Who stands to gain from microcredit?

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No country has as many tax treaties as the Netherlands. According to the organization Tax Justice, the country has made tax agreements with nearly one hundred countries. 

"Are you sure you are in the right place?" The receptionist of Deutsche Bank gives us a puzzling look. It's Monday morning, nine o'clock and we are in an ultramodern tower block next to the Amsterdam Arena. "We are here to see ProCredit", we tell her again. "A microfinance organization. According to the Chamber of Commerce they are located here". We show her a piece of paper with a copy of the company details. She shakes her head in confusion. "I have worked here for two years now and I have never heard of ProCredit." She calls two colleagues over. One of them searches in the computer system, the second checks with the mail room "because they know everything there."

"Could it be that the organization is registered at this address to avoid tax?" We ask. The boss begins to nod and says: "That might very well be the case. Yes … That is very possible." 


Context: Tax Treaties


No country has as many tax treaties as the Netherlands. According to the organization Tax Justice our country has made tax agreements with nearly one hundred countries. The first treaties were signed, for example, to prevent someone who lives in the Netherlands and works in India to have to pay the same income tax twice. The countries agreed who would charge which tax.


For example, Serbia normally charges 20 percent tax on profits, but in the treaty with the Netherlands it was agreed that Serbia decreases this amount to zero when a company is established in the Netherlands.

"Poor countries feel obliged to sign these kinds of treaties" says financial geographer Rodrigo Fernandez, who works at the University of Amsterdam and at SOMO (Centre for Research on Multinational Enterprises). "They agree to reduce their taxes, because they believe that this will increase investment yields." That is not the case in practice. However, other countries make use of the tax treaties made by the Netherlands. "A company from Canada that invests in Mongolia, is now doing this via the Netherlands," says Fernandez. "Because Mongolia is now able to charge less tax on the profits of that company it will forego revenue."


According to the Central Bureau of Statistics there are 23,500 of these foreign letterbox companies in the Netherlands. They annually channel around 10,000 billion Euros, twenty times our gross domestic product. We earn a tip of 1.5 billion Euros per year for providing this service. Poor countries are missing out on 122 billion Euros in taxes, says Tax Justice.


Fernandez: "Since poor countries have a small budget, such amounts weigh even heavier for them."


At the end of 2012, Mongolia decided to stop the tax treaty with the Netherlands. It is the first time that a government unilaterally decided to end tax agreements with the Netherlands.

"ProCredit is a letterbox company: a company that is only based in the Netherlands on paper because there are financial benefits, but in practice no work is done from here (see box). According to the Dutch newspaper deVolkskrant at least sixty out of a hundred of the largest companies in the world make use of such Dutch constructions. This earns them 57 billion euros. Or vice versa: it costs the governments of other countries 57 billion euros.

In comparison to that the advantage of ProCredit is minimal. The governments of Bulgaria and Serbia "only" missed out on 7.5 million Euros because the German microfinance organization was providing its loans through the Netherlands.

Yet it is strange that a microfinance organization uses the financial benefits of a tax haven. Especially when you take into account that ProCredit calls its way of working (apart from ‘profitable and efficient’) ‘socially responsible ',' transparent’ and ‘sustainable’. And that the concept of tax havens is internationally criticized because the rich are benefiting at the expense of the poor.

Not the only one

Located in the office block in Amsterdam, besides ProCredit, are at least two other microfinance organizations. At least, this is what is stated in the register of the Chamber of Commerce. In practice, the offices of FINCA and Agora Microfinance are as empty as the workspace of ProCredit.

The American FINCA is, according to Wikipedia, "one of the most influential microfinance organizations in the world". The nonprofit organization was set up with funds from development organizations, but now receives most of its money from private investors. Which should, according to the website of FINCA be "socially responsible" for FINCA's fund is ‘open only to investors whose mission is equal to that of FINCA’. Nevertheless the new lenders do demand a reward for their financial input. In three years they gained 5.6 million Euros. The extent of the profit was also due to the fact that FINCA ran investments in seven countries through the Netherlands. Our country has a treaty with six of those seven countries as a consequence of which FINCA pays less tax. The 'charity' branch in the Netherlands spends more on tax advice than on income tax.

The English Agora Microfinance has only recently been registered in the Netherlands. From here money is invested in microfinance banks in Cambodia and Zambia. The organization also has a branch in Mauritius. From there it invests in India.

