Muhammad Yunus challenges Compartamos bank
Is it ok to make a big profit from lending to the poor? Where does microcredit end and loan sharking begin?
Carlos Danel and Carlos Labarthe, the CEOs of Compartamos, a nonprofit-cum-commercial bank which charges an annual interest rate of nearly 100 percent, believe that only the lure of profits will motivate people to lend to the poor. Today Compartamos reaches 700,000 borrowers and 88 percent of its clients come back for more loans. In 2006, it was rated as Mexico's most profitable bank.
Muhammad Yunus, the Nobel laureate who pioneered the movement three decades ago and has made loans to some 7 million borrowers in Bangladesh, disagrees. Poor people's willingness to pay high interest is not a justification for charging it, he says. Compartamos is not microcredit, it's "raking in money off poor people desperate for cash."
What do you think? The comments are open. The entire program is available here.
Comments (11)
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I agree, and am deeply disturbed by the recent trend of profit focused microfinance. It seems to me that the NGO-based not-for-profit microfinance movement was working well and having positive impacts on borrower's lives. Donors were interested and providing the capital necessary for MF ventures.
However, with the realization that MFIs can sucessfully operate under a for profit structure, MFIs that offer multiple products and services without a profit motive are being forced to shift their model to one of for profit sustainability. This shifts the entire industry upmarket and results in the limiting of donor funds for those who do not make the shift.
I am not arguing that financial sustainability is undesirable. On the contrary, if an MFI is able to remain focused on its inital goals and operate sustainably, that is ideal. The problem is that a 'sustainability first' focus frequently results in mission drift.
Posted by: Caio | Oct 2, 2007 12:02:25 PM
I think it is absolutely tragic that a bank would hold itself out as a non-profit and charge poor borrowers 100% per annum interest on their micro-loans. That being said if these same borrowers would use village loan sharks and pay 1000% interest if Compartanos didn't exist than they are moving in the right direction. I just hope and pray that those who benefit (profit) from this bank's Public Offering find it in the kindness of their hearts to use their proceeds for charitable purposes.
Posted by: Brian Doyle | Oct 2, 2007 2:10:49 PM
If profits are reinvested, lenders like Compartamos and the Peruvian Caja Trujillo, which I advise, are able to reach more borrowers. Each new small borrower is hugely benefitted by being able to borrow at 100% instead of the several hundred percent charged by informal lenders.
Posted by: Richard Webb | Oct 2, 2007 6:35:17 PM
Would Yunus be upset if big banks decided to serve the poor? I'm guessing he wouldn't. Some (maybe CK Prahalad) would say, it's about time these corporations paid attention to this market.
Anyway, it sounds like investor money can expand microfinance to a lot of people quickly. Yeah, the investors are making a profit. But are we going to prevent the poor from improving their lives just so the rich can't get richer? This is really short-sighted.
What we need to know is the sweet spot for interest rates and investor money. How much can interest rates be raised without adversely affecting a large fraction of the borrowers, and at the same time, raise enough money to serve as many people as possible? This is what PBS should have addressed.
Posted by: Mark H. | Oct 10, 2007 4:58:36 PM
the simple truth is that the markets are driven by ROI. we talk about the efficiency of the markets in terms of private capital utilisation; but cringe when the market finds its "sweet spot" (and it happens to be 100%). truth be told, microfinance is becoming development's "sub-prime" marketplace. IFI's could play a bigger role, a regulatory role from a capital flows POV, by undercutting the ability of private capital to take advantage of the poor while also reducing the risk of loans to micro-enterprises by providing clear a framework and even guarantees.
Posted by: spook | Oct 17, 2007 12:04:58 PM
C.K.Praladh's approach to make corporate profit out of poverty through microcredit whereas prof Yunus's Gramin Bank wants to enrich poor by microcredit and provide them necessary support so that nonperforming assets of the bank does not increase being paid back the loan.
Posted by: DR.PRABIR DUTTA | Oct 29, 2007 1:13:55 PM
It is obvious it is creating jealousy. As competition will grow interest rates will go down. Compartamos might be looking to benefit from his leading position, agressivly investing to expand and settle it's market reach, before other banks try to enter the market. Moreover, the most expensive credit is the denied access to it. People are dying to access opportunities and handling such small loans individually justifies higher interest rates which are more than welcomed among its users.
Posted by: grasshopper | Nov 10, 2007 3:36:09 AM
As a microfinance ppractitioner in Ethiopia, I am happy to see this debate again here, after the intensive discussion at the microfinance practioners yahoo groups discussion some months ago.
I would say ''it is better if the poor can access finance even if they pay higher interest rate -- i.e, if the alternative is NOT having the access at all''. The real question, however, is whether the 'existing poor' should paymore to the MFI (and to what extent?) inorder that the MFI expand operation and the 'future poor' would have the access to the 'sustainable' financial services. Mechanisms should be also be in place to check that the MFI is working at the 'desirable' (what is the benchmark?) level of efficiency and appropriate measres are in place to facilitate the 'infrastrucure' (roads, etc, that also impact on the MFI efficiency) in which the MFI is working.
The next logical question is whether the profit so generated is actually used or re-invested for the intended purpose of service expansion. The MFI board (and others in governance) has the direct responsibility on this. The assumption is that the MFI with a 'double-bottom-line' objective have people at the board who work to maintain their 'reputation' (since they are not profit-motivated) and good public image. It may also be for future election. ....But we cannot guarantee that they work for their reputation, public image, etc. Indeed, where the democratic system is so poor, as it is in many poor countries, they can even manage to win the next election without having to bother about good reputation and public image.
