MICROCAPITAL BRIEF: New York Times Article Addresses High Interest Rates and Mission Drift Among Microfinance Providers

A recent article featured in the New York Times newspaper entitled, “Banks Making Big Profits From Tiny Loans,” argues there is a growing mission drift among microfinance providers and discusses the efficacy of microloans and the need for more transparency in the industry. The articles claims that “the microfinance industry, with over USD 60 billion in assets, has unquestionably outgrown its charitable roots,” with banks and finance firms serving 60 percent of all microfinance clients and some charging interest rates of 100 percent or more.

The article points to the USD 458 million initial public offering of Compartamos, a Mexican microfinance institution (MFI) with 1.2 million borrowers, as a transformative event which allowed investors to “fully recognize” the profitability of microfinance. According to the article, Compartamos charges an average interest rate around 85 percent and its return on equity (ROE) hovers around 40 percent.

Dr Mohammed Yunus, founder of Grameen Bank, recently proposed that MFIs should keep their interest margins—financial revenue from loans less financial expenses—below 15 percent, with anything higher putting them in the same category as loan sharks. Some experts argue, however, that Dr Yunus’ proposed methodology is too simplistic and it takes a more complex analysis to effectively judge MFIs.

“The overriding question facing the industry, analysts say, remains how much money investors should make from lending to poor people, mostly women, often at interest rates that are hidden,” concludes the article.

By Stefanie Rubin, Research Associate

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).

Additional Resources:

Source Article: The New York Times: “Banks Making Big Profits From Tiny Loans,” http://www.nytimes.com/2010/04/14/world/14microfinance.html?pagewanted=3

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

MICROCAPITAL BRIEF: Microfinance Information Exchange (MIX) and CGAP (Consultative Group to Assist the Poor) Criticize Mohammed Yunus’ Method of Judging Microfinance Institutions’ (MFIs’) Interest Rates

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

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