Ana Escalante

Hard Questions for Microfinance: How Much Profit is Too Much Profit?

Indigenous womenMicrocredit is generally considered a step forward in the war against poverty. Giving small loans to impoverished people helps transform lives–read the annual report of any MFI for details. While I am a firm believer that microfinance is a good thing, does it remain “good” when the people who are lending start making huge profits?

I have been following discussions inside the microfinance field, specifically regarding the Compartamos IPO.

“Carlos Danel and Carlos Labarthe, the CEOs of Compartamos, a nonprofit-cum-commercial bank which charges an annual interest rate of nearly 100 percent, believe that only the lure of profits will motivate people to lend to the poor. Today Compartamos reaches 700,000 borrowers and 88 percent of its clients come back for more loans. In 2006, it was rated as Mexico’s most profitable bank?

via PSD blog and iPienso. I also read the Microfinance Gateway reports from CGAP and Microcredit Enterprises. These reports caused me to reflect upon the debate, and I came to the following conclusion: while poor people are in need of credit and willing to pay high interest rates, that in and of itself doesn?t justify charging such rates and earning huge profits out of them.

Compartamos started in 1990 as a non-profit organization lending small amounts of money to indigenous Mexican women. Today, Compartamos has turned into a giant, for-profit bank with more than 600,000 clients. Compartamos’ transition from NGO to for-profit bank sparks controversy–while many indigenous women in Mexico are grateful for the programs, now the bank is targeted by critics. Among these critics are Chuck Waterfield, Jonathan Lewis, and Mohammad Yunus – Nobel Prize winner and pioneer of microfinance.

A recent CGAP case study clarifies the debate: the concern is not the large profits, but rather the large portion of those profits that were created by charging higher-than-necessary interest rates to borrowers. The report claims that such disequilibrium is due to a lack of competition in the microcredit market, and there’s still hope that competition will reduce rates and exorbitant profits in this sector. Among CGAP’s conclusions is the following declaration:

“All of us who are involved in commercial transformation?that is, moving microfinance operations from not-for-profit to for-profit institutional forms?need to think more clearly and realistically about the consequences of the resulting changes in governance incentives.”

The issue at hand is not to just pile on Compartamos, because eventually many other organizations will face the same questions. What is important here are the philosophical questions underneath microfinance. How much profit is too much profit? Are we truly serving the poor, or exploiting them? Where do we draw the line?Here’s a really good video, worth watching on the subject.