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By, VILLA DE VÁZQUEZ, Mexico
— Carlos Danel and Carlos Labarthe turned a nonprofit that lent money to Mexico's poor into one of the country's most profitable banks.
But not all of their colleagues in the world of microlending — so named for the tiny loans it grants — are heaping praise on the co-executives of Compartamos. Some are vilifying them as "pawnbrokers" and "money lenders."
They are the center of a fractious debate: how far should microfinance go toward becoming big business?
At one end stand traditional microlenders, like the economist
Muhammad Yunus, founder of the most famous microlender, the Grameen
Bank, and winner of the 2006 Nobel Peace Prize. At the other are the
Two Carloses, as they are widely known in this tight-knit world that
gave them their start as starry-eyed idealists.
Microlenders, the original and still the most common type of
microfinance organization, help the poor start or expand businesses in
places most banks shun, like the slums of Calcutta or these
impoverished hills in Mexico's sugar cane country, three hours south of
Mexico City. Their efforts are widely considered successful in
transforming the lives of developing-world entrepreneurs, particularly
women, and their families.
Many microlending advocates, including Mr. Yunus, say that success is
threatened by Mr. Danel and Mr. Labarthe's market-oriented model, with
its emphasis on investor returns.
"Microfinance started in the 1970s with a focus on using this
breakthrough to help end poverty," said Sam Daley-Harris, director of
the Microcredit Summit Campaign, a nonprofit endeavor that promotes
microfinance for families earning less than $1 a day. "Now it is in
great danger of being how well the investors and the microfinance
institutions are doing and not about ending poverty." He said the
situation posed the danger of "mission drift."
Mr. Danel and Mr. Labarthe say microfinance will help more poor people
by tapping the boundless pool of investor capital rather than the
limited pool of donor money.
"It's marvelous to have one creditor but it's marvelous to have one
million creditors," Mr. Labarthe said, "and that's where we really
start to change the face of opportunity."
Compartamos ("let's share" in Spanish) expects to reach one million
borrowers this year. Its profits are healthy, some $80 million last
year, and its portfolio has grown to almost $400 million. Since it went
public nearly a year ago, return on equity has been more than 40
percent.
Both sides agree that there is a need for capital, too great to be met
by the donor groups that initially financed microlending. Deutsche Bank
estimates the global demand for microfinance loans at about $250
billion, 10 times the amount that has been lent.
But Compartamos's decision to go public last April became a flashpoint
in what had been a genteel debate over how microfinance could tap into
the financial markets' vast resources. The initial public offering gets
special mention at every microfinance conference, and has been
condemned by Mr. Yunus, the Nobel laureate.
Alex Counts, president of the Washington-based Grameen Foundation, said
Compartamos's poor clients "were generating the profits but they were
excluded from them."
Lynne Patterson, a founder of Pro Mujer, a nonprofit microfinance group
with branches in several Latin American countries, agrees. "We use the
profit to reinvest in the service of the clients," she said, referring
to loan repayment profits.
Since lack of access to credit is just one of the problems the poor
face, Pro Mujer also offers services like breast cancer screenings,
advice on dealing with domestic violence and financial education.
Still, in three decades microfinance has evolved — from small
nongovernmental organizations lending $50 to women to buy sewing
machines or fruit to sell at market to, in some cases, formal banks
that cover costs and grow through profits, like any business.
On Wall Street, investment banks package microfinance loans to sell to
institutional investors, many of them "socially responsible" and
looking for steady returns rather than trading profits. A few equity
funds have even taken stakes in microfinance institutions.
Critics say that Compartamos manages its business to benefit its
investors, not its borrowers. The bank began as a nongovernmental
organization in 1990, started by a Catholic social action group called
Gente Nueva, whose inspiration was a visit by Mother Teresa to Mexico.
After Compartamos became a for-profit company in 2000, costs fell as
efficiencies increased, but the bank kept interest rates high. On
average, customers pay an annual interest rate of almost 90 percent,
which includes 15 percent in government tax. In much of the world,
microfinance interest rates range from 25 to 45 percent. But in Mexico,
high costs, inefficiency and limited competition keep interest rates
much higher. Compartamos's rates are only a few percentage points
higher than Pro Mujer's, for example.
Like microfinance businesses around the world, Compartamos makes loans
without collateral. Its borrowers, who are nearly all women, are
organized in groups, which guarantee the loans. Stop paying and your
friends must pay for you: the system keeps default rates down.
Historically, microlenders point out, such borrowers are excellent
risks. For instance, Compartamos's nonperforming loans were just 1.36
percent of its portfolio at the end of last year.
Servicing those loans takes labor and that pushes up rates on such
small amounts. A Compartamos collection agent visits each group every
week, riding public buses out to villages.
