Studies on Mexican microlender shed light on profit, poverty

by Reuters
Monday, 24 June 2013 20:02 GMT

By Paige Gance

WASHINGTON, June 24 (Reuters) - Mexico's microfinancing bank Compartamos, accused by activists of exploiting poor borrowers with exorbitant interest rates, has generally helped people but could cut the interest it charges without hurting its bottom line, a pair of studies has found.

The two studies, funded by the Massachusetts Institute of Technology's Poverty Action Lab, looked at whether loans by Compartamos, the country's largest and most profitable microfinance lender, had helped the people it sought to serve and, separately, whether it could lower interest rates.

Originally a charity, Compartamos went commercial in 2000 and it drew criticism from microfinance purists after its highly successful initial public offering in 2007.

One of the studies found that when Compartamos has a greater presence in a neighborhood or town, measures of well-being such as happiness and trust in others improved. And while there were no significant changes in household income, households were able to avoid selling assets to pay down debt, improving economic well-being.

"Microcredit is on average modestly beneficial - but not transformative," said University of Michigan's Manuela Angelucci, who co-authored one of the studies.

The studies neither vilify nor exalt Compartamos' style of microfinance, and they dovetail with a growing body of literature on microfinance that has found little or no impact on the financial fates of the poor in places such as the Philippines, Morocco and India.

This marginal effect, coupled with annual interest rates of around 100 percent, has led to questions of whether Compartamos primarily serves shareholders or the more than 2.3 million clients that traditional lenders would turn away.

Beginning with Grameen Bank in Bangladesh, the charities that pioneered microfinance had high hopes that making credit available to the entrepreneurial poor could be a powerful tool to fight poverty. They envisioned a sustainable form of aid in which funds would be constantly recycled as loans were repaid. Questions of profit were not part of the equation.

Nobel prize winner Muhammad Yunus of Grameen Bank, widely seen as the father of microfinance, has openly criticized Compartamos for mixing business with its social mission.

The interest rate Compartamos charges is average in Mexico, even among non-profits, said Dean Karlan, co-author of the studies and a professor of economics at Yale University.

"The costs of doing business in Mexico are just really high," said Karlan, given that the lender needs to attract skilled workers but is administering very small loans. Monica French Cuenca of Compartamos' financial inclusion department said operating costs often consume up to half the total loan amount in Mexico.

But the second study found that because administrative costs are so high, the bank could benefit from economies of scale. It found that when Compartamos lowered interest rates, it attracted new clients and made larger loans, while its profits held steady.

The finding could challenge other for-profit microlenders to look at their own practices.

"This should push firms to re-evaluate their policies, although we need to see more research," said Karlan.

As the former non-profit continues to grow off investor capital, many microfinance organizations have also foregone donor support and undergone the commercial transformation.

"Investors should be quite happy and sleep better at night knowing they're making money and making the world a better place," said Karlan. ((paige.gance@thomsonreuters.com)(luc.cohen@thomsonreuters.com) )