Big Business

According to the report A Billion to Gain, published by ING Bank, the microfinance sector has grown by 43 percent per year since 2005. It is now a 62 billion euro sector. Banks, insurance companies and pension funds are the fastest growing group of investors. Of the twenty largest banks in 2008 half were involved in microfinance.

It was the huge financial return of the Mexican microcredit institution Banco Compartamos that caused banks to massively expand their investment portfolios with microfinance funds.

Compartamos (Spanish for 'let's share’) began as a non-profit institution lending to poor rural women. To be able to provide more money, the organization got involved with commercial investors. The number of borrowers increased tenfold. Investors sold shares that at one point had cost them one million U.S. dollars, for the immodest amount of 270 million.

Finding the next Compartamos was for banks and other profit-driven investors a quest for the Holy Grail. The Dutch government encouraged citizens and businesses to invest in microcredit funds. Those that had invested in a 'socially responsible' manner did not have to pay tax on that investment. This tax break was abolished on the first of January of this year, but the funds still carry the label 'responsible'.

It is the rich who are having a field day through microfinance investments. This is reflected also in the calculations of the Indian micro banker Ramesh Arunachalam. 94.27 Percent of all microfinance funds are provided by funds in seven wealthy countries. Most investments are done from tax haven Luxembourg followed by the Netherlands. Also in the top seven: the United States (Delaware), Mauritius and the Cayman Islands. Here the profit that is made with lending to the poor is pocketed.

ASA INTERNATIONAL started as ASA Bangladesh, a local microfinance organization, which overrules the success of microcredit guru Muhammed Yunus in its homeland. The Bangladeshi bank has 6 million borrowers, 99 percent of this group pays in time.


During the microcredit hype the founder of ASA decided to create a partnership with the director of the Dutch investment fund Sequoia. Together they founded the international version of ASA: ASA International.



GETS MONEY FROM: CMI, the investment fund which was created by Sequoia.



CMI GETS MONEY FROM: the American pension fund TIAA_CREF, Gray Ghost Ventures, responsAbility, the Netherlands biggest pension fund ABP, and more.



INVESTS IN: among others India and Pakistan (through Mauritius) and Ghana, the Philippines and Sri Lanka (through the Netherlands). At the end of 2011, ASA Netherlands had about 25 billion uitstaan.


PAID: 20 percent less in taxes, thanks to the Dutch construction, over the profit pay-outs coming from the Philippines. Because the Netherlands has a special arrangement, the Dutch subsidiary can stall their profits tax-free on Mauritius.


Cash out via Mauritius

A Dutch microcredit fund that wants to cash out like Compartamos, is Catalyst Microfinance Investors (CMI), registered in Mauritius. CMI invests on behalf of the Dutch pension fund ABP in starting banks in developing countries. The fund does this through the microfinance organization ASA International. Presentations intended for future investors make clear that the intention is to sell all these banks off at a profit after seven years. For this CMI is well positioned in Mauritius. The African island has a lucrative tax treaty with India, which states that CMI does not have to pay taxes in India in the case that property, such as a bank, is sold at a profit. In Mauritius also the gains are tax free. The tax haven charges a grand total of zero percent tax on dividend (distribution of profit among investors).

CMI denies that the organization avoids tax. "That is absolutely not what is happening", says Martijn Bollen on behalf of the organization. "Quite the opposite. The banks in which we invest pay all statutory local taxes. We are very honest and transparent when it comes to this." After perusal of this article Bollen repeatedly presented the ‘proposal’ to OneWorld to delete this comment. He then sent a long explanation in which he, inter alia, mentions that ASA International even received a certificate from the Philippine tax authorities in 2011.

Whether it's due to taxes or not, the fact is that CMI's investments in India go via Mauritius and that therefore –because of the tax treaty between the two countries– in India no tax is paid on the profits which the company pays to shareholders.

Nearly 40 percent of foreign investments in the last ten years in India went via Mauritius. India indeed considers the African island to be a tax haven, as was reported by The Wall Street Journal last summer. India entered into the tax treaty with Mauritius voluntarily, but did not realize that investors could exploit the agreements made to avoid the Indian tax authorities. The Times of India revealed that the Mauritian Minister of Trade and Foreign Affairs offered two islands to improve the tormented relationship with the Asian country. Something that the minister himself denies.

