DJ Mexico Compartamos IPO Raises Tough Issues for Microfinance
Wailin Wong, Dow Jones Newswires, June 01, 2007

NEW YORK (Dow Jones)--In most initial public offerings, the market cheers when the debut produces huge profits for the company and its investors. But the case of Mexican microfinance institution Compartamos has prompted hard questions and soul-searching among its industry peers.

Compartamos completed a $450 million IPO in April, becoming one of the few microfinance institutions, or MFIs, to do so. The lender's challenge to maintain a so-called double bottom line of improving clients' social welfare and generating returns for shareholders is an issue more MFIs could face as the industry grows. The microfinance sector, which provides tiny loans to the poor for small businesses, stepped decisively into the international spotlight last year when Grameen Bank founder Muhammad Yunus won the Nobel Peace Prize.

Established commercial banks, including Wall Street firms such as Deutsche Bank and Citigroup, also have social investment arms. The heightened attention has brought with it a backlash from some critics, who said MFIs charge overly high interest rates and don't do enough to pull their clients out of poverty. Compartamos' IPO adds a further set of concerns to the mix about corporate governance and how the lender uses its resources.

At a panel discussion last week at the Council of the Americas, Carolina
Velazco, manager of strategic planning at Compartamos, said the lender's
responsibility is "to keep the transparency that we began our operations
(with as) an NGO."

Compartamos was founded as a non-profit, non-governmental organization in 1990 and transferred its operations into a regulated for-profit finance company, known in Mexico as a sofol, a decade later. In June 2006, the finance company obtained a full banking license. Compartamos now has more than 600,000 clients and a $275 million portfolio.

The Compartamos NGO is the largest shareholder in the finance company and plans to use its proceeds from the IPO for its own operations, which involve health services for poor Mexicans.

A recent report by Richard Rosenberg of the Consultative Group to Assist the Poor, a group of 33 public and private development agencies, said "the tension between social and commercial objectives did not begin with the IPO. It began with commercialization in 2000...(The IPO) simply brought into stark relief an issue that was created when the finance company took in private for-profit investors."

Compartamos' IPO was a secondary offering, with its existing s hareholders selling a 30% stake for about $450 million - more than 12 times the shares' book value, the CGAP report said. The offering, which was managed by Credit Suisse, was 13 times oversubscribed and drew participation from about 6,000 private investors and 160 institutional investors, according to Compartamos.

The CGAP report notes that the selling shareholders' return on their
original investment of $6 million was roughly 100% per year compounded over eight years. CGAP gave a grant of $2 million to the Compartamos NGO in 1996 but is not a shareholder.

Among the selling shareholders were ACCION, a microfinance-focused
non-profit organizationheadquartered in Boston, and the World Bank's International Finance Corp. ACCION praised Compartamos' IPO in a statement and said its returns from the transaction will be channeled into activities such as technology development, staff training and investing in younger MFIs.

"With the Compartamos IPO, the financial markets have shown the true value created by high-performance, double bottom line-oriented microfinance institutions," ACCION said.

Asad Mahmood, a New York-based managing director at Deutsche Bank that runs the firm's global social investment funds, said at the Council of the Americas panel that there needs to be a recognition that different approaches to microfinance can work. Compartamos is a socially oriented NGO that serves hundreds of thousands of clients, Mahmood said, and its decision to pursue an IPO reflects a "different model" that's worth considering.

As Compartamos' Velazco explained, the lender was seeking to monetize part of its shareholders' investment and set a precedent for other social
institutions. The CGAP report also highlights Compartamos' desire to cement the microfinance industry's reputation as a legitimate part of the Mexican banking sector.

But "it is hard to avoid serious questions about whether Compartamos'
interest rate policy and funding decisions gave appropriate weight to clients' interests" when considered against shareholders' financial interests, the report said.

Compartamos and other MFIs have come under criticism for their high interest rates, though the industry contends that it charges far less than the other sources its clients have traditionally accessed. Compartamos raised its effective annual interest rate above 100% during Mexico's so-called Tequila Crisis in 1994-1995. Afterwards, the lender left its rates around those elevated levels to fund its growth. CGAP said the "decision to grow fast has been defensible from a development perspective."

Compartamos' Velazco added that "in the past, we've done a great effort to lower this interest rate," which is now at 88%, but microfinance rates are "not comparable with the banking industry" because of high labor and
administrative costs, as loan officers have to visit clients every week.

MFIs say interest rates will come down as more players enter the field. The growth of competition may be one more thorny issue of capitalism that the industry will find unavoidable as it seeks to be a serious player in global finance, despite its devotion to a purpose that goes beyond mere
profitability.

The sector must "get beyond the hoopla of making microfinance sexy," said Mahmood of Deutsche Bank. "We dress it up...(But) when we look at it closely, it has a lot of pimples and hair on its back."

-By Wailin Wong, Dow Jones Newswires; 201 938 5240; wailin.wong@dowjones.com