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Mexican microfinance comes under spotlight in duel of words

Published on November 17, 2011

 

A new round of what is thought the most persistent rivalry in the microfinance industry played out at this month’s Global Microfinance Summit in Valladolid, Spain, with Mexico’s Compartamos Banco in one corner and the U.S. organization MFTransparency in the other.

The first round came during the workshop “Is Transparency Enough? What is Fair and Ethical When it Comes to Interest Rates in Microfinance?”

The panel debated a paper written by Waterfield himself. Elizabeth Ryne of ACCION International’s Center for Financial Inclusion moderated the panel made up of Danel, Waterfield, Nadine Chehade of Planet Rating (Lebanon) and P.N. Vasudevan of Equitas (India).

Click to view MicroDinero Media Story

 

Mexican Microfinance Comes Under Spotlight in Duel of Words – Martín Páez Molina in Valladolid, MicroDinero,17 September 2011

A new round of what is thought the most persistent rivalry in the microfinance industry played out at this month’s Global Microfinance Summit in Valladolid, Spain, with Mexico’s Compartamos Banco in one corner and the U.S. organization MFTransparency in the other.
The row first started after Compartamos, the largest microfinance bank in Latin America, went public in April 2007.

At the summit, leaders of both sides were brought together on two separate panels: MFTransparency’s founder and chief executive Chuck Waterfield and Compartamos’ co-founder and executive vice president Carlos Danel.
The dispute brought to the center-ring the profits and interest rates of Compartamos and on a larger scale the trend toward the commercialization of the microfinance industry.

Round One 

The first round came during the workshop “Is Transparency Enough? What is Fair and Ethical When it Comes to Interest Rates in Microfinance?”

The panel debated a paper written by Waterfield himself. Elizabeth Ryne of ACCION International’s Center for Financial Inclusion moderated the panel made up of Danel, Waterfield, Nadine Chehade of Planet Rating (Lebanon) and P.N. Vasudevan of Equitas (India).

The paper lashes out against the Mexican microfinance sector and in particular Compartamos. It mentions the high returns generated by the bank’s IPO (300 to 1 based on initial investment), interest rates of up to 100% annual and big profits in spite of the high costs of operating in Mexico compared with Bolivia and Peru.

Waterfield’s questioning went from the mathematical to the ethical: “What’s the acceptable return on a US$5,000 credit? And when a credit is US$200?” he asked.

Danel countered by referring to the bank’s transparency reports, highlighting its growth in the last few years and a progressive decline in the interest it charges on its loans.

He didn’t avoid exposing his defensiveness and even suffered a few blows on questions from the public on who financed the growth of the bank, the investors or clients.

Waterfield also had his moment when Maricarmen Díaz Amador, coordinator of Pronafim, a fund that finances microenterprises in Mexico, pressed him on the sourcing of the data for the paper. Waterfield said that it came from U.S.-based data an analysis provider MIX as well as from 28 MFIs in Mexico, among other sources.

Round Two 

A day later, Danel and Waterfield met again on the plenary session “Initial Public Offerings (IPOs): The Field’s Salvation or Downfall?” Led by Larry Reed, the fledgling director of the Microcredit Summit Campaign, the debate was on a paper of the same name by Vickram Akula, founder and CEO of SKS Microfinance, a publicly traded microfinance institution in India. The panel consisted of Sanjay Sinha, general manager of the Indian rating system CRISIL along with Danel, Waterfield, CGAP’s Stephen Rasmussen and Anne-Marie Chidzero of AfriCap.

For Danel, IPOs are not a salvation. But he did say that the entry of investors can bring dynamism and efficiency to a microfinance company. Indeed, he said that in the four years since Compartamos started trading on the stock exchange its client roster has expanded to 2.5 million from 600,000.

He said many of the bank’s characteristics haven’t changed since its foundation as a non-governmental organization in 1990s: its clients still are mostly women.

What is more, the bank has been able to expand its offerings after the IPO with mortgage loans, microinsurance and most recently microsavings, a product now in the test phase in the state of Veracruz.

He said Compartamos grew 35% a year in the first years after the IPO, slowing to 25% a year since then. He said the profitability demanded by investors is not immediate and isn’t impeding investors such as the US$60 million layout on a network of branches.

Danel admitted that the entry of commercial capital isn’t attune to the social sense of a microfinance firm, but he said that with good regulation, client protection principles and a government that has a clear vision and mission and capacity to align conflictive interests, this can make it so that an IPO is a tool for growth.

Waterfield reproached the issue for its financial payoff. He said that Compartamos has capital return rates not even seen in commercial markets. And there is no certainty that these returns have been invested.

He said there is a lack of transparency of the bank and its shareholders (he exempted ACCION) about the destination of the returns.

Apocalyptically, he said an over-indebtedness bubble could lead to a collapse of the Mexican microfinance market, closing his remarks by reciting to his rival the Seven Social Sins of Mahatma Gandhi.

The public also played a role in the verbal tussle, applauding and murmuring based on the opinions of one and the other. At the end, in a count of hands proposed by the moderator, it seemed most of the public view IPOS as neither a salvation or a downfall but as an acceptable option under the right conditions.

Of course, the polemic likely won’t end here.

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