ratings. The rules require ratings, which according to Warren Buffet eliminate any negotiating power on the part of the ones seeking the ratings. This in itself would not be so bad were this not a part of other externalities, which are in the form of an issuer-pay model and an obvious lack of competition. The performance metrics of the rating agencies should be concerned with the returns, risk, ability to meet contractual obligations, impact of adverse changes in economic conditions, etc. of the financial product/company being rated.

However, the reality is that the rating agencies focused on the profit and the volume metric. Once they rate a product (fairly or dubiously) there are no penalties for a lack of performance or a higher degree of risk being realized, than which is expected of a particular rating association. There are obvious conflicts of interest, which have been raised in the past.

The point of the matter is that we should never have a performance metric that tells only half the story. More so, if people are going to rely on that metric to make important decisions. All of the world’s Service Level Agreements, Key Performance Indicators (KPIs) and other measures, which profess to track productivity or quality or some version of it will not save an organization from mediocrity if they are not focused on the right metric.