In the fourth quarter of 2010, Compartamos reported flat performance but expected to reap future benefits from the addition of new products like microinsurance and home-improvement loans [2]. Over the twelve months ending March 2011, the bank expanded its outreach by 30.5 percent to 2 million clients. The total loan portfolio increased by 26.1 percent to MXN 10.7 billion (USD 920 million). The share of nonperforming loans dropped from 2.40 percent to 2.01 percent, supported by strength in the bank’s core group loan product. Although the loan portfolio grew by more than MXN 2 billion (USD 172 million), year-on-year write offs remained constant at MXN 63 million (USD 5.4 million) for the quarter [1].

Compartamos is currently negotiating a deal to acquire a majority stake in Financiera Creditos Arequipa SA, a Peruvian microfinance institution (MFI) as was reported by MicroCapital in March [3]. In a telephone interview with The Wall Street Journal, Compartamos’ Chief Financial Officer Patricio Diez expressed plans to begin operations in Guatemala before the end of 2011 [1].

By Rohan Trivedi, Research Associate

About Banco Compartamos:
Banco Compartamos is a microfinance bank based in Mexico that was founded in 1990. It offers group and individual loans in rural and urban areas. Banco Compartamos provides loans to low-income people for business and home improvement purposes. It also offers voluntary savings and insurance products. The company made its initial public offering (IPO) in 2007 on the New York and Mexican stock exchanges in a transaction worth USD 467 million and, as of March 31, 2010, has a total loan portfolio of MXN 10.7 billion (the equivalent of USD 920 million).

Sources and Additional Resources:

[1] Wall Street Journal Online: “Mexico’s Compartamos 1Q Net Profit Rose 14.8% on Higher Fees”, http://online.wsj.com/article/BT-CO-20110425-706115.html

[2] MicroCapital.org article, February 25, 2011: “MICROCAPITAL BRIEF: Banco Compartamos of Mexico Reports Flat Net Profit For Q4 as Staffing Level Rises 33% in One Year”, http://www.microcapital.org/microcapital-brief-banco-compartamos-of-mexico-reports-flat-net-profit-for-q4-as-staffing-level-rises-33-in-one-year/

[3] MicroCapital.org article, March 29, 2011: “MICROCAPITAL BRIEF: Mexican Microfinance Institution (MFI) Compartamos Banco to Acquire 82% Stake in Peruvian Lender Financiero Creditos Arequipa SA”, http://www.microcapital.org/microcapital-brief-mexican-microfinance-institution-mfi-compartamos-banco-to-acquire-82-stake-in-peruvian-lender-financiera-creditos-arequipa-sa/

Compartamos Banco Press Release: “Compartamos Banco Reports 1Q11 Results”, http://www.compartamos.com/wps/wcm/connect/?MOD=PDMProxy&TYPE=personalization&ID=NONE&KEY=NONE&LIBRARY=%2FcontentRoot%2Ficm%3Alibraries&FOLDER=%2FRelacion+con+Inversionistas%2FInfo+Gral+para+Inversionistas%2FInformaci?n+General+En%2F&DOC_NAME=%2FcontentRoot%2Ficm%3Alibraries%2FRelacion+con+Inversionistas%2FInfo+Gral+para+Inversionistas%2FInformaci?n+General+En%2FCompartamos_Reporte_1Q11_ENG__graphics__V8.pdf&VERSION_NAME=NONE&VERSION_DATE=NONE&IGNORE_CACHE=false&CONVERT=text/html&MUST_CONVERT=false

MicroCapital.org article, January 24, 2011: “MICROCAPITAL BRIEF: Mexican Microfinance Bank Compartamos Banco Looks to Expand in Other Latin American Nations”, http://www.microcapital.org/microcapital-brief-mexican-microfinance-bank-compartamos-banco-looks-to-expand-in-other-latin-american-nations/

MicroCapital Universe Profile: Banco Compartamos, http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Compartamos+Banco

Browse the MicroCapital Universe and add your entry to the wiki at: http://www.microcapital.org/microfinanceuniverse/

By Jacqueline Foelster, Research Associate

About Microfinance Information Exchange (MIX): Established in 2002, Microfinance Information Exchange (MIX) is a nonprofit organization with headquarters in Washington, DC, and regional offices in Peru, Senegal, India and Indonesia. MIX provides detailed financial and social performance information from microfinance institutions (MFIs), as well as business information from market facilitators, donor organizations and investors in microfinance. MIX was founded by CGAP (Consultative Group to Assist the Poor) and is sponsored by Citi Foundation, Deutsche Bank Americas Foundation, International Fund for Agricultural Development (IFAD) and the Bill & Melinda Gates Foundation.

