This is a continuation from Part I which focused on a recent New Yorker article.
New York Times Article
Elizabeth Malkin recent wrote an article in the New York Times called, Microfinance’s Success Sets Off a Debate in Mexico where she outlines some of the issues in the debate on the commercialization of microfinance. This article focuses on Banco Compartamos, a successful microfinance bank in Mexico, which went public in 2007 resulting in a large amount of publicity on investor returns from a bank which serves Mexico’s poor.
First, if you’d like to get a deeper understanding of the Compartamos IPO, there is an excellent case study written by Richard Rosenberg and published by CGAP (Consultative Group to Assist the Poor … part of the World Bank) called CGAP Reflections on the Compartamos IPO. I have read this article in detail and found it very helpful in unpackaging the complexities, nuances and unique circumstances of the IPO which is often lost in the sound bites of both supporters and critics.
Here are a few [of the many!] facts surrounding the Compartamos IPO:
- Compartamos didn’t issue any new shares as this was a secondary offering. Rather, certain shareholders sold their holdings on the Mexican stock exchange.
- At the IPO, more than 2/3’s of the shares of Compartamos were held by NGO shareholders who were (and are) committed to reducing poverty.
- $275M or about 5/8ths of the IPO sale proceeds went to NGOs to reinvest in their missions and the rest (about $150M) went to private shareholders.
- The IPO made public (and realized in the case of the stock sellers) the investor returns which had accumulated while the company was private. That is, while there likely was some upward bump due to market conditions in the value of the shares through the IPO process, most of the investor returns were not related to the IPO itself.
- At the IPO, the market valuation of Compartamos was approximately $1.5B which represents a roughly 100% per year compounded return for investors over 8 years.
- The interest rates charged by Compartamos in terms of yield in 2005 was 86.3% (when you add required VAT, the rate to borrowers is about 100%.)
Needless to say, with these type of numbers floating around in the same sentence as “the poor” there are lots of opinions on this transaction and whether this is a positive or negative event for microfinance and ending poverty. Supporters (and even CGAP) say that this is going to result in a lot more private capital being directed to the poor resulting in a broader variety and higher-euality financial services being delivered to the poor. Critics highlight the high interest rates as gouging the poor and the amount of profits pocketed by private investors (although somewhat reduced in this situation) as being exploitive. And most everyone agrees that optically high profits in serving the poor could be used by populist politicians to argue for regulations on microfinance which could reduce the availability of financial services to the poor.
Here are some additional facts on Compartamos:
- To survive the heavy devaluation of the peso and inflation in 1995, Compartamos was forced to raise its interest rates (to its current rate levels) in order to survive.
- When this macro economic financial turmoil subsided in 2000, Compartamos chose not to reduce their interest rates in order to fund rapid expansion to reach new [poor] clients. CGAP report notes Compartamos’s growth rate of 46% per year post 2000 (vs. 24% in previous 4 years) would not have been possible without the higher retained profits from maintaining these interest rates.
- The interest rates charged by other Compartamos are about the mid-range range for what MFIs charge in Mexico and there isn’t much difference between the high and low rates.
- Of the interest earned by Compartamos, about 25% of it is profit. That is, they would make no profit if their interest rate was ~65%. [Note: when I asked the CEO of Mexican MFI competitor why they didn’t charge a lower interest rate than Compartamos, he said that this would only put them at the disadvantage in their ability to fund growth of client reach. That is, they would grow more slowly serving fewer poor clients.]
- Their single largest cost is “operating expense” which is relatively high because they are continuing to forward invest in opening new offices to expand their client base. They are more cost efficient than most MFIs in Mexico.
- Most of Mexico’s population still have no access to bank services and credit in particular.
Here’s another interesting perspective on commercialization of microfinance titled “What would Leland Stanford do?” by Jonathan Lewis of MicroCredit Enterprises.
All of this data is hard to get your head around … yet alone come to a clear conclusion upon.
The question in my mind is whether in the long-run the Compartamos IPO will be a net positive or net negative for the poor in Mexico?
I think that on net it will result in a positive result for Mexico’s poor. The main factor is that the IPO has raised awareness of the bankability (investability) of the poor and this will attract more private capital which is the only source large enough to support the development of a broad range of financial services for the poor. While I expect that in the short-run that interest rates for microloans aren’t going to drop much, I do think that competition will drive down interest rates in the medium term as more players enter the market. I do hope that competition comes sooner rather than later in order to avert meddling by populist politicians.
Now there’s lots of fodder in this post for some controversy. So, please post your comments with as much objectivity as possible 😉 Disagreements are fine.
2 thoughts on “Critiquing microfinance, Part II”
I agree with your overall conclusion (it’ll be positive).Nevertheless it has now been demonstrated that you could get rich my setting up a MFI. This will not only draw people concerned about the poor so watch out for more aggressive promotion of (consumer) loans even to people who might not really benefit from them.