Issue: For Profit vs Non Profit

As I have told you in my overview of microfinance piece, microfinance has become widely popular over the past 20+ years. Dr. Yunus of the Grameen Bank won a Nobel Prize for his work in starting microfinance all those years ago. Now it has become a booming business. According to estimates made by several organizations the total assets of all microfinance institutions was about $33 billion dollars last year. Although this is only a small percentage of the trillions of dollars in banking in total it has grown rapidly. These small loans that were once intended to help the poor are now helping companies and banks rise up and take a bigger position in the developing countries that the MFIs are located. As you may have been able to tell from my previous posts I am a firm believer of microfinance as a way to help individuals and communities raise themselves out of poverty rather than a place to invest money and make money. But there are many companies that look at microfinance with money signs in their eyes rather than kindness. I understand that might not be fair to say since many of them still say that they exist to help people in need of small, quick loans. Many of them are still cheaper than local loan sharks and other unofficial players. Microfinance started as a helping hand rather than a greedy one. It has been recognized throughout the world because it allows people an opportunity to make a huge difference with what some people would consider pocket change. Microfinance is a chance for the bank neglected to get safer and more secure services as I have mentioned in previous posts. But now it is being looked at as a valuable investment opportunity for many banks. Moreover, even though many companies are not for profit it does not mean that many of these organizations are making a profit. Many not for proft organizations are very successful but they are reinvesting all of their earnings to bring out more loans to their clients. This is why I believe this is one the most important issues when dealing with microfinance. Today, I hope to present both sides of the argument and what I think of it all. To reprsent both sides I have chosen two organizations that are at the forefront of both sides. The for profit representative is Compartamos, a Mexican based microfinance bank. The not for profit representative is the Grameen Bank. Both exemplify their sides perfectly and I hope to use it as a type of case study.

Compartamos, meaning "let's share", originally started as a not for profit donating food and clothing to the poor. Jose Ignacio Alvalos Hernandez is the founder and the one that decided that Compartamos needed a change. They decided to convert the organization into a small microfinance institution that started lending small amounts of money to clients. Their clients are mostly women that are in groups of 12 or more according to a Businessweek article written last year (Businessweek). They can only borrow to help a struggling business or to start their own small business. The group structure is important because it ensures that the organization gets their money back. If the borrower is not able to pay back the loan the group will make up the difference. The peer pressure is a better social way of enforcing the loan repayment instead of scary collection agents. This peer pressure is very important because the people they lend to have very little to use as collateral for their loans. But this risky lending causes greater costs for these microfinance firms including Compartamos. Compartamos presents itself as a helping hand in the communities they act in. They claim nothing has changed since their initial public offering and a for profit company in 2000. They believed that it would help them get more money invested in the bank to allow for more loans and more profits. The IPO, in fact, was very successful and raised about $400 million. Alvalos, made hundreds of millions of dollars as did many of the early investors. He sold parts of his investment in the company and remains on the board today. They claim that making large profits will develop the industry. The profits will attract more investors to enable to give their clients more (Economist). The profits that they have been earning over the years have attracted more competition that have caused them to reduce their interest rates. When Compartamos first became for profit many borrowers experienced extremely high interest rates. The rates could reach over 100%. Compartamos does not represent these high interest rates at all. Even though they have reduced their interest rates they are still much higher than many other not for profit microfinance institutions. I personally think it is wrong for them to charge such high interest rates when they have so many investors willing to invest in them. They are no longer the helping hand they claim to still be. They are obviously more concerned with earning money and impressing investors than lifting people out of poverty. If they wanted to help more they could lower the interest rates and take smaller profits. But since they are public now they can reduce their profits but instead look for more ways to increase profit. Compartamos representatives that supervise borrower groups earn bonuses up to 120% of their normal salary based on their growth in the number clients and size of their loans (Businessweek). This incentivizes representatives to urge borrowers to take out more loans as they repay them. Most likely the borrowers still need more money to get weekly supplies for their businesses and will listen to their representatives. This pressure to borrow more is keeping these poor people constantly in debt and having to worry about that huge interest rate. But yet Compartamos is able to grow in remarkable rates. According to "The Economist" Compartamos has been able to grow from 61,000 clients in 2000 to over 900,000 in 2008. There is no denying that the people of Mexico must trust Compartamos. Compartamos is definitely more trust worthy of an opportunity than loan sharks and other more dangerous people that their clients might have used in the past. The collection process is definitely not as frightening as those unofficial lenders. As Compartmos grows more people will learn of the availability but is this the best way of doing business? Preying on the poor is definitely wrong in my book but it is possible that Compartamos is not doing so. There have been articles written that Compartamos targets a population between the poorest of the poor and the conventional bank users. Compartamos gives out larger loans than not for profit organizations. The people they target are not the poorest of the poor according to many sources. But, even if they are not the large amounts due in interest payments must still be daunting. The goal for Compartamos is to reduce costs and make more profit for their investors. It has commercialized itself. Personally, I think it has sold out the idea that microfinance originally came into prominence with. The Grameen Bank is the perfect example of the original idea.

