Chuck's mail on the Compartamos listing and my reply to the mail

Chuck Waterfield wrote on the microfinance practice Yahoo group on April 24, 2007:

Something very important for us to reflect on.Personally, I'm stunned by this. I've seen this in the works for years now,but still stunned that it has really happened.

Compartamos, working inMexico, has created a very large operation. They work currently with600,000 clients. They have kept their interest rates at over 100% for manyyears (effective interest rate is currently 105%, as stated on their ownwebsite). This is startlingly high to people inside of microfinance as wellas outside of microfinance.

They have gotten very profitable. For the last several years, they havegenerated an ROE of over 50%. "Invest $100,000 and make $50,000 in returnafter one year." You can see their financials at www.themix.org. As theyreached profitability, their interest rates did not come down. Theycontinued to keep them high and generate high profits. Last year they made$57 million in profits.

I've watched them over the years. I have worked in their offices, but thathas been some years ago.Friday they went "public". The board and key staff members have becomemulti-millionaires (valued in US dollars). They hold a considerable numberof shares. 30% of the total Compartamos shares were sold on the marketstarting Friday. Details are in the Reuters news article below.

This is a non-profit institution started with grants. They got the firstgrant ever awarded by CGAP. $1M in 1997. They have gotten support fromnumerous donors and networks.

They now are generating extremely highprofits that now, as a publicly held institution, go to their share-holdingboard and staff and to their shareholders.Is this the future of microfinance? Is this where some other MFIs havealready gone, and where other MFIs are hoping to go? Is this the "solutionto poverty"? Do the "benefits" of this market-based approach outweigh anypotential costs of such intentional and blatant moves that will inevitablydraw the attention of the public? Will these actions cause at least somepeople concern about how the "deeds" of microfinance more-and-more appear tocontradict the "words" we say? Will microfinance become the home of theprofit-maximizing investors instead of the area that donors and non-profitsuse to effect beneficial economic and social change?

Please read the following article from Reuters. Think carefully about thissubject. I strongly believe it is the most important current issue inmicrofinance. I believe it has been for years (as anyone who has attendedmy courses knows). I think it is time we stop avoiding this issue. I thinkwe need to openly discuss this. I don't believe it is necessary to "pickon Compartamos." I think we should be looking at the bigger "philosophical"picture, of where microfinance is going. I think this is an essentialissue for us to clarify. The world now knows about microfinance. The worldwill soon know about the "complexities" of microfinance. What will you saywhen people start to ask you about these issues?I look forward to your comments.Chuck WaterfieldBy Noel

RandewichREUTERS12:03 p.m. April 20, 2007MEXICO CITY - Shares of small Mexican bank Compartamos, which specializes inlending to mom-and-pop businesses, surged as much as 34 percent in their$407 million stock market debut Friday. Owners of Banco Compartamos, which means "let's share" in Spanish, soldabout 30 percent of the bank, spokeswoman Luisa del Castillo told Reuters. More than 80 percent of the offer was placed in New York, with the rest onMexico's stock exchange, according to a company release. Mexican shares of Compartamos jumped as high as 53.53 pesos after thecompany priced the offer at 40 pesos per share. In afternoon trading thestock eased back slightly to 52 pesos. Compartamos said it sold 111,572,532 shares, with an over allotmentprovision of 16,735,880 shares. It was unclear whether banks managing theoffer exercised the over allotment, worth about $61 million. Compartamos, with profits of around $57 million last year, has just over600,000 clients in rural and semi-urban regions of Mexico. "We have clients who work in food, clothing, shoes and crafts," Castillosaid. "They're people with anything from a super-small business up to acorner store." Despite lending to customers with little credit history or collateral,Compartamos has kept past-due loans below 1 percent of its portfolio. "The offer received a lot of demand from institutional and retailinvestors," said one banker associated with the offer. "This is aone-of-a-kind story in the market today, which is why there is so muchinterest." Last year, Bangladeshi economics professor Muhammad Yunus received the NobelPeace Prize for pioneering microlending as a way to create self-employmentand escape poverty. The World Bank's International Finance Corporation, which backs privatecompanies with an eye toward eliminating poverty in developing markets, isthe third-largest shareholder in Compartamos. Mexico's government gave Compartamos a banking license last year, prior towhich it had operated as a specialized lending firm. Mexico's mostly foreign big banks, led by Citigroup and BBVA, focus on asmall but growing middle class, although they are beginning to designconsumer products for lower-income clients. The big banks' branches are absent from many rural areas in Mexico, whereone in two people live on less than $5 a day.

I replied:

Hi Chuck,

You have raised several important points. I wonder which of these is really shocking:
1. The fact that Compartamos charges high interest rates.
2. The fact that somewhere in its institutional lifecycle it decided to transition to a for-profit structure.
3. The fact that it became fairly large and currently has 600,000 clients.
4. The fact that it is hugely profitable.
5. The fact that Compartamos went public.
6. The fact that it rewards its share-holders that includes its employees (I wonder how many people it employs).

I also wonder whether it is fair to criticize Compartamos at this juncture. I believe the decision to be a for-profit organization must have preceded the listing. The primary objective of for profit organizations is to maximize share-holder wealth.

Public listing allows small investors to participate and they would gain only if the listed company makes profit. Capital market regulators also strive to ensure (with varying degrees of success) that trade transactions are fair and equal. As a result listed companies are required to adhere to a variety of disclosure norms and guidelines. You atleast know what they are doing.

Compartamos charges a high interest rate but still has 600,000 clients. What is the value proposition it offers to its clients? I also wonder whether there is any competition. Compartamos being a bank is a regulated entity. I wonder what views the central bank has regarding such monopolies.

I guess one of the intriguing issues here also is that Compartamos has benefited from benevolent donors. I would like to relate it to the recent debate on whether IFI development investments crowd out commercial investments. Is it possible that such investments may actually lead to monopolies and their associated maladies?

Regards,

Atul