Mauritius does not have such as favorable tax treaty with all countries like it does with India. The Netherlands does. Therefore ASA International (the organization that invests CMI’s money) has a subsidiary here. From the Netherlands the money flows to Ghana, Sri Lanka and the Philippines among others. Thanks to this construction ASA in the Philippines pays 10 percent tax on distributed profits. Had the money been invested via Mauritius then ASA would have had to pay 30 percent.

On the amounts pouring in ASA hasn’t paid any corporate tax in the Netherlands. Because our country has a special arrangement (the so called participation exemption), the un-taxed profits from the subsidiary can be channeled to ASA's (and then to CMI's) Mauritian bank account.

Non-profit organization FINCA was founded in 1984 by development expert John Hatch. By now, FINCA gives out loans to almost a million people. To attract more funds, FINCA started a holding in 2011. In its rules and regulations it is stated that board members of FINCA cannot haves shares in this holding.


GETS MONEY FROM: World bank fund IFC, developmentbanks KfW (Germany) and FMO (the Netherlands), responsibility and the Dutch fund Triple Jump, which invests on account of Oxfam Nvib, ASN-Novib, SNS Bank and Habitat for Humanity.


LOANS FROM: among others the Deutsche Bank, Triodos, Triple Jump and OikoCredit.



INVESTS IN: 21 countries. In 2009, FINCA managed to get a loan of 21 million at the Deutsche Bank, despite the economic crisis at the time. This money is loaned to microfinance companies by the organization, via the Netherlands, these companies are located in Armenia, Congo, Georgia, Kirgizia, Mexico and Tajikistan. Congo is the only country in this list with which the Netherlands does not have a beneficial tax agreement.  

"Catalyst Microfinance Investors Fund is fast becoming the world's largest investment fund in microcredit," The Telegraaf newspaper wrote in 2007 after CMI had managed to raise 125 million from the ABP pension fund among others. "It is time that organizations such as Cordaid make way for commercial funds," said CMI's director at the time in that article. "Being too social slows things down."

We do not evade

CMI is not the only microfinance fund established by the Dutch that lets the money flow via Mauritius. Goodwell also invests through the African island in Ghana, Nigeria and India. "Not to avoid tax”, emphasizes employee Bob Assenberg. "Mauritius is not a tax haven for us. If we would be based somewhere else, we would pay the same amount in tax. Mauritius does, like Luxembourg, have a highly developed financial services sector. The people there have more experience with investing in India and Africa than firms in the Netherlands. That we make use of this, I do not regard as something negative. "

The commercial company PROCREDIT was founded in 1998 by the consult company Internationale Projekt Consult, which is based in Germany.



GETS MONEY FROM: foundation DOEN (one of the first stakeholders), KfW (Germany) and BIO (Belgium), responsibility, MicroVest, and others.



INVESTS IN: 21 countries. The financial statements show that ProCredit loaned 125 million from investors, in 2006. This money was then loaned, via the Netherlands, to the ProCredit Bank in Serbia. The taxes on profits are lowered in Serbia from 20 percent to zero percent, because of the tax agreement the Netherlands has with Serbia. The same rule applies to the 145 million loan which ProCredit granted to one of her banks in Bulgaria. The involved governments missed out on 7.5 million euro because of this system.



WANTS TO LET US KNOW: that the bank in Serbia has repaid the loan in the meantime. The construction with the Netherlands was created because of the special circumstances in Serbia and Bulgaria at the time of granting the loans. Thanks to this contruction the ProCredit banks were able to enlarge their credits, which in fact caused the involved countries to receive more taxes from these banks.




Just like CMI and Goodwell, ProCredit and FINCA also deny that they are registered in the Netherlands for tax avoidance. ProCredit is present in Amsterdam for "operational reasons", the organization informs us by email. "Because the authorities in Serbia and Bulgaria limited the provision of loans to SMEs, the organization decided to set up two departments in the Netherlands," says Indra Heerkens of DOEN Foundation, one of the first shareholders of ProCredit. "Without the branch in the Netherlands we would not have been able to provide 270 million Euros in loans to SME entrepreneurs in these countries."

The receptionist at the FINCA office in England immediately exclaims that "everyone in England is very much against the Dutch tax route". FINCA is present in poor countries and in America, Canada and England. Not in the Netherlands. When confronted with the extracts of the Chamber of Commerce, she answers she will “consult the communications department." There has been telephone and e-mail contact with FINCA in America, but no substantive response was ever received.

