Microfinance Control Fraud: Poverty and Profiteering in Latin America

Investigating vulnerabilities to fraud in microfinance

Over the past three decades, the global microfinance industry has witnessed phenomenal growth in terms of the number of borrowers and the total gross loan portfolio outstanding. An application of the criminologists’ perspective and Black’s theory of control fraud to the global microfinance industry reveals a high degree of overlap between the common characteristics of control frauds and the characteristics of the microfinance industry. This suggests that the sector provides a criminogenic environment suitable to Ponzi-type dynamics, including:

  • An imperative of growth;
  • Misrepresentation of financial and operating performance;
  • A reputation for integrity and innovativeness;
  • Concentration in unregulated markets and areas most conducive to accounting fraud, non-transparency and secrecy;
  • Dubious accounting methods;
  • Lobbying in favor of deregulation;
  • Attempts to suborn controls such as accountants, lawyers, regulators, and rating agencies;
  • Executive use of the company for personal gain;
  • Excessive risk taking at the expense of investors’ capital;
  • Warnings raised but ignored, and, finally, inevitable collapse.

Regulatory interventions are needed to prevent predatory lending and over-indebtedness of poor microfinance borrowers in Latin America and elsewhere. Such regulation, while necessary to protect the poor, is not well liked by the investment community as it places microfinance institutions under local scrutiny, reduces the profitability of the sector, and limits opportunities for control fraud.

About this Publication

By Butcher, W. , Galbraith, J.K.