Compartamos is more efficient than other Mexican microfinance
institutions and its own borrowing costs are lower, thanks to its
strong credit rating. Critics charge that it has not passed those
savings on to its customers.
The numbers seem to bear that out. A study last year by the
Consultative Group to Assist the Poor, known as CGAP, a microfinance
industry group based at the World Bank, estimated that 23.6 percent of
Compartamos's interest income went to profits. Its return on average
equity is more than triple the 15 percent average for Mexican
commercial banks.
Profit is not a dirty word in the microfinance world. The question is
how much is appropriate. CGAP estimates the average return on assets
for self-sufficient organizations to be 5.5 percent. The figure for
Compartamos was 19.6 percent in the fourth quarter.
Mr. Danel said Compartamos's interest rates have fallen 30 percentage
points over the last five years. "They go down based on efficiencies,
and we pass this benefit on to the customer," he said.
Compartamos grew to 840,000 customers last year, from 60,000 in 2000.
Last April, Compartamos' owners sold 30 percent of their stock on the
Mexican stock market in an initial public offering. The public offering
brought in $458 million. Private Mexican investors, including the
bank's top executives, pocketed $150 million from the sale. More than
half of the public offering proceeds went back to development
institutions that had invested in Compartamos when it moved from being
a nonprofit to a commercial venture in 2000.
One of them was Acción International, a Boston-based nongovernmental
organization that helps build microcredit institutions and provides
them with technical assistance. Acción invested $1 million in
Compartamos in 2000. It sold half its 18 percent stake at the time of
the public offering for $135 million.
"This is one strategy to address poverty that doesn't remain small and beautiful," said María Otero, president of Acción.
Charles Waterfield, a microfinance consultant who has been among the
most vocal critics of Compartamos's model, disagrees. "Not only are
they making obscene profits off poor people, they are in danger of
tarnishing the rest of the industry," he said. "Compartamos is the
first but they won't be the last."
There has not been a rush to market yet. In part, the subprime mortgage
debacle and the ensuing selloff on global markets has made this a poor
time for initial public offerings. Compartamos has not escaped the
turmoil; its stock price is up nearly 17 percent since the offering,
but down 32 percent from its high last July.
Those who argue for more such public offerings say that Compartamos set the right example.
"Boy, you got a lot of people's attention with that I.P.O.," said Bob
Pattillo, who runs Gray Ghost, a fund that invests in microfinance.
"This has got Wall Street's eye, London's eye, Geneva's eye — to have
one out there to say that if all the dots got connected this can be
quite profitable."
Mr. Danel and Mr. Labarthe argue that successful microlenders in a
middle-income country like Mexico should use the capital markets,
instead of crowding out donations.
As part of their defense, they argue that Compartamos's success has
prompted a number of institutions, including traditional banks and
retailers, to start offering financial products to the poor. "We don't
only see ourselves as a specialist in microfinance but also as the
builder of an industry," Mr. Danel said.
Compartamos estimates that its target market is 14 million households,
more than half of the country's population, most of them with little or
no access to banking services.
At the recent weekly meeting of a group of Compartamos borrowers in the
village of Valle de Vázquez, the interest rate was not a great concern.
Indeed, several women said they had left another microfinance
institution because it charged more.
The group was well established, 35 strong and well into its third year
of borrowing. The meeting, which took place in the living room of one
borrower's home, was the start of a new four-month borrowing cycle.
A Compartamos manager, Claudia Ayala, began with a pep talk, pointing
to a house plant set on a chair beside her. "This plant grows and this
group can grow," she said to the women, who were listless in the
afternoon heat. "How? By inviting more compañeras," or friends. "By
fertilizing it with responsibility," she said.
Though the village depends largely on remittances sent by relatives in
the United States, the Compartamos loans have helped some women become
self-sufficient.
Silvina Martínez started a little restaurant in her house a year ago to
sell her homemade snacks to students at a nearby high school. It has
grown steadily since then. With this cycle, she was going to borrow
about $1,100 to paint the restaurant and expand her menu. "It's my own
business," she said. "You are a slave to it, but at least it's mine."
Other women were successful entrepreneurs to start with, but the
Compartamos credit gives them a push, allowing them to hire an employee
or help ease their cash flow.
Alejandra Abúndez, 57, keeps pigs and cattle, and produces 330 pounds
of cheese a day, which she sells in the local market. She and her
daughter, Micaela Rivera, were borrowing $3,550 from Compartamos to buy
animal feed and to stock the tiny store in her front entryway.
"Everything I have, I invest," said Ms. Abúndez, who was left a widow with five children at 35. "No gadding about for me."
source:http://www.nytimes.com/2008/04/05/business/worldbusiness/05micro.html?pagewanted=1&ei=5087&em&en=253b1304b9bc5c3f&ex=1207540800
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