Microfinance is under threat from greed Hugh Sinclair, its British author and microfinance veteran, claims that after a decade, he's discovered the sector isn't dominated by saints but has been "hijacked by profiteers." Rather than helping the world's poorest people set up their own businesses, the book says the funds are charging up to 200pc interest for a tiny loan and creaming off "eye-popping" returns. David Korten, the Harvard economist, says in the foreword to the book: "Sinclair spells out in detail, many micro credit programmes are nothing more than predatory lending schemes rebranded as socially responsible investment opportunities." He adds that the book is about "how a good idea was derailed by the same mindless pursuit of financial gain that caused the global financial crash of 2008." And yet again some of the world's financial powerhouses, including Deutsche Bank, Standard Chartered and Citibank, are among the beneficiaries. The big banks are not accused of devising the interest rates or dubious lending policies of many of the microfinance initiatives (MFIs) on the ground, but they are blamed for fuelling the crisis and allegedly turning a blind eye to the problems. After collecting money from investors, the banks usually channel cash into MFIs directly, or via a third-party. Sinclair's claims suggest that - at the least - the institutions have failed to do proper due diligence on the schemes they are funding. He concedes it isn't always their fault: he describes the sector as opaque, secretive and hostile to those who ask questions. But he claims the banks have been slow to stop funding projects, even when they are told about dubious practises. Which is worse - to invest in such an MFI with full knowledge or to admit investing without bothering to obtain full knowledge? Best left unanswered," he writes. The book is likely to send shockwaves far and wide. The sector has attracted such names as Microsoft founder Bill Gates, Pierre Omidyar, founder of eBay, and George Soros, the hedge fund investor. Celebrity supporters include Bono, the Clintons and the Queen of Spain. The big names have been drawn by what Sinclair calls the "core values of entrepreneurial vision - of teaching a man to fish rather than handing him a fish on a plate." Yet, in the book, he says the quote should be rephrased: "Give a woman a microcredit loan to buy a fishing boat and the CEOs of the MFI and the microfinance funds will eat for a lifetime." Yunus started the practise by lending small amounts to basket weavers in Bangladesh so they could start a business. The idea that gave rise to Yunus's Grameen Foundation was that investors in Geneva and Washington make a reasonable return in the process and soon poverty vanishes altogether. It was an ideal that inspired Sinclair to join the industry in 2001 after years of working in investment banking at ING Barings and BZW, which became part of Barclays. Sinclair is not the first to criticise the industry. Even Yunus has lamented the development of the sector he pioneered. "We created microcredit to fight the loan sharks; we didn't create microcredit to encourage new loan sharks," he told a meeting of officials at the United Nations. But the criticism has so far been piecemeal and sporadic. Sinclair's claims are detailed and comprehensive - and are as devastating to the industry because of the vast bank of evidence he has collected as much as for the allegations themselves. Alongside the book, Sinclair, who still works in microfinance in South America, is publishing a website loaded with transcripts, references, secret recordings and documents. He hopes the book will be a "call to action" and wants it to trigger a full investigation by financial regulators, particularly America's Securities & Exchange Commission (SEC). Sinclair is careful not to condemn the whole industry. He insists there are funds that are faithful to the original ideals. But he says they are now the exception - and, worse, are often crushed by the profiteers. He writes in an email to The Sunday Telegraph: "The sector actually penalises those who help the poor, by rewarding the more profitable and ruthless banks to destroy the good guys in the perpetual quest for maximised profit." The biggest problem, he argues, is that microfinance is successful for Western banks and investors because 200m people repay the loans and the steep interest rates, albeit by borrowing even more. He says the process is as illogical as claiming that the more credit cards are used, the better off a population must be. "There is actually surprisingly little evidence supporting microfinance as a practical tool of poverty reduction," he writes. Microfinance does not apparently require evidence to prove it works. It works because the poor repay loans and this is all the proof the sector requires. The sector is comprised of three main parts: the ultimate capital providers (governments, pensioners, individuals and savers); the intermediaries, who channel the funds (the microfinance funds in developed countries and the MFIs in developing countries); and the poor, who receive the loans in developing countries. Sinclair says the biggest problems are with the intermediaries. He adds: "The MFI charges whatever rate of interest to the poor it can get away with, in unregulated markets with minimal client protection." There is little effort to check what the loans are for. Instead, the cash is often taken and spent on a TV or repaying other loans. The loan often comes with hidden charges on top of hefty interest rates. "Interest rates under 30pc a year are disappointingly rare, and rates of 100pc or higher are common," writes Sinclair. One celebrated [microfinance initiative] in Mexico charges up to 195pc per year. Even when the loan is