Sources and Additional Resources:

[1] Microfinance Information Exchange (MIX), http://www.themix.org/publications/microbanking-bulletin/2011/03/myths-and-reality-cost-and-profitability-microfinance

[2] MicroCapital.org Brief, January 10, 2011, “Founder of Grameen Bank and Nobel Peace Prize Winner Dr Muhammad Yunus Speaks Out Against the Commercialization of Microfinance Institutions (MFIs)”, http://www.microcapital.org/microcapital-brief-founder-of-grameen-bank-and-nobel-peace-prize-winner-dr-muhammad-yunus-speaks-out-against-the-commercialization-of-microfinance-institutions-mfis/

MicroCapital.org Brief, March 15, 2011, “Microfinance Information Exchange (MIX) Updates Review of Yunus’s Classification of Interest Rates, Argues Against Interest Rate Caps”, http://www.microcapital.org/microcapital-brief-microfinance-information-exchange-mix-updates-review-of-yunuss-classification-of-interest-rates-argues-against-interest-rate-caps/

MicroCapital Microfinance Universe Profile: Microfinance Information Exchange (MIX), http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Microfinance+Information+Exchange+%28MIX%29

Browse the MicroCapital Universe and add your entry to the wiki at: http://www.microcapital.org/microfinanceuniverse/

The report also announced the development of the Seal of Excellence for Poverty Outreach and Transformation in Microfinance, a designation that will recognize microfinance institutions (MFIs) that “do the most” to assist families in helping themselves out of poverty. Chuck Waterfield, founder of US-based nonprofit MFTransparency, elaborated on the need for the Seal: “With such incredible growth in microfinance there is a need for some certification, some objective measurement that makes it clear to the outside world that these are the goals of those microfinance institutions that are committed to reducing poverty and these are the institutions reaching those goals.”

The report continues with a debate on the relentless topic of whether or not MFIs should operate on a for-profit basis. In the report, leaders from Banco Compartamos and SKS Microfinance, two for-profit MFIs based in Mexico and India, respectively, argue that commercial financial support and profit generation are crucial ingredients to the success of microfinance. Critics of the viewpoint offer counterarguments in the reports as well, citing possible long-term consequences of negative publicity from recent cases of abusive collection practices [1].

By John Howard-Smith, Research Associate

About Microcredit Summit Campaign: Microcredit Summit Campaign is a project that was launched by RESULTS Educational Fund (REF), a nonprofit advocacy group based in Washington, DC, in 1997. The campaign’s mission is to help 100 million people rise above the international poverty line of USD 1.25 a day by 2015. The campaign also aims to bring financial and business services to 175 million people, especially women, by 2015.

[1] Microcredit Summit Campaign Press Release: “Record 128 Million of World’s Poorest Received a Micro-Loan in 2009”, http://www.microcreditsummit.org/news/

MicroCapital.org Special Feature, October 15, 2008: “MICROCAPITAL SPECIAL FEATURE: Mohammad Yunus and Michael Chu Debate Profiting from Poor People at the Worldwide Microfinance Forum”, http://www.microcapital.org/microcapital-special-feature-mohammad-yunus-and-michael-chu-debate-profiting-from-poor-people-at-the-worldwide-microfinance-forum/

MicroCapital.org Paper Wrap-Up, February 2, 2009: “MICROCAPITAL PAPER WRAP-UP: The State of the Microcredit Summit Campaign Report 2009, by Sam Daley-Harris”, http://www.microcapital.org/microcapital-paper-wrap-up-the-state-of-the-microcredit-summit-campaign-report-2009-by-sam-daley-harris/

MicroCapital.org story, November 23, 2010: “MICROCAPITAL BRIEF: Finance Minister of India Vows Not to Strangle Indian Microfinance Industry”, http://www.microcapital.org/microcapital-brief-finance-minister-of-india-vows-not-to-strangle-indian-microfinance-industry/

