The April 4th New York Times article on microfinance, “After Success, Problems for Microfinancing in Mexico,” addresses one of the central debates surrounding this growing industry: “How far should microfinance go toward becoming big business?” The article focuses on ‘Compartamos’, a once-nonprofit lending institution turned for-profit bank in Mexico.
In an address to the IPSA conference on the same day, María Otero, President and CEO of Acción International, described recent trends in microfinance and defined today’s microfinance as having a commercial foundation with private sector funding. While microfinance has expanded from extending microcredit to providing a range of financial services to the “unbankable poor”, it is still the marriage of finance and development concerns, and its goal is still to lift people out of poverty. There is, as Otero believes, an important role for private sector money in today’s microfinance industry—a distinct break from the traditional funding of microcredit through development assistance and one of its emerging debates.
At the center of this debate is an ethical question: should private banks and their investors make a profit off the world’s poor? Is Compartamos’s $80 million first-year profit justified because the now-public bank can provide capital to more poor borrowers? (In 2000, the year it went public, Compartamos extended loans to 60,000 borrowers, and by 2007, the number of loans had increased to 840,000.) The answer depends on its overall impact on microfinance clients.
In her support of the expansion of microfinance into capital markets, Otero noted that the key to providing quality financial services is meeting the demand for making capital available, something that she says the development assistance institutions are not equipped to do.
Microlenders who criticize the entry of private capital into the microfinance industry (among them is Muhammad Yunus) believe that shifting the focus from alleviating poverty to returns on investment and profit jeopardizes this industry’s legitimacy.
Banks such as Compartamos operate on a market-oriented model that emphasizes investor returns and excludes borrowers from enjoying the bulk of the profits they generate. Annual interest rates of MFIs are commonly between 25% and 45%, but some (including that of Compartamos) are as high as 90%. In the case of higher-interest rate lenders, lower costs which are associated with the transition to for-profit status have benefited investors and not the bank’s clients, although a Compartamos co-executive says that their interest rate has decreased 30% over the past five years. Charging unnecessarily-high interest rates (those in the 80% to 90% range) is the sort of unethical practice that does not prioritize the alleviation of poverty.
It is also relevant to consider that private banking institutions want their clients to become more bankable and thus have a vested interest in facilitating their rise from poverty. In a true market environment, banks that charge the highest interest rates will be forced to reduce them to the market rate.
While it is not ethical for private banks or any profit-seeker to make a buck on the poor, the entry of the private sector into microfinance is both necessary and beneficial to the industry. Private sector involvement doesn’t necessarily mean that banks get a bigger slice of the pie, but that the pie has grown in size. More clients can access funds and other financial products because private sector involvement in the microfinance industry creates more investors. As one Compartamos co-executive says, “it is marvelous to have one million creditors.”
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