Markets for the Poor in Mexico
By Mary Anastasia O'Grady
The Wall Street Journal
June 30, 2008
Helping the poor may be virtuous, but when the poverty industry starts losing "clients" because the market is performing good works, watch out.
Compartamos Banco knows what it's like to have a tarnished halo. The Mexican bank specializes in microfinancing for low-income entrepreneurs in a country that never used to have a financial industry serving the poor. Compartamos not only figured out how to meet the needs of this excluded population, but also how to make money at it.
As a result, the bank has been growing fast. With an average loan size of only $450, it now has more than 900,000 clients – 15 times as many as it had in 2000.
This strong growth suggests that the bank's for-profit model makes both borrowers and lenders better off. Yet the triumph is not good news for everyone. In the economic sector that Compartamos serves – those making about $10 a day – the international charity brigade is at risk of becoming obsolete. Perhaps this explains why people who make their living giving away other people's money are badmouthing Compartamos for the vulgar practice of earning "too much" profit.
Lending to microenterprises took off some years ago as economists recognized that the poor, just like the middle class, can make productive use of credit. The most famous microfinancier is Muhammad Yunus, founder of the Grameen Bank and winner of the 2006 Nobel Peace Prize.
Compartamos got its start in southern Mexico in 1990 as a nonprofit providing working capital to small businesspeople like food preparers, vendors and handicraft producers. Its funds initially came from private-sector charity and governments, and its clients were – and still are – largely female. This group is often illiterate but it is also entrepreneurial and, as it turns out, a very good credit risk. In lieu of collateral, the bank typically accepts the credit of a group of entrepreneurs who effectively co-sign for a peer.
After 10 years, Compartamos was financing 60,000 microborrowers. But it recognized that the need for its service was much greater. In 2000, to raise new capital, it formed a for-profit company to utilize private-sector capital as well as loans and grants from government agencies and charities. In 2002, it issued $70 million in debt, and four years later its client base had grown to more than 600,000.
By 2006, bankers in the developing world who had traditionally ignored the "C" and "D" economic classes – with "A" being the wealthiest and "E" being the poorest – began to realize that lending to lower-income entrepreneurs is good business. One reason for the change was that computer software advances enabled banks to handle small accounts more efficiently.
What was once written off as an unviable market became a hot opportunity, and Compartamos was well positioned to capitalize on it in Mexico. Last year the company launched an initial public offering that was oversubscribed 13 times. That's when the do-gooders stepped in to question the company's ethics.
In a commentary published last June on the Compartamos IPO, Richard Rosenberg, a consultant for the Consultative Group to Assist the Poor – not part of the World Bank but housed on its premises – observes that the demand for shares in the company was driven, in part, by "exceptional growth and profitability." He then ruminates for some 16 pages on whether Compartamos's for-profit model is at odds with the goal of lifting the poor. A similar, though far less rigorous, challenge to Compartamos titled "Microloan Sharks" appears in the summer issue of the Stanford Social Innovation Review.
In his "reflections" on "microfinance interest rates and profits," Mr. Rosenberg writes that "overcharg[ing]" clients under a nonprofit model is OK because it is done for the sake of future borrowers. But when profits go to providers of capital through dividends, then there is a "conflict between the welfare of clients and the welfare of investors." It's not the commercialization of the lending, we're told, but the "size" of the profits that must be scrutinized.
What seems to elude Mr. Rosenberg is the fact that there is no way for him to know whether there is "overcharg[ing]" or by how much. That information can be delivered only by the market, when innovative new entrants see they can provide services at a better price. This has been happening since for-profit microfinance began to emerge, and the result has been greater competition. Rates have been coming down even as the demand for and availability of services have gone up.
How much better it would have been, Mr. Rosenberg suggests, if Compartamos had raised capital through "socially motivated investors" like the "international financial institutions" – i.e., the World Bank and the like. How much better indeed, for him and his poverty lobby cohorts, but not, it seems, for Mexico's entrepreneurial poor.