MicroCapital.org story, January 27, 2011: “MICROCAPITAL BRIEF: Microcredit Summit Campaign of RESULTS Educational Fund (REF) Releases Report, “Number of Microcredit Clients Crossing the US $1.25 a Day Threshold During 1990-2008, Estimates From a Nationwide Survey in Bangladesh” http://www.microcapital.org/microcapital-brief-microcredit-summit-campaign-of-results-educational-fund-ref-releases-report-number-of-microcredit-clients-crossing-the-us-1-25-a-day-threshold-during-1990-2008-estimates-fro/

MicroCapital’s Microfinance Universe profile: Microcredit Summit Campaign, http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Microcredit+Summit+Campaign

Browse the MicroCapital Universe and add your entry to the wiki at http://www.microcapital.org/microfinanceuniverse/

The MCGF was initially started with a GBP 10 million (USD 16.2 million) grant from the UK Department of International Development (DFID).  The SBP’s intention is to use the facility to reduce risk for banks and DFIs lending to microfinance institutions and thereby increase the outreach of financial services to the poor.  The partial guarantees will allow the SBP to leverage the initial grant amount up to four times.  Also, because it has been observed that banks are reluctant to lend in local currency, the structure of the guarantees will allow MFIs to borrow in local currency. The amounts lent by banks to MFIs under the facility will be deductible from each bank’s Demand and Time Liabilities for purposes of the SBP’s statutory liquidity requirement (SLR) and cash reserve requirement (CRR) calculations – meaning the banks will not be required to set aside additional reserves for these loans.  Guidelines for the MCGF have also been simplified and made more flexible, said the SBP. 

According to the MCGF guidelines, the interest rate charged to MFIs is limited to 200 bps (2 percent) over the prevailing SBP policy discount rate.  The SBP recently lowered its policy discount rate by 100 bps to 14 percent.  At the time of the move, inflation had declined to a still significant 19.1 percent (year-on-year), from a high of 25.3 percent in August of 2008.  The projection for average CPI inflation for fiscal year 2009 is 21 percent, with fourth quarter inflation falling to 14 percent.  Consequently the SBP’s real rate is currently negative, and the real rate banks are limited to charging MFIs are also negative, counteracting the SBPs recent attempts to entice banks to use the facility.  This latest amendment to the MCGF does compensate banks for charging a lower interest rate to MFIs, however given the large gap between inflation and the discount rate banks are likely to continue to be reluctant to lend until inflation falls significantly or the SBP removes, or raises, its interest rate restrictions. 

The SBP has made several recent attempts to promote microfinance in Pakistan.  MicroCapital reported on the SBPs move last month to require MFI shareholders to deposit their shares in blocked accounts of the Central Depository Company of Pakistan in an effort to ensure adequate capitalization of MFIs.  Unfortunately, as with the SBP’s limitation on interest rates, not all political intervention has served to promote microfinance: for example local politicians in Punjab province were reportedly declaring general amnesty for micro-loans.  More on this and Grameen Foundation’s and Women’s World Banking response can be read about in this MicroCapital report. 

As reported in a MicroCapital paper wrap-up, currently only 14 percent of Pakistanis use savings, credit, insurance, payments and remittance services from the formal financial system versus 48 percent in India, 32 percent in Bangladesh, and 59 percent in Sri Lanka.   According to the original paper entitled “Bringing Finance to Pakistan’s Poor” by the World Bank, financial institution willingness to expand access in Pakistan has been stinted by slow technological advances, weak legal foundations, unsuitable financial processes and products, and the difficulty local banks have had in serving SMEs profitably.   

