Doing good by doing very nicely indeed
Monday, June 30, 2008
For years Muhammad Yunus reigned as the public face of microfinance. It seemed only right when, in 2006, the Bangladeshi economist cum social entrepreneur and his Grameen Bank shared the Nobel peace prize for a micro-lending revolution that has helped millions to earn their own way out of poverty. Yet for the past year or so, microfinance has had another public face, one that troubles people like Mr Yunus. CompartamosBanco argues that the best way for microfinance to help the poor is for it to make a socking great profit.
Since Compartamos listed its shares for over $1 billion in April 2007, it has stirred up an increasingly fierce debate. To Mr Yunus and its other critics, the Mexican bank is no better than an old-fashioned loan shark, earning its huge profits by charging poor borrowers a usurious interest rate of at least 79% a year. Perhaps sensing opinion turning against it, the bank has belatedly sprung to its own defence, issuing a defiant justification of its business in an 11-page “letter to our peers”. And it manages to make a convincing case for its strategy of fighting poverty with profits.
Shares and sharing out
Compartamos was born out of the same social concern that inspired Mr Yunus. It uses a similar group-lending model to Grameen’s. It says its mission has not changed, but it has become convinced that by pursuing profits it will be able to provide financial services to many more poor people far more quickly than it would if it had continued to act as a charity.
Microfinance, especially lending to microentrepreneurs with no collateral, is labour-intensive and costly-in Compartamos’s case, around $152 a year per client, with an average loan of $450. By charging an interest rate that generates a profit, the bank can grow fast and provide many more “micro-entrepreneurs” with the finance they need, even at interest rates that by the standards of rich countries seem unacceptably high. The bank now has over 900,000 clients, and expects to reach over 1m this year, up from the 61,000 it had in 2000, after a decade as a traditional non-profit outfit. None of these new borrowers was compelled to come to its doors.
Compartamos also argues that its profits will build a microfinance industry. The more it earns, the more attractive microfinance will seem to investors, and the more capital will flow in. And the evidence supports this apparently self-serving claim: since Compartamos started to pursue profit, seven new regulated microfinance providers have begun to compete with it in Mexico, many of them financed by profit-seeking capitalists. Greater scale and competition are driving down interest rates-in Compartamos’s case, from 115% seven years ago. Even Mr Yunus has recently started to make the case for a more self-sustaining “social business” model, though his “non-loss, non-dividend company” is hardly as hungry as Compartamos.
Profiting from the poor can be wrong, when lending is predatory-when the lender expects that the borrower will be unable to pay the interest or repay the principal. Compartamos does not target the poorest of the poor: it argues they would be better served by benefits such as income support from the state. It reports low default rates and high customer satisfaction. As for exploiting the ignorance of some borrowers, Compartamos says it is committed to transparency on interest rates and other charges. Since going public, it has offered financial literacy courses-some 60,000 of its clients went on one last year. If only those rich-country banks which touted subprime mortgages to the poor had been as public-spirited.