Saturday, April 19, 2008

Role of for-profit MFIs

The Mexican microfinance bank Compartamos, run by Carlos Danel and Carlos Labarthe, has emerged as one of Mexicos's most profitable banks. It has even gone public and, in the one year since, given a return on equity in excess of 40%. It is estimated that 23.6 percent of Compartamos’s interest income went to profits. But its success has generated an interesting debate about how microfinance institutions (MFIs) should be run and what should be their objectives.

Compartamos went commercial in 2000 from being a non profit institution. Last April, Compartamos’ owners sold 30 percent of their stock on the Mexican stock market in an initial public offering, which brought in $458 million. Compartamos grew to 840,000customers last year, from 60,000 in 2000. The success of Comparatamos and other commercial microfinance banks have set off a scramble to get into this market. Major Wall Street Banks like the Citigroup have recently sprouted their own microfinance arms. These commercial banks have been attracted by the high, 25% to 45% range of interest rates charged for microloans in much of the world.

Mr. Danel and Mr. Labarthe say microfinance will help more poor people by tapping the boundless pool of investor capital rather than the limited pool of donor money. But others disagree and say that such microfinance banks that focus on the investors and their returns, instead of the borrowers, end up defeating the very purpose of micro loans.

This debate about the role of MFIs is beside the point. Deutsche Bank estimates the global demand for microfinance loans at about $250 billion, 10 times the amount that has been lent. This huge demand cannot be met from donor assistance alone, and will have to tap into the general investor pool. Therefore banks like Compartamos have an important role to play in complementing the efforts of donor financed MFIs like the Grameen Bank.

It would have been fine if non-profit MFIs were ready to step in and replace for-profit microfinance banks like Compartamos. But given the huge gap between the demand for microloans and the available pool of non-profit microloans, any effort to ban institutions like Compartamos will only hurt the poor. The world of microloans is large enough to accomodate both non-profit and commercial MFIs, and still leave enough space for others too. And in any case, the progression from the moneylender culture with all its attendant and well documented problems to organized microloans is itself a welcome development.

Update 1 (14/4/2010)
Times captures this debate on the pros and cons of for-profit MFIs who charge large interest rates and use the MFI cover to penetrate the market at the bottom of the pyramid.

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