Microfinance
Poor people, rich returns

May 15th 2008 NEW YORK
From The Economist print edition

Is it acceptable to profit from the poor?

SINCE CompartamosBanco, a Mexican lender to the poor, went public a year or so ago, a rift has been growing in the booming microfinance industry. To supporters of traditional charitable microfinance—providing loans and other financial services to help lift people out of extreme poverty—the Compartamos initial public offering has come to symbolise an aggressive move by capitalists to profit from the poor. To its backers, on the other hand, the success of Compartamos, despite the recent lacklustre performance of its shares, symbolises how the profit motive can help lift many more people out of poverty than charity alone could ever do.

Critics of Compartamos include Muhammad Yunus, a Bangladeshi economist who won the Nobel peace prize in 2006 for his work in popularising microfinance through the Grameen Bank. He was reportedly “shocked” by the IPO, and has argued that microfinance should be about “protecting [poor people] from the moneylenders, not creating new ones.” Another critic, Chuck Waterfield of Microfin, a provider of software to microfinance institutions, accuses Compartamos of “monopolistic exploitation of the poor”. He alleges that it is charging interest rates of over 100% a year, little different from what illegal loan sharks demand, and that it is deliberately making it difficult for poor borrowers to understand how much they are paying for their loans. He and Mr Yunus are campaigning for the microfinance industry to agree on common standards on disclosing charges to help borrowers.

Compartamos concedes that its rates may seem high—though it reckons they are closer to 70%—but says they are set to allow the bank to grow quickly to meet vast untapped demand in Mexico. Its borrowers have risen in number from 60,000 to around 900,000 in the past eight years. This is hardly an indication of exploited customers. Moreover, it is targeting potential borrowers just outside the mainstream, not the very poorest Mexicans.

A “big win” like the Compartamos IPO was needed to attract lots more capital into the microfinance industry, says Álvaro Rodríguez Arregui, the chairman of ACCION International, a charity that has been helping to spread microfinance since the 1970s. He expects interest rates to fall sharply as the rush of capital that followed the IPO expands supply and intensifies competition—just as it has done in Bolivia, which boasts the first for-profit, but not listed, microfinance institution, BancoSol. For-profit microfinance has been growing fast, including in India where SKS, a lender created by Vikram Akula, a former McKinsey partner, is backed by Sequoia, a leading Silicon Valley venture-capital firm.

ACCION was an early investor in Compartamos, and banked $140m in the IPO (and retains a 9% stake). This infuriates critics such as Mr Waterfield, especially as ACCION has received funding from the American taxpayer via USAID, the development agency. ACCION is reinvesting the money in new microfinance schemes, however. Mr Rodríguez Arregui fears the public fight over profits may scare away investors. Perhaps the best way to help the poor is to acknowledge that charitable and commercial microfinance can co-exist.

http://www.economist.com/finance/displaystory.cfm?story_id=11376809