Debating profit in microcredit

from the International Herald Tribune

A debate has begun in microcredit circles about how much should the lender profit. Muhammad Yunus gives his side in this story. - Kale

When Nobel Peace Prize winner Muhammad Yunus began making US$27 loans to women in Bangladesh three decades ago, he wasn't thinking of initial public offerings and return on equity.

Now that the field of microfinance is become increasingly commercialized, though, such terms weigh heavily on his mind.

"Poor people should not be considered an opportunity to make yourself rich," Yunus said by phone from Bali, Indonesia, where he is attending a meeting on microcredit that opened Monday.

This week at the Microcredit Summit Campaign conference, privatization advocates will be pitted against those who believe you can save the world or make a buck — but not do both at the same time. The gathering is drawing several heads and former heads of state, including Indonesian President Susilo Bambang Yudhoyono, and microfinance representatives from 60 countries.

Members of the pro-market faction argue that civic-mindedness alone will never draw enough capital to serve the billion people who want rudimentary banking services. Profitability is the key to sustainability, they say.

Those against commercialization fear the microcredit movement is losing its soul, prioritizing investors over the world's farmers, sheepherders and street vendors, many of whom struggle by on less than a dollar a day.

Microfinance, for profit or not, is booming. According to Deutsche Bank, the volume of microfinance loans hit US$25 billion in 2007, up from US$4 billion in 2001, and another US$250 billion is still needed. The bank expects that private investors will pour US$20 billion into microfinance institutions in 2015 — ten times more than they did in 2006.

Many groups that started as nonprofits have become for-profit, and a plethora of microfinance investment funds, targeted at institutions and individuals, have opened in the last few years.

Citigroup, Credit Suisse, Deutsche Bank, and Morgan Stanley have all entered the microfinance market, either providing direct funding, backing investment funds or securitizing debt, and private equity investors have also started to pile in, according to the World Bank's CGAP, a microfinance research group.

"You are seeing more and more financially driven investors going into this market," Eric Savage, managing director of Unitus Capital, a new for-profit firm that will help microfinance groups raise capital, said by phone from Bangalore, India.

Savage said the subprime crisis may give microfinance a further boost as investors seek diversification, and that tightening credit has so far had a "quite muted" effect on loans to microfinance institutions.

"The microfinance sector has been relatively isolated from the global credit crisis," he said.

At least two microfinance institutions are publicly traded: Mexico's Banco Compartamos, SA., and Kenya's rapidly expanding Equity Bank Ltd.

The Compartamos initial public offering, in April 2007, was a watershed event. The bank raised US$474.7 million — and the hackles of the field's civic-minded pioneers, who say the bank is making indecent profits by charging too much interest.

On Friday, Compartamos reported that net income for the first half was up 13.9 percent, to 500 million Mexican pesos (US$49.5 million), over the same period last year. Return on equity fell 11.3 percent, to 39.2 percent.

Compartamos founders Carlos Danel and Carlos Labarthe, argue that microfinance is, first of all, finance. In an 11-page "Letter to Our Peers," published this year, they argued that high interest rates are needed to cover the cost of administering small loans in difficult markets.

They defended above-average profits as necessary to attract investors to the still-nascent field. Competition, they wrote, is already helping the poor: In the past 7 years, Compartamos' interest rates have dropped from 115 percent to 79 percent, which they say is in line with the competition.

The combination of high costs and small loan size in Mexico means interest rates are higher than in many other countries, they said.

Globally, microfinance institutions charged an average of 28 percent a year in 2006, according to CGAP.

Many, however, remain galled by what Yunus, who won the 2006 Nobel Peace Prize, calls the "distortion" of the field he forged.

His pioneering bank, Grameen, is owned by the poor borrowers it serves, and sustains itself with local deposits. The bank reported a narrow profit of 106.9 million Bangladeshi takas (US$1.6 million) on revenues of 10.6 billion takas (US$155 million) in 2007.

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