used to start a business, they are usually too small to generate enough to support the payments. Sinclair accepts that there are genuinely high operating costs in microfinance, which is a partial explanation for the high rates: it costs the same to administer a loan for $100 as for $100,000. But Sinclair says the excuse is abused and used as a catch-all for any sort of behaviour. "Mexico, for example, charges about 150pc to the poor because of 'high operating costs," but Honduras charges 30pc. America charges 8pc. Mongolia charges 24pc. And there are profitable MFIs in all of these countries," he says. In his book, Sinclair focuses most of his attention on the first MFI that he says truly shocked him: the Lift Above Poverty Organisation (Lapo) which operates in Nigeria and was backed with funds from banks, including Deutsche. At the time, Sinclair was working for an Amsterdam-based microfinance investor called Triple Jump and was dispatched to Nigeria to sort out a problem with Lapo's IT systems. He describes how, in the course of his work, Sinclair learned about Lapo's high interest charges, unusual lending operations and vast profits. According to Sinclair, Lapo claimed to be charging interest of 3pc per month for eight months but after irregular diary calculations, fees and commissions, it worked out at more than 40pc a year. Clients were made to stump up a 20pc deposit - but still paid interest on 100pc of the loan value - and continued to pay the same flat rate, despite paying down the rump. On top of this, Lapo then used the clients" deposits to lend money to other clients - a practice that is only allowed with a banking licence. Lapo appeared to be making far more than any normal bank by charging borrowers high interest and paying depositors low interest. According to Sinclair, Lapo clients were "getting entirely fleeced in all ways possible." However, only after further investigation did Sinclair discover that Lapo sometimes charged up to 144pc interest for its loans. Sinclair says he raised the alarm with some of Lapo's big investors, expecting them to put pressure on Lapo to change or withdraw their funding. Instead he claims he was ignored, and eventually fired from his job. Later, some microfinance rating agencies confirmed that Lapo's loans often amounted to more than 100pc. This weekend, Godwin Ehigiamusoe, managing director of Lapo, told The Sunday Telegraph that interest rates at the MFI were 2.5pc a month with a 1pc management fee - or a total of 42pc a year. He said in his criticisms, Sinclair had failed to appreciated the high costs of operating in Nigeria. He said: "For instance, we have to acquire and maintain electricity generating sets [for] our 269 full branches, across the country." He dismissed Sinclair's book, saying it was full of "sweeping comments on Lapo." He said "we have not put our finger on his motive" but concluded Sinclair was angry over losing his job. "A 'corrupt" microfinance institution in a 'corrupt" Nigeria is a ready tool to leverage on," he said. Ehigiamusoe said Microfinance Transparency, an American company, had been employed to review the price codes. Lapo has also obtained a banking license since Sinclair's investigation and has since sent monthly reports to the Central Bank of Nigeria as "part of our supervision by the central bank." There does appear to be change afoot. In recent weeks, the Indian parliament introduced The Micro Finance Institutions (Development and Regulation) Bill following anger about the collapse of the country's only listed fund, SKS Microfinance. Shares in SKS, which lends to Indian women, have plunged from Rs1,021 (£11.70p) in October 2010 to around Rs65 (75p) today. The company raised $350m in its stockmarket listing but was badly damaged after politicians criticised the fund for aggressive collection tactics that allegedly drove some women to suicide. SKS has strongly denied the claims but parted company with its founder, Vikram Akula, and has pledged to rebuild its name. For its part, Standard Chartered said it had also recently overhauled its operations. A spokesman said: "Last year we carried out a wholesale review of our MFI client portfolio and have subsequently introduced additional social performance measurements to our due diligence processes. More widely, we are supporting the Microfinance Information Exchange [Mix Market] which has a social performance reporting system for MFIs and we are encouraging our clients to sign up to this. Last year, we were the lead sponsor of the Microfinance India Social Performance Report, which seeks to increase transparency within the industry, while we also provide technical assistance, including credit and risk training. But Sinclair says more comprehensive reform is needed. He calls for a transparent regulatory framework to be put in place that shows how the loans benefit the clients, as well as their full costs. He argues that as the main source of funding - banks and global investors - should lead the charge. Rich returns Microfinance describes the supply of funds to the poor in developing countries Capital providers, such as governments, pensioners, individuals and others, use "intermediaries" to channel the funds to people on low-incomes who receive the loans The problem arises where the intermediaries charge whatever interest rate to the poor they can get away with, in unregulated markets, with limited client protection The investors are not protected by any meaningful law, have a limited idea of what their funds are being used for and rely entirely on the intermediaries to reassure them The intermediaries operate in a "cult," according to Hugh Sinclair, as they are the only practical means for the average investor to invest, but they control the flow of information back