07 April 2008

Microfinance: How Big Can Micro Get?

To profit or not to profit? That is the question. Whether it is nobler to make microloans with donor money or with investor capital is being hotly debated in the development community these days.

The question surrounds Compartamos, which means "let's share" in Spanish, and whether its principals -- known as the two Carloses -- should be sharing the spoils of their microlending institution cum commercial bank. According to a study cited in the New York Times, Compartamos enjoyed a 19.6 percent return in the 4th Quarter.

Part of the issue is profit, but another is about shareholder return. Will shareholders or investors keep the best interests of the poor in mind? Or are the interests of the poor better served by the donor community, who have typically funded microfinance?

For the record, among the largest shareholders in Compartamos are Accion Gateway Fund (Accion Gateway Fund L.L.C), IFC (International Finance Corporation), Oikocredit (Oikocredit), PROFUND (ProFund International, S.A.), Triodos-Doen Foundation (Triodos-Doen Foundation). Not exactly cutthroat capitalists.

There is certainly a need for more capital. According to a Deutsche Bank study, cited by The Times, "the global demand for microfinance loans [is] about US$250 billion, 10 times the amount that has been lent."

Banco Compartamos went public last year in an attempt to gain access to a broader capital market rather thank rely on the limited pool of philanthropic capital. That got the attention of Wall Street and drew some ire from more traditional microfinance institutions.

Some of the criticism stems from the roots of microfinance as a tool for eradicating poverty. A play like Compartamos seems to take microlending in a completely different direction, which, to some, strays from the mission.

But the question remains, is there room for traditional banks and other lending institutions to offer financial products for the poor?

What if Compartamos had not started as a non-profit (it was founded by a Catholic social action group called Gente Nueva, according to the Times), but had started with a different approach?

It seems like microfinance is feeling some growing pains. Some 20 years after the concept first sprouted -- and only two years since one of its originators, Muhammad Yunus and Grameen Bank, won the Nobel Peace Prize for the innovation -- its best practitioners have demonstrated it works. Now others want in the game.

I suspect there has to be room at the table for players like Compartamos, as well as commercial banks and other investors, alongside the small "mom-and-pop" shops and the Kiva.orgs, the latter of which connects lenders directly with borrowers through an online interface. The problems of poverty -- extreme as well as low- and mid-level -- are just too great to be limiting approaches now.

As I've argued before in this blog, the poor need better access to the full range of financial services -- and they need it now more than ever.

We need to remain vigilant as big institutions enter this space or we may end up with something like the mortgage crisis on our hands. We don't want people, as microfinance consultant Charles Waterfield told the Times, "making obscene profits off poor people."

But who decides when micro gets too big to be called micro any more?


For more on this issue, read the New York Times article by Elizabeth Macklin, "Microfinance Success Sets Off a Debate in Mexico."