By Laura Anderson, Research Associate 

Additional Resources: 

The Daily Times of Pakistan: SBP adds incentive to Micro Credit Guarantee Facility

State Bank of Pakistan: Home

Micro Credit Guarantee Facility: Home

State Bank of Pakistan Circular: Amendments in Micro Credit Guarantee Facility (MCGF)

State Bank of Pakistan Circular: Maintenance of Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR)

State Bank of Pakistan Press Release April 20, 2009: Salim Raza announces reduction in SBP policy rate to 14% on positive inflation outlook

UK Department for International Development (DFID): Home

MicroCapital Story: Grameen Foundation and Women’s World Banking Express Concern Over the Potential Crisis in Punjab, Pakistan’s Microfinance Sector

MicroCapital Story:  State Bank of Pakistan Directs Shareholders of Microfinance Institutions to Deposit Their Shares in Blocked Accounts of the Central Depository Company of Pakistan

The World Bank: Home

MicroCapital Paper Wrap-Up: “Bringing Finance to Pakistan’s Poor” by Tatiana Nenova, Cecile Thioro Niang and Anjum Ahmad

UNITED KINGDOM,  April 28  -  Our correspondent finds doubts raised about the effectiveness of one of the big ideas in the fight against poverty.

The statistics make mightily impressive reading: microfinance is worth a dizzying $6.5 billion; its ten largest funds grew at an equally impressive 32 per cent last year alone. It is, according to a report published yesterday, “unscathed” by the global recession. So why is the apparently well-meaning practice of lending small amounts of money to people in poverty so controversial, so much so that its critics think its time has already passed? In short, does microfinance really work?

According to Aneel Karnani, Associate Professor of Strategy at the Ross School of Business at the University of Michigan, the answer is, in short, no. “The problem with microfinance is that it simply doesn’t do that much to lift the poor out of poverty,” he argues.

“Countries that have lifted people out of poverty have not done it through microfinance. It’s been through the development of larger enterprises which create jobs – for example, in places like China and Vietnam. The question is: ‘Could we not use the resources in a better way?’ – for example, creating garment factories rather than creating individual entrepreneurs by giving them each a loan to buy a sewing machine.” Unfortunately, microfinance will grow and take in more public and private money.

“There is a lot of romanticisation of microfinance: the United Nations and the World Bank is enamoured by it and putting money into it. Even private money is going into it – you see a lot of rich entrepreneurs, like Pierre Omidyar [the founder of eBay], giving money to microfinance because this is what they think is helping the poor. It sounds like a wonderful notion: give someone a $100 loan and they can lift themselves out of poverty. But the evidence suggests otherwise.”

Such criticism, as Professor Karnani says, is not entirely fashionable. Ever since Muhammad Yunus, founder of the Grameen Bank, loaned a Bangladeshi woman $27 to start a business in the mid-Seventies, microfinance has been seen as the saviour of the world’s poor. Dr Yunus has loaned more than $7.6 billion to 7.7 million people in Bangladesh, at interest rates lower than those of local loan sharks, with Grameen a famously not-for-profit organisation. He was awarded the Nobel Peace Prize in 2006 for his work.

But talking microfinance now comes with caveats, qualifications, nuances – not least judging the priority that should be given to alleviating poverty over driving efficient economic growth, be it on a personal or national level.

Vineet Rai, chief executive of Aavishkaar, a micro venture-capital firm in India, says that banks now focus on making finance available as cheaply as possible rather than on poverty reduction: “The desired outcome is that people will come out of poverty – but unfortunately it is not the outcome on which microfinance focuses. Having a microfinance loan does not mean that you will get out of poverty and therefore it does not really matter if the money comes from private equity funds or venture capital funds or government or not-for-profits.”

Xavier Reille is a senior manager at the Consultative Group to Assist the Poor (CGAP), a consortium of agencies trying to expand access to financial services for the poor in developing countries, whose report has high-lighted the recent rise of microfinance. He says that microfinance “provides financial services for the poor and the financially excluded and recognises that the poor need a broad range of financial products” – but adds that things are getting “blurry” as more commercial companies jump on to the microfinance bandwagon.

“Using the term microcredit is so loaded nowadays,” says Helen Alexander, of ProCredit Holding – the top microfinance investment fund, according to the CGAP research. “Dr Yunus’s approach is totally legitimate, but while we give uncollateralised loans and give them to very small enterprises, we would never claim to be lending to the poor. We do not give consumer loans, but entrepreneurs can increase their income using loans from us.

“We’re somewhere in the middle between the Grameen approach and the commercial banking system. We define our social objectives differently. We see our role as deepening the financial sector and strengthening the enterprise sector and the banks in the countries in which we work with a view to having them create the employment and wealth that the countries need.”

