On April 20, Mexico's biggest microfinance lender, Banco Compartamos, struck gold in an initial public offering. Share prices rose 22 percent in the first day. Considering that Compartamos' client base is 600,000 very poor Mexicans who pay interest rates as high as 100 percent a year for access to Compartamos loans, the lucrativeness of the public offering immediately struck some longtime participants in microfinance as troubling. Almost two months later, econoblogger Felix Salmon alerts us to an excellent in-depth examination of the issues raised by the Compartamos IPO, "Reflections on the Compartamos Initial Public Offering: A Case Study on Microfinance Interest Rates and Profits," written by Richard Rosenberg for the Consultative Group to Assist the Poor, one of Compartamos' early donors.
That last sentence should raise the first red flag. Founded in 1990 as a nonprofit organization, Compartamos got its start with the help of loans from international donors explicitly interested in helping the poor. But in 2000 the organization created a for-profit finance company, and that entity conducted the IPO. So one of the first questions raised by the IPO was: Did donor funds end up in private pockets?
Rosenberg convincingly argues no. To him, the far more distressing problem has to do with the reason why the IPO was so attractive -- Compartamos' high profit margins, which were not only greater than those raked in by most of Compartamos' competitors, but were generated by interest rates that were also significantly higher than those of other comparable microfinance institutions (MFIs).
According to Rosenberg, Compartamos originally raised its interest rates so high in order to survive a rough patch when Mexico's economy cratered in the mid-'90s. But when the economy improved, the interest rates did not come back down.
The problem, writes Rosenberg, has to do not so much with the IPO as with the original decision to form a for-profit finance company in 2000, a development that the original donors may not have anticipated. Looking to the future, Rosenberg suggests, nonprofit donors interested in supporting financial services for the poor may want to think more carefully about the conditions under which they give their money.
In the meantime:
One needs to be realistic about commercialization of microfinance. Although it brings the advantage of access to much greater funding and allows exponential expansion in the number of people served, one cannot be too shocked if a for-profit corporation starts acting like other businesses. But in the Compartamos case, a controlling majority -- two thirds of the shares -- was held by three pro-bono shareholders who were committed to development objectives, not profits. At a minimum, one wants to ask why they did not insist that greater weight be given to the interests of Compartamos' clients. In our view, this question is more troubling than most of the others associated with the company's development between commercialization in 2000 and the IPO in 2007.
While the Compartamos IPO may stimulate investors' interest in other MFIs, it may also have less fortunate results for some other MFIs in Latin America and elsewhere. A number of countries are seeing a strong backlash against high microcredit rates from populist politicians, media, and social activists. This populist critique usually ignores the fact that microcredit rates have to be higher -- sometimes much higher -- than normal bank rates even when the MFIs are efficient and profits are reasonable. But the public example of Compartamos, where the interest rates and profits that fed into the IPO look surprisingly high even to a fair-minded observer, could add fuel to the flames. In the present environment, MFIs are going to have to pay more attention to the political consequences of their interest rates.
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