For years Muhammad Yunus was the public face of microfinance. In 2006, the Bangladeshi economist-social-entrepreneur and his Grameen Bank shared the Nobel peace prize for a microlending revolution that has helped millions to earn their way out of poverty.
Yet for the past year or so, microfinance has had another public face, one that troubles people like Yunus. Compartamos Banco argues that the best way for microfinance to help the poor is for it to make a socking great profit.
Since Compartamos listed its shares for over $1 billion in April 2007, it has stirred up an increasingly fierce debate. To Yunus and its other critics, the Mexican bank is no better than an old-fashioned loan shark, earning huge profits by charging poor borrowers an interest rate of at least 79 percent a year.
The bank lately has sprung to its defense, issuing a defiant justification of its business in an 11-page "letter to our peers." It makes a case for its strategy of fighting poverty with profits.
Compartamos was born out of the same social concern that inspired Yunus. It uses a similar group-lending model to Grameen's. It says its mission has not changed, but it has become convinced that by pursuing profits it will be able to provide financial services to many more poor people far more quickly than it would if it had continued to act as a charity.
Microfinance, especially lending to poor entrepreneurs with no collateral, is labor-intensive and costly -- in Compartamos' case, around $152 a year per client, with an average loan of $450. By charging an interest rate that generates a profit, the bank can grow quickly and provide many more "micro-entrepreneurs" with the finance they need, even at interest rates that by the standards of rich countries seem unacceptably high.
The bank now has more than 900,000 clients, and expects to reach more than 1 million this year, up from the 61,000 it had in 2000, after a decade as a traditional nonprofit outfit.
Compartamos argues that its profits will build a microfinance industry. The more it earns, the more attractive microfinance will seem to investors, and the more capital will flow in. Evidence supports this apparently self-serving claim: Since Compartamos started to pursue profit, seven new regulated microfinance providers have begun to compete with it in Mexico, many of them financed by profit-seeking capitalists.
