MICROCAPITAL STORY: New York Times Reports on Controversial Microfinance Giant Banco Compartamos of Mexico

The New York Times has reported on the ongoing controversy surrounding Banco Compartamos, a for-profit microfinance bank in Mexico whose practices have drawn criticism from many traditional voices in the microfinance field.

The article traces the path of Compartamos from its inauspicious origins as a non-governmental organization (NGO) begun by a Catholic social action group in 1990 to its current status as the nine hundred-pound gorilla of micro-lending in Mexico, a publicly traded company that critics claim is more interested in pleasing investors than alleviating poverty.

Most offensive to people like Muhammad Yunus – considered the founding father of microfinance – are the high interest rates charged by the bank to its poor clients. Mexican banks usually charge interest rates up to 90 percent due to inefficiencies, high costs, and limited competition. Compartamos, however, has been able to produce greater efficiencies and a strong credit rating as a result of its for-profit orientation. Critics charge that Compartamos does not pass on these savings to borrowers, instead steering interest income into boosting its own bottom line. As a result, return on equity was 38.38 percent and return on assets was 17.19 percent for 2007 (Annual Report). Average return on equity for Mexican commercial banks is 15 percent, and the average return on assets for self-sufficient organizations is 5.5 percent.

By contrast, organizations like Pro Mujer are shown to be reinvesting their profits in their clients, including the provision of social services, all towards the end of poverty reduction. Sam Daley-Harris, director of the non-profit Microcredit Summit Campaign, accuses Compartamos of “mission drift” – losing sight of the socioeconomic goals of microfinance in favor of maximizing returns for investors. Carlos Danel and Carlos Labarthe, co-executives and founders of Compartamos, are known to be have been pejoratively labeled “pawnbrokers” and “money lenders.”

On the other hand, the bank’s proponents point to the success of Compartamos’ initial public offering (IPO) last year and its inherent advantages. One microfinance investment fund manager was quoted as praising the IPO for attracting major publicity in the world’s financial centers as a viable investment. Labarthe said using abundant investor capital is much more advantageous than relying on donor money, and Danel said that their success has inspired the offering of more financial products to the poor. Even some development institutions that had previously invested in Compartamos were pleased to see their investment rewarded by the USD 458 million IPO.

The article concludes with an inside look at a village meeting of Compartamos borrowers. It was held in a member’s living room at the beginning of a new borrowing cycle and was described like a pep rally. For the 35 members present, interest rates did not seem to be a concern at all; many of them had been able to become self-sufficient with the help of Compartamos loans, while the rest of the village continued relying on remittances from family members in the United States.

MicroCapital recently reported on Compartamos’ 33.7 percent increase in annual net income for 2007. MicroCapital also previously reported on steady declines in the bank’s share price since its peak last July and the continuing debate about its IPO (part 1, part 2).

Banco Compartamos is based in Mexico City and last reported total assets of MXN 5.1 billion (USD 474.4 million). Its debt-equity ratio is 123.33 percent, and its most recent credit rating from rating agency Standard & Poor’s in October 2007 is mxAA-.

By Stephen Son

Additional Resources:

New York Times: “Microfinance’s Success Sets Off a Debate in Mexico”

Banco Compartamos: 4Q07 Results; “Standard & Poor’s sube a ‘mxAA-’ la calificación de largo plazo de Banco Compartamos; la perspectiva es estable” (Spanish)

MicroCapital.org article, February 28, 2008: “Banco Compartamos, Mexico’s Largest Microfinance Bank, Reports 33.7 Percent Increase in Net Income in 2007”

MicroCapital.org article, February 13, 2008: “Compartamos Windfall One Year Later”

MicroCapital.org article, June 18, 2007: “Further Extracts from the Microfinance Practice Group Debate on Compartamos IPO – Malcolm Harper”

MicroCapital.org article, June 19, 2007: “Further Extracts From the Microfinance Practice Group Debate on Compartamos IPO – Vineet Rai”

MIX Market: Profile for Banco Compartamos