Things have moved on a lot since Compartamos, the Mexican microfinance bank, angered Dr Yunus’s followers by going through a stock exchange flotation in 2007. The bank was accused of profiteering from the poor with its 100 per cent APR interest rates. “The rate should be low enough to support income generation for poor people rather than generating income for investors,” Dr Yunus said.

The bank responded that “the challenge of poverty is much larger than microfinance itself”. The Mexicans, some now argue, may have been right.

Comat provides a number of technological services that incorporate India’s rural poor. For instance, they participate in “software development, hardware procurement, systems integration, and kiosk deployment and operations” related to rural kiosks, which allow villagers to access technological services. They also work with government to provide the technical backing for policies and programs designed to assist the poor. Comat is a for-profit business that also focuses on achieving positive social goals. Financial data was not available on the company’s website.

The Unitus Equity Fund (UEF) is a fund administered by Elevar Equity, a “strategic affiliate” of Unitus, inc. According to a Unitus press release, the fund stopped raising new capital in 2006 and had USD 23.4m under management at that time. The fund’s website lists six current equity investments. Each of the recipient companies is involved in actual microfinance lending. At least one, MokshaYug Access Pvt. Ltd, also performs technical functions and supply chain management. This is the fund’s first investment in a company that does not perform lending services. According the MIX Market, the Microfinance Information eXchange, UEF had 8 equity investments totaling USD 9.4m as of 12/31/2005.

Unitus also recently launched the Unitus Equity Fund II (UEF II), which was founded in May with a combined USD 40m investment from Omidyar and Legatum. According to a previous MicroCapital story, the new fund will expand on its predecessor by “investing in companies that ‘offer products and services that enable the world’s poor to create opportunities for themselves and their communities,’” breaking away from a pure focus on MFIs. The new fund is not yet listed on MIX Market, the Microfinance Information eXchange, nor does it maintain its own online presence.

The Omidyar Network is a philanthropic investment organization created by Pierre Omidyar, the founder and e-bay, and his wife, Pam. The organization has invested over USD 150m in microfinance-related organizations. According to the company’s website, they “are working to enable the microfinance sector to access private capital markets.” According to MIX Market, the company works with a wide range of investment types, including private equity, loans and debt securities as well as grants and technical assistance. They have made investments in technology firms, research institutes, microfinance funds and other important players in the microfinance market, spanning many countries. To view all microfinance related investments, please see the company’s website. In addition to their recent investment in UEF II, Omidyar also provided a USD 9m grant to Unitus. MicroCapital has reported extensively on Omidyar’s previous investments.

By Greg Casey, Research Assistant

Additional Resources:

Business Standard: “Comat raises Rs 60 crore from Omidyar and Unitus

MIX Market: Omidyar Network

MIX Market: Unitus

Omidyar Network: Home

Omidyar: Portfolio – Access to Finance

MicroCapital Story, May 12, 2008: Indian Microfinance Institution Grama Vidiyal Microfinance (GV) Plans Expansion and Receives USD 3.5 Million from Unitus Equity Fund and Vinod Khosla

MicroCapital Story, May 19, 2008: Investment Group Legatum and Omidyar Network Invest $40m in Unitus Equity Fund II

MicroCapital Story, April 29, 2008: MICROCAPITAL STORY: Omidyar Network Granting $9m to Microfinance Non-Profit Unitus

Unitus Equity Fund: Portfolio

Unitus Press Release: “Unitus Equity Fund Closes Largest Private Global Equity Fund Targeting Microfinance”

Comat: Home

Comat: “GoRural – Rural Telecentres/Kiosks”

Unitus: Home

MokshaYug Access Pvt. Ltd: Home

Oanda.com: FX Converter

In an article published in Stanford Social Innovation Review, a magazine of Stanford Graduate School of Business, University of Michigan’s Dr. Aneel Karnani argues against investment in microfinance. As the essay’s title articulates, “Microfinance Misses its Mark,” the professor argues that microfinance “does not significantly alleviate poverty.”

Continue reading “PAPER WRAP-UP: "Microfinance Misses its Mark," by Aneel Karnani”

Continue reading “Uganda to Cap Interest Rates Charged By Microfinance Institutions”

Continue reading “Can a State-owned Microfinance Institution Succeed? A Look at Colombia’s New Banco de las Oportunidades”