MICROCAPITAL BRIEF: Wall Street Journal Article Examines “Profit Versus Purpose” Debate in Microfinance Industry

A recent article featured on the Wall Street Journal website entitled “Microfinance’s Midlife Crisis” examines the underpinnings of the debate in the microfinance industry about profit versus purpose. Profit advocates argue that improved access to foreign capital—USD 14.8 billion in 2008—has benefited the industry by freeing “many microfinance institutions (MFIs) from their reliance on donor funding.” Traditionalists, on the other hand, argue microfinance companies are becoming to focused on attracting foreign capital and “are in danger of becoming little better than predatory moneylenders.”

According to the World Bank, funds have been bringing in average annual returns of 6.3 percent when investing in MFI debt and 12.5 percent when investing in MFI equity. The article also states that “investors are attracted by they fact that returns on microfinance investments are reasonably uncorrelated to other asset classes.”

Experts who believe that the industry is losing sight of its vision to alleviate poverty point to MFIs such as Compartamos, which charges interest rates of around 85 percent and makes a return on equity of around 40 percent according the Journal article. Compartamos, the largest microfinance bank in Mexico in terms of client base, made a USD 458 million initial public offering on the New York and Mexican Stock Exchanges in 2007.

About Compartamos Banco

Compartamos Banco is a microfinance bank based in Mexico. It was founded in 1990. It offers both group and individual loans in rural and urban areas. Compartamos Banco provides small loans to low-income Mexican individuals and business owners, such as craft manufacturers, food vendors and other small businesses. It also offers voluntary savings, insurance, and loans specifically for home improvement. 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 December 31, 2009, has a total loan portfolio of MXN 7.6 billion (the equivalent of USD 591 million).

By Stefanie Rubin, Research Associate

Source Article: The Wall Street Journal: “Microfinance’s Midlife Crisis,” http://online.wsj.com/article/SB1000142405274870331500457507351047226843…

MicroCapital Universe: Compartamos Banco: https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Com…

Who’s Who in Microfinance: Compartamos Banco: https://www.microcapital.org/who%E2%80%99s-who-in-microfinance-compartamo…

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