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"MFIN Section B)
! Commercialization of Microfinance
! Massive IPO by Compartamos Banco, Mexico
! High interest rates (>100% p.a.)
! Private investors earning profits at the expense of
poor borrowers
! Muhammad Yunus says that poor people's
willingness to pay high interest is not a justification
for charging it. Compartamos is not microcredit,
it's ³raking in money off poor people desperate for
cash.´-10/01/2007

2/10/2011 2
! O



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! Êedicated to advancing financial access for the
world's poor.
! Supported by over 30 development agencies and
private foundations who share a common mission to
alleviate poverty.
! Provides market intelligence, promotes standards,
develops innovative solutions and offers advisory
services to governments, microfinance providers,
donors, and investors.

2/10/2011 3
2/10/2011 4
! ÿanked 3rd in the mid cap sustainability ranking
! Has 327 service offices in Mexico

2/10/2011 5
! Dell over 1,300,000 clients
! 98% of the clients are women
! 99% repayment rate
! Êisperses credit risk ± different activities:
1. ÿural food trade
2. Consumer products and clothing
3. Arts and crafts production
4. Agricultural activities
5. Other Service and trade activities
! Profiting from the poor-Interview with Compartamos co-CEO

2/10/2011 6
! @he shareholders:
! @he original price paid: roughly $6
million.
! End of 2006 book value of shares -$126 million, because of
very high profits.
! Existing shareholders received $450 million for 30 percent
of their shares, which represents more than 12 times the
book value of those shares.
! Most sale proceeds went to public-purpose institutions and
not-for-profit NGOs and 1/3 proceeds, about $150 million,
went into the pockets of private shareholders
! IPO threw up 3 main questions:

2/10/2011 7
2/10/2011 8
! 
$
  
% 



&$ & $
' (and stayed
there, without leaking into private pockets. No grants
made to the finance company.

! % ' (
 

)





$
#
#- huge capital gains go
back to the NGOs and are used to fund the public-
purpose work.

! 5/8 sale proceeds gone back into organizations whose

assets are used for development purposes and are not
distributed to private owners.

2/10/2011 9
! m
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! Êonor grants funded operations at an earlier, riskier, stage of
operations. Compartamos NGO received a premium over and
above the face value of the loan portfolio that it transferred to
the finance company.
! Finance company still a high-risk proposition for private
investors in 1998. Many private investors motivated by social
as much as by financial objectives at that time
! Loans from development agencies and social investors
benefited the company, including its minority of private
investors. However, interest rates paid for these loans
generally at or above commercial levels.

! % m*

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± end of 2006, donors¶ original
grant investment amounted to about $10 per current active
borrower

2/10/2011 10
2/10/2011 11
Latin America-NBFI-for profit

Latin America-MFI banks

Mexico

Compartamos

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Profit Margin ÿoA

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2/10/2011 12
 ! Compartamos charges its
K

  $
"
3
borrowers interest rates that
are considerably above what
Latin America-NBFI-for profit
the company needs to cover
its costs
Latin America-MFI banks

! Competition by others
Compartamos replicating Compartamos¶
model has driven interest
0% 10%20%30%40%50%60%70%80%90%
rates down from ~88% in 2005
to 71% in 2008

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2/10/2011 13
! Some part of the high interest charged is justified due
to higher operating expenses, driven by smaller loan
sizes

2/10/2011 14
 % & 2m $
"6 3 ! Growth of loan portfolio
450,000,000
of Compartamos is
400,000,000 substantially higher than
350,000,000 that of Latin America
300,000,000

250,000,000 ! Modest dividend of 25%

200,000,000 in 2007 ± majority of
150,000,000 funds retained for

 ompartamos 31.8%
100,000,000 
 Latin merica 19.3% expansion of
50,000,000
operations, as claimed by
0
the company
2005 2006 2007 2008

2/10/2011 15
! Compartamos¶ interest rate is usually significantly lower than the
vendor credit and informal sources that are the clients¶ main
alternatives

! In Mexico interest rates are high because capital and labor are
expensive compared to other developing markets:
o 3 MFIs ± FINCOMUN, FINCA and FINSOL ± charge interest rates ranging from 81
-103%
o Compartamos is more profitable than these MFIs because it is more efficient and
has lower operating costs compared to these MFIs

! Compartamos¶ loan portfolio > 90 days is 1.7% as compared to

2.9% for Latin America

2/10/2011 16
! Compartamos primarily serves businesses with high inventory
turnover (i.e. buy a dozen eggs for 100 pesos in the morning, and
sell them for 120 pesos in the afternoon, for a 20%  
return). @herefore, 71%  interest is actually not as
burdensome as it seems.

