Lenders to the Poor Adopt Guidelines

 

MEXICO CITY — For months, the fellowship of institutions providing microfinancing has been angrily divided over the actions of one of its own.

Compartamos, a fast-growing Mexican bank, went public in April 2007 and sold $468 million in shares on the Mexican stock market and gave the cash to its investors. Critics said the bank, based here, was putting profit ahead of clients, contrary to the altruistic ideals of microlending, which specializes in giving tiny loans to the poorest of the poor.

In its defense, Compartamos said that the stock sale showed private investors that microfinance could be profitable and would attract more private capital to the industry.

Now, it seems, the two sides have reached a truce. This week, Compartamos joined a group of microfinancing organizations to announce a code of conduct to protect the microlenders’ clients from being exploited.

Organizations signing the code say it is meant to reaffirm the principles of microlending and set microlenders, which showed the poor were good credit risks, apart from consumer lenders entering the market.

But the campaign was also prompted by the reaction against Compartamos, the microfinancing institution that began as a nonprofit and is now a fully fledged bank with one million clients. Critics say that interest rates charged by Compartamos are too high — some as high as 100 percent — even though the bank’s costs have fallen.

“There was a lot of concern, and there still is, that it’s very difficult to differentiate finance from microfinance because, look, everyone is coming in,” said Lynne Patterson, the founder of Pro-Mujer, a network of Latin American microlenders that signed the code. “What people were able to agree on is that we want to protect the client.”

Microfinancing, the practice of lending tiny sums of money to poor women to start their own businesses, has grown into a global industry since it began in the 1970s. Institutions involved now range from local nonprofit microlenders to commercial institutions that raise capital on financial markets and return profits for investors.

As microfinance has grown, the debate over how commercial it should be has gotten louder.

It took a yearlong protest of the Compartamos initial public offering to mobilize the industry. In April, Deutsche Bank convened some 25 industry leaders for a two-day conference in Tarrytown, N.Y. The code is the outgrowth of that meeting.

“The level of disagreement was probably not as great as it seemed,” said Elisabeth Rhyne, the managing director of the Center for Financial Inclusion in Washington, which promotes commercial models of microfinancing with a social mission. “You have people who have common ground for 75 percent of what they do.” What came out of the New York conference, she said, was an agreement that “this industry needs to assert its brand much more clearly.”

The code requires institutions to avoid reckless lending that can lead to excessive indebtedness, a worry in light of the “stunning example of the subprime crisis,” said Ms. Rhyne.

It calls on institutions to adopt transparent pricing along with collection practices that are not abusive, and it commits lenders to protect clients’ privacy and to offer them a way to resolve problems when they cannot pay.

Carlos Danel, a co-founder of Compartamos who was at the New York meeting, said the code of behavior “comes out of the worry that the industry is more diverse. But we can set up some rules of the game over how we treat people.” Since the code has no enforcement mechanism, the next step is to set up ways to measure how well microlenders are putting the rules into practice. That is where Compartamos may be able to shake off its strongest critics.

“If we’re able to establish a microbankers’ code of conduct and if Compartamos is at the center of delivery on that,” Alex Counts, the president of the Grameen Foundation, which supports microfinancing programs around the world, said, “that would go a long way to address their critics.”