So where there is practically no one seriusly monitoring that the profit generated actually goes to expansion of service provision to reach more poor (both now and in future) either from the MFI board, the Central Bank, Government, MFI Associations, lobby groups, etc, etc, MFIs -- particularly those facing little competition to force them lower the credit interest rate down -- will continue taking money from the very pocket of the poor, and still justify there operation under the pretext that the profit so generated will be used for expansion to more poor in other (remote) places, future tme, etc -- It is simply like mining newly-discovered natural resource!!
Every one working o development issues should be concerned about this very issue.
My papers dealing on this and other microfinance issues are posted at the World-Bank microfinance wing Consultative Group to Assist the Poorest (CGAP) (www.cgap.org). For pecific papers, you can visit CGAP's microfinancegateway using the following link:
http://www.microfinancegateway.org/fulltext/results.php?ft_datatype=32%2C11%2C7%2C20%2C5%2C13%2C9&ft_junction=all&ft_keywords=gobezie&pr=cgap_mfg&order=r&Submit=Go+%3E
Looking forward to hearing fro you soon.
Best Regards,
Getaneh Gobezie
Amhara Credit & Saving Institution
Deputy Managing Director
Tel: 251-911-092033
P.O.Box: 498
E-MIAL: getanehg2002@yahoo.com
Bahir-Dar
ETHIOPIA
Posted by: Getaneh Gobezie | Nov 25, 2007 2:11:18 PM
I beg to disagree with Gobezie. One can not imagine that there should be access to finance even within such a harsh condition of reaping off returns to investments at 100% interest rates. Besides, what would the supervising authority be doing? Validating such ills? The recultivation of excess profits earned into expansion does nothing better because it is about 'reap-off and leave on drip' while you 'reap-off' yet another lot. The mathematical accumulated defects are enormous.
What is important, in my view, is that if the global microfinance bodies believe that microrinance is for poverty reduction (of the poor) and not for the glamorous profits/dividends to owners then there must be a 'pro-poor and not a market-led policy' that demands for:
(i) mandatory services package a MFI must deliver
(ii) interest rate ceiling above which it is criminal to transact
(iii) an institutionalized routine impact evaluation beyond the money-metric poverty measures.
It is therefore self-defeating to find that microfinance for poverty reduction is businetize in line with the global business liberalization policy.
Posted by: Dr Alfred Lakwo | Nov 26, 2007 11:02:55 AM
Every time I read debates such as this one on Micro-Finance I get frustrated about the fact that NO ONE even stands still to consider what it is MF aims to achieve.
Isn't it that Money and Financial Services have been found (and that for centuries) key to fighting poverty in a sustained manner?
If all can agree to that then all involved need to answer the question what determines the value of money and how can a society be structured such that money keeps that value whilst integrating all citizens in its value-making process.
All wealthy democratic nations are based on capitalism but also have incentives and structures to integrate the entire society. Capitalism only means to me that goods and services are valued in a manner acceptable to all (also responding to the need that all want their effort, their labour, to be valued "justly"). And that acceptance is determined by performance based data that can be verified, thus the need for transparency. If many citizens do not trust data or prices, or they do not form part of the process/system, risks emerge of devaluation, inflation, instability.
In Bangladesh, Prof. Yunus' and GrameenBank's (which is an NGO according to the Central Bank, but allowed by a special ministerial decree to carry the otherwise protected name "bank") country, all the Micro-credit institutions together have difficulties demonstrating that they make a sustained impact in the fight against devastating mass poverty in their country.
Consequently, limiting this debate to what profit levels MFIs present in order to demonstrate sustainability and outreach increase, should be directly linked to the FSD debate, the building process of an inclusive financial sector. That process is a dynamic process, as the financial services access experts in all wealthy nations can tell you.
Comportamos in Mexico needs to be able to contribute to a process that results in people proud to stay in the country and emigrants wanting to come back. Ireland, still in the 1990-ies considered a developing country by its citizens, now boasts one of the highest wealth rates and a remigration stream of a what was once a traditional emigration country.
Kind regards, Peter
Posted by: peter van dijk | Nov 28, 2007 6:00:27 AM
How nice that the innovator of microfinance finally comes to mollifying the thinking of those of us who have been agonizing with the blatant exploitation of the poor by the rich!
The moral fiber behind microfinance seems to have died out with the diminution of development funds that followed the death of the USSR and the birth of a new Eastern Europe.
To sustain the practice of microfinance today, the costs to be met in running the microfinance mean having to charge high costs on the money. The glorification of microfinance initiatives that convert to banks even when the morality of supporting the less privileged is thrown out of the window means that evil schemes are crafted to shift money from the very poor to the rich. Compartmos is just but one example. There are others that have impoverished even those that were not in the unenviable reference of 'the poor'. Unfortunately our monetized thinking ensures that those crucifying the poor get cerebrated.
The trend is dangerous and will need other Yunus to come up and recreate microfinance or any other name that means what was intended by Yunus - the path out of poverty with small amounts of monies financing the daily necessities. Indeed, the hostile environment that has been created by 'profitability for sustainability' has to be mitigated. The thinking that 'the poor have no problem with high interest rates' is just a justification for the 'profiteering mercenaries'. Agony is that the poor know no alternative to their situation.
Posted by: Kiringai Kamau | Nov 28, 2007 9:49:57 AM