Compartamos or Compitamos? Comportense!

Those that have been following the microfinance news a little broader than Kiva alone, know about the storm that has been going over this world caused by the IPO of Compartamos, a Mexican microfinance institute. The discussion, which can be followed on a daily basis on mailing lists like this one, mainly focuses on how a social-commercial entity used cheap NGO capital and charged very high interest rates to poor borrowers to build a commercial corporation that was so successful, that it could go IPO. As a result, some of the late-coming commercial investors reaped all the benefits, while the NGOs, but especially the poor (who paid interest rates of sometimes more than 100% APR), were the people to make this possible.

This brings forward an interesting dilemma. Can social-commercial entities truely be commercial? Should there be limits to how "commercial" they are in order not to lose the "social" part? Should financial services to the poor at all be done in a "for profit" way?

This is a hard question to answer, because in reality, there is nothing to stop a commercial company from pursuing their shareholder's commercial interest. Well, they supposedly work in a market economy, but (obviously) that economy is not functioning well in a place that allows interest rates of more than 100%.

I have always been a fan of these socio-commercial MFIs, and I've touted the greatness and efficiency of companies like Prisma Microfinance in Central America and Mifex in Ecuador (although the latter isn't really a declared "for profit" entity). I believe that a commercial setup creates sustainability and efficiency for an MFI, and having multiple players in the market (competition!) will make sure that the borrowers get the best deal.

Still, Compartamos (meaning "Let's Share" in Spanish) didn't do a real good job at, what's supposedly at the heart of their organization-- providing services that allow poor entrepreneurs and home owners to increase their wealth or standard of living.

I think that the discussion about "for profit" vs. "not for profit" is a hard one to be had. Even though nobody (except for the commercial investors) really feels good about making millions of dollars over the backs of the poor, the way to address this is probably not by making commercial MFIs less commercial. I think that commercial MFIs would need to put in safeguards in their business model that ensures that the "social" part of a "social-commercial entity" doesn't get lost in the shuffle. And that can be done various ways:

• Like the Grameen bank does, they can provide equity to their borrowers. This is a very interesting idea, but not necessarily very effective, as the borrowers really cannot do anything with their equity until the company goes public or is sold to a publicly listed company.
• They can provide direct "cash back" for the loan in a profit sharing scheme. The cash back could be invested in a savings account at the same MFI or at another (regulated) savings institute. This could be used to slowly build confidence of the borrower in the banking system, so they learn to retain savings (however small) in financial equivalents and institutionalized investments rather than in direct investment in goods and property. The cash-back could be constructed in such a way that it reduced the profits of the company, and therefore reduces the tax basis.
• The investors in the company can make stipulations about use of capital and social impact of their investment. In the case of Compartamos, early investments were done by Acción and other social investors; only later investments were done by purely commercial investors. If Acción or other early investors would have stipulated that their investment AND the possible future growth that their investment enables, was bound to some "rules of the games" protecting the consumers, nobody would have been whining now. In all honesty, if they had done that, chances would have been good that Compartamos wouldn't have gone IPO, and the possibility exists that purely commercial investors wouldn't have invested in the company because their upside would have been limited by the social manifest of the company.
• Compete, compete, compete. The reason for the high interest rates in Mexico isn't inflation. It is not related to (amply available) government regulation or taxation-- the latter is only done over the PROFIT, not over the INCOME (see this post from Kendall Mau). It is purely related to the lack of feasible competition.
  

So who dares? What will it take to set up a broad microfinancing operation in Mexico that bases its pricing on Risk + Mark-up rather than purely on possible Reward?