The following is an article I wrote for The Inductive.
Within the international development community, a debate for the heart of the movement recently came to the fore with the IPO of Compartamos, the largest microfinance institution in Mexico. Divisive and controversial, Compartamos’ decision to sell shares and publicly list on an exchange is perhaps the clearest manifestation of where the two sides diverge. One side, led by Muhammad Yunus, founder of the Grameen Bank and winner of the Nobel Peace Prize in 2005, contends that, at its core, the sole fundamental mission of microfinance is poverty alleviation. The other side argues that the goal must be maximizing profit and, more specifically, ROE (return on equity) – extending services to a previously unbanked population and expanding via revenue growth. Just about everyone has an opinion on the decision and, at the very least, it allows for a great philosophical and economic debate about the most effective way to assist the billions of people who live below the poverty line.
It’s necessary to first give a little background on microfinance and its role in economic development. Without going into too many specifics, microfinance describes the provision of financial services to individuals below the poverty line with no material collateral. Microcredit, specifically, refers to the disbursal of small loans – generally between $50 and $1,000, depending on the sophistication of the institution and the industry in general (average loan with Compartamos is $623) – to individuals that cannot access credit via the traditional banking system. Given their small size, the cost of servicing these loans, as a percentage of the total, is high. Remember: it costs the same amount to service a $10,000 loan as it does a $100 loan (salaries, office materials, etc.), and these microfinance institutions often have to track down the borrowers on a weekly basis to collect the interest and principle. In other words, interest on microfinance loans are higher than one might think appropriate. In the United States, 50% for a loan may seem exorbitant. But, when you look at it relative to the alternatives (up to 800% from loan sharks) and the fact that these loans are expensive to service, high interest rates are a necessity. But at what level are interest rates exorbitant, even for an MFI? This is the question at the heart of the Compartamos debate.
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Here in the Philippines, the most common use for a microloan is a sari-sari store – otherwise known as a general or convenience store. There are an estimated 700,000 of them here, and you can find one on just about every block in the country. In 2007, an organization called Microventures Incorporated introduced its Hapinoy program, which is a coop of sari sari stores across the country. By joining together, these stores can get leverage economies of scale to get volume discounts, competitive pricing, and more favorable terms for microloans. The organization purchases products in bulk from Procter & Gamble and other large manufacturers, and distributes them to each Hapinoy store via a community store. It is a hub-and-spoke model with a wholesale store serving different regions. Here is a program that operates within the existing framework of the country, improving what exists, rather than trying to change it altogether. Continue reading