A few years later Hugh Sinclair, who spent several years working for microfinance institutions, compellingly described his disillusionment and anger at the way the industry was going in Confessions of a Microfinance Heretic: as money flooded into the microfinance institutions, they became like the loan sharks they replaced. At the centre of the book is the Lift Above Poverty Organization (LAPO), a Nigerian microfinance institution (MFI). It charged deceptive and high interest rates, it was audited by the brother of the CEO, and it siphoned money into many already-wealthy pockets. As microfinance grew in scale it spawned a web of interacting operations: microfinance funds invest in microfinance institutions which are rated by microfinance rating agencies, and which make loans through other partners. Principal-agent problems become pervasive and, without a regulatory framework, there were incentives everywhere that not only enabled corruption but, Sinclair argues, pushed participants to keep a lid on stories of corruption—to try to fix them quietly rather than to risk the reputation of the broader industry. Taking a charity and turning it into a bank is, Sinclair says, a great way to build assets and then capitalize on them.

Beyond generally promoting the market-driven approach to microfinance, Omidyar Network was a big donor to Unitus, a microfinance fund embroiled in a 2010 scandal involving Indian MFI SKS. When SKS went public, raising $350m in its IPO, Unitus backed out of microfinance: “In charity circles, people wondered about the motives of the Unitus board members, at least four of whom had invested in SKS Microfinance themselves and thus would reap profits from the I.P.O.” More controversy followed in 2012 when it was revealed that over 200 poor, debt-ridden residents of Andhra Pradesh killed themselves in late 2010. The state blamed microfinance companies for fueling a frenzy of “overindebtedness and then pressuring borrowers so relentlessly that some took their own lives”.

Sinclair concludes that “Frankly, I think the only means to rein in these groups is to formally regulate them.” (p227) He also notes that “Impact Investing”, which is the Omidyar Network’s current emphasis, has similar problems: “I do not believe there are panaceas for poverty reduction – it is hard work and requires a number of tools used wisely and collaboratively” (p236).

A lesson of the story is that, as capital and social action have conflicting goals, using markets to scale up social action can destroy the very thing that made it special in the first place.