! Compartamos¶ strong equity base, built from retained earnings, as

well as its profitability, were undoubtedly factors in the decision of
the Mexican government to authorize Compartamos¶ banking
license

2/10/2011 17
! Opaque loan pricing method ± stated 4% per
month interest rate becomes 105% p.a. and is
actually 129% according to reports.

2/10/2011 18
! Opaque loan pricing method ± stated 4% per
month interest rate becomes an effective interest
rate of 105% p.a. and actually costs 129%
according to reports.
! 4% flat interest (on initial loan amount, not by
declining balance method) every four weeks. 1
month = 4.3 weeks, Value Added @ax
! ÿequires compulsory 10% saving of loan amount
³with unpaid interest´-Acts as partial loan collateral

2/10/2011 19
2/10/2011 20
2/10/2011 21
! 2#$ 
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o
: As a newly-licensed Mexican bank, Compartamos is under-
leveraged relative to other banks (40% capital adequacy ratio versus
16% for Mexican banks on average); this leaves room to grow through
borrowings

o  )
:
 Several publicly owned or socially motivated investors ± such as
´international financial institutions´ (IFIs) and ³microfinance investment
vehicles´ (MIVs)²are anxious to invest large amounts in debt and
equity of MFIs. @he supply of such funds has been larger than the
demand from MFIs who meet these investors¶ risk and return criteria.
 Compartamos could have raised funds through additional issue of
shares

2/10/2011 22
2/10/2011 23
! Êouble bottom-line: It claims to have dual
objectives of both social and commercial profits
but hard now
! High expectations due to high IPO price
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2/10/2011 24
2/10/2011 25
! Focus belongs on dealing with the future more
than on judging the past
! Complex issues of governance, incentives and
ethics
! Many initial non-profit donors including CGAP
didn¶t foresee prevalence of such high interest
rates because of competition
! Competition will eventually reduce profits but
impact is slow.

2/10/2011 26
! CEOs wrote a letter outlining their defense
! Challenge of combating poverty is much larger than microfinance itself.
! Êebunks myth: microfinance provides opportunities, but is not by itself a
solution to poverty alleviation
! Microfinance is finance-efficiency, transparency, cost controls, etc
! Microfinance has to be sustainable
o Operations more efficient (cost per client at $152 for $450 loan vs. $174 for $1322 loan) and
productive (196 vs. 135 borrowers per staff) than LAC MFI
o ³If we had a loan size double of what we have, the implied interest rate would roughly
be half of what it is today´
! Microfinance has to expand the market
o Higher profits ploughed back to business expansion
o Interest rate reduced from 115% to 79% in 7 years
o @ransparency and accountability also fosters good corporate governance
! Compartamos has created economic value because of the social value
created by its financial and working methodology.
o Scored a 74 on a 0 to 100 scale on client loyalty compared to a 48 average for the
banking industry in Mexico.
! Claim that Social and Economic goals not contradictory

2/10/2011 27
2/10/2011 28
2/10/2011 29
! Pros
o Dill scale up microfinance programs to reach millions of
impoverished people waiting to become entrepreneurs.
o @he marketplace of tough love will work its magic
o More social investment will cause more competition
reducing interest rates
! Cons
o Mission drift- ÿeduce focus on the very poor
o Competition still a long way off (CGAP reports 3 countries
only with competition (Ug, Bn, Bo)-IBIÊ
o Profiteering from the poor
o Volatile capital markets and foreign currency risk
o ÿisk of Government intervention and then inefficiency

2/10/2011 30
! Mohammed Younus: µDhy do you want to make
money off the poor people? You make money
somewhere else. Here, you come to help them.
Dhen they have enough flesh and blood in their
bodies, go and suck them, no problem. But, until
then, don¶t do that. Dhatever money you are
taking away, keep it with them instead, so they
can come out more quickly from poverty.¶

2/10/2011 31
1. CGAP report ± ³ÿeflections on the Compartamos Initial Public Offering´
2. CGAP website
3. http://www.compartamos.com
4. MIX Market
5. http://www.accion.org
6. http://fellowsblog.kiva.org
7. http://www.latinfinance.com/Article@op100.aspx?ArticleIÊ=2327622
8. http://psdblog.worldbank.org/.m/psdblog/2007/10/muhammad-yunus-.html
9. ³A letter to our peers´- Carlos Êanel & Carlos Labarthe
10. Explanation of Compartamos Interest ÿates - Chuck Daterfield
11. Bruck, Connie, Millions for Millions, @he New Yorker, October 30, 2006
12. Dhat Dould Leland Stanford Êo?-Jonathan C. Lewis
13. Compartamos Annual report, 2008

2/10/2011 32