"Our activities are not aimed at profit maximization," says Tanmay Chetan on behalf of Agora Microfinance. "In all countries where we work we adhere to the rules, which is also confirmed by the central banks there." Chetan acknowledges that the Netherlands has a favorable tax climate. "But there are a number of even more preferable destinations from a tax perspective, but we take a holistic view keeping in mind the investment climate and overall regulations in addition to the tax regime. When a couple of years back we spoke to potential investors into Agora, including many government agencies, the Netherlands was a preferred domicile for our operations. As a manager of other people's funds, we have to take this preference into account when setting up our operations. The company address is provided by our administrators, who are a respected multi-national entity. This is standard practice all over the world, and therefore having more than one company on one registered address should not be a cause of suspicion."

A respected entity? That must be the "ignorant" Deutsche Bank that we visited at the beginning of this story. Deutsche Bank also helped ProCredit and invests in both FINCA and Goodwell. The social arm of Deutsche Bank also bought and sold shares in the Indian microfinance organization SKS. The funding flowed – how could it be any other way – via a subsidiary in Mauritius.

Sidestory: Hijacked by profiteers

Microfinance Funds dodge tax? Micro Banker Hugh Sinclair is not surprised. "The industry has been hijacked by profiteers," the Englishman says. In his book Confessions of a Microfinance Heretic and in KRO Reporter’s broadcast "Maxima's microcredit" he raises the alarm on this topic.

At first it seemed the commercialization of the microfinance sector was a positive development. Worldwide, there were more than a billion people without access to financial services. Aid agencies did not have enough money to be able to lend to all those people. More funds would lead to more competition, and thereby to lower interest rates in the struggle to attract poor borrowers, that was the idea. It went the other way: the funds fought mainly over wealthy investors.

"For investors a profitable fund is attractive," says Hugh Sinclair. Funds then choose to turn to profitable microfinance banks. "There are two ways for banks to increase profits: to make more money and to cut expenses. The first is done by charging poor borrowers high interest rates. The second by cutting back on supervision. The funds can reduce their costs by paying less tax. "


In 2010, more than fifty women committed suicide in the Indian state of Andhra Pradesh. They did not know how to get out of the microcredit debt spiral. One of the banks that is explicitly linked to these suicides is SKS. Major investors: the Dutch Sequoia (the founder of CMI) and Deutsche Bank.

In a response to the suicides two thousand players in the microfinance sector joined SMART, a campaign to protect micro borrowers. Deutsche Bank took the initiative, the director of FINCA sat on the board. The other main characters in this story also joined. From figures from the website MFtransparency we can conclude that many organizations still overcharge the poor. Interest rates on FINCA loans in Zambia can get as high as 248 percent!

"Remember: the main purpose of microfinance organizations is profit," emphasizes Hugh Sinclair. "They are in a difficult position. If they start treating the poor fairly, it will cost money. If they are faced with negative publicity, it also costs them money. "

Side story: Microfinance: What next?

Should we stop with microcredit? From research conducted by Maren Duvendack among others it turns out that there are wonderful stories about women who have escaped from poverty through microcredit. (What is the evidence of the impact of microfinance on the well-being of poor people?, 2011) On a larger scale however it has not been proved that microfinance has a positive impact. According to FINCA founder John Hatch only 1 in 10 borrowers uses the money to start a business. The rest uses the money to pay off other loans, to go to the doctor or to buy a TV. If the borrowers do not use the money in a proper way, a country becomes poorer as a result of microcredit. A calculation: if a Dutch investor lends 1,000 Euros to a microfinance bank in India, at a 10 percent interest rate, then 1000 Euros enter India, and 1,100 Euros leave India again.

What next? First, we should start taking microfinance as seriously as ordinary banking. There should be an umbrella organization that keeps oversight and makes rules. Now microfinance practitioners can do whatever they want, because governments and investors believe that these bankers are 'doing good'. It is even legal to provide credit to a drug lord or a trader making use of child labor.

Secondly, we must demand that funds (such as our pension fund ABP) only speak of "responsible banking" if the organizations in which they invest comply with the rules. They should also set a maximum to the allowed profit rates. To earn 1 percent interest on a loan to the poor is possible. But if the investor is earning 10 percent, this raises serious questions.


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