Before I head off to Africa for the next two weeks on my first trip out of India since I arrived here nine months ago I wanted to re-address the Compartamos discussion.
Note: Compartamos is a Mexican MFI which recently went public and is now registered as a full-fledged bank with the Mexican government.
On line blogs, chat rooms and email list serves are still breathing fire at the IFC, CGAP and Accion for their alleged malfeasance in allowing a microfinance company charging its borrowers an APR equivalent of more than 90% with returns on equity of 50% to undergo a completely secondary IPO (sale of existing shares with no new funds infusion) without achieving any direct benefit for the microfinance borrowers themselves.
I have been tempted to come to Compartamos' defense as I understand and support the commercialization of microfinance so long as these organizations maintain transparency (which Compartamos has done) and abide by some basic customer codes of conduct (i.e. educating your customers about credit, explaining you product's features and responsibilities, not intimidating borrowers into repayment, verbally abusing them or physically threatening them in anyway) which I do not know if Compartamos has done.
Note: Many of these basic standards of conduct were codified in an MFI Code of Conduct that Indian microfinance industry association SA-DHAN put together following the political unrest and closing of many MFI branches in Andhra Pradesh's (South Indian state) Krishna district last year.
However, non-binding codes from a single country's industry association are not enough to ensure that microfinance organizations the world over act responsibly. Only the Boards and management of those organizations can do that.
As I learn more about Compartamos my biggest concern isn't the fact that they were charging their borrowers what amounted to very high rates (the short-term 3 month loan product meets customers' needs and they were willing to borrow and able to repay very consistently) but instead that they were seeded heavily with development capital that remained seemingly tacit in the decision making of the company even while additional tax payer funded and donated dollars continued to be used to fuel the investment returns of other shareholders just months before the IPO.
As was mentioned on one of the DevFinance email list serves last week, $10 million from the IFC was given to Compartamos as a guarantee for a low cost local currency loan in September of 2006, just seven months before Compartamos first offered its equity shares up on the public market to overwhelming commercial demand.
My concern is that this was a company which certainly as late as 2006 no longer needed the support of the IFC for any fresh "development" capital. As such, given the IFC and Accion's roles on the Board of the MFI, were they still truly involved in the decision making and financing of the Company that late in the game, they could have acted more in line with their own social mandates to serve the poor rather than simply serve the fiduciary interests of exiting shareholders. To do this they might have moved to reduce interest rates or solicit further funds for investment into the company, rather than simply using more of their own tax payer dollars to juice the returns of selling shareholders.
I take no issue with profit-oriented financial investors taking actions to maximize valuation and returns on investment, that is their purpose and their expertise, but that is not the mandate of the IFC or Accion.
If, in fact, Accion and the IFC were not able to influence the decision making of the Board (together they held 28% of the Company prior to IPO and combined were the second largest shareholder), they should not have continued to use their assets to fuel Compartamos. Instead they might have simply sold their shares in the IPO and committed publicly to plowing the equivalent amount of profits back into development projects in the communities where Compartamos had worked. This would at least have ensured that the windfall monies from the IPO, generated by the past and expected future credit discipline of local shopkeepers, at least stayed in Mexico, the country of origin, and did not travel back across the border into the bursars of Washington D.C. and New York.
I've spoken my peace for now on Compartamos.
I hope that other MFIs are also able to generate such overwhelming interest in future microfinance IPOs, particularly in India, but I think these events need to be approached with a little more caution and thoughtfulness now that we've been able to see all the angles of the Compartamos transaction.