The Grameen Bank was the first major microfinance institution. It was created in the 1970s by the Nobel Prize winner, Muhammed Yunus. The Grameen Bank has many similarities to the Compartamos bank. They target mostly women and they are required to be in borrowing groups. As individual group members are able to pay back the loans more group members are allowed to borrow. According to the Grameen Bank "credit should be accepted as a human right." They certainly act that way. As I browsed through their website Grameen Bank had a different feel to it than Compartamos. Compartamos did not have any information on how the process worked, what their code of ethics was, or how they plan on helping people life themselves out of poverty. The Grameen Bank is inherently different. According to their website, "the overarching objective of a conventional bank is to maximize profit. Grameen Bank is...to help them fight poverty, stay profitable, and financially sound" (Grameen). They also have located many of their branches in rural areas where people are in great need of capital to turn around their businesses. Compartamos focused on major urban areas like Mexico City. Grameen Bank is not just a lender they are a resource for the people who are looking and willing to change their life. The Grameen Bank chooses women borrowers not because they are more trustworthy but because the women are the ones in the family that want to change their lives for their family, especially their children. The Grameen Bank also instructs clients on financial issues but also on issues like hygiene. The Grameen Bank actively gives credit build houses, latrines, and other community necessities. The bank also never allows interest payments to become larger than the loan. If a client is having trouble paying a loan they can go to representatives in branches in various small villages in rural areas to work out a better payment plan. They do not want to become a burden on their clients like other institutions would be when their money is at risk. Everything Grameen Bank does is to help people break out of the cycle of poverty. They want to teach them how to live a better life and stay above the poverty line. I think this is a more noble objective.

In conclusion, it is a tough call when it comes to microfinance. Microfinance burst onto the scene as a benevolent and innovative way to help people out of poverty. But after years of success people have found the monetary value behind these operations. Capitalism will always find its way to where the money is. Companies and organizations are going to have to make a decision as to what their belief system will be. Although I personally believe in the non profit route I also believe that if people wish to make money off these legitimate loans that is their own decision. I am business student so I understand where there is a demand there should be a supply and not all the supply will be as benevolent as the Grameen Bank. The demand for microcredit loans has been estimated to be about $250 billion but only a portion of that has been given out. If companies can find a way to supply loans and make a profit in the process that is great for them. But I do not believe we should be profiting off people who are struggling. However I do have a problem with the way that Compartamos has presented itself. It has a history as being non profit and a donator to the community and I believe they have tried to leverage that as a means to get more borrowers and investors. But, it is obvious that they no longer believe in that kind of system anymore. If a company is in it for profits then they should not try to present themselves in a different light. Although they are helping people get capital they need they are doing so at a great cost to the borrowers and I do not believe that is fair. Dr. Muhammed Yunus is a firm believer of this and has said microfinance should be about "protecting the poor from the money lenders, not creating new ones" (The Economist). If the "father of microfinance" believes that it is just another form of loan sharking then I am going to take that seriously. Also, with microfinance still being relatively new there are very few regulations put on it throughout the world. We have seen what can happen when greedy people look for new ways of making money in a relatively unregulated environment. This may cause more harm than good. You may think differently but I thought I would take my first crack at this issue that has been stirring in world of microfinance.