Two months ago, shareholders in the Mexican MFI Compartamos had a hugely successful public equity offering. The remarkable success of the IPO and the gains produced by the sale were driven in part by Compartamos’ history of very high profits. These profits stem from interest rates that were a lot higher than was necessary to cover costs. These circumstances have provoked discussion and concern within the microfinance community and elsewhere. Some of this concern is justified and some is not, according to CGAP.
CGAP's analysis of the situation is now available as a draft Focus Note, CGAP Reflections on the Compartamos Initial Public Offering: A Case Study on Microfinance Interest Rates and Profits. Among the paper's conclusions:
- The most important issues have to do not with the IPO itself, but with Compartamos’ very high interest rates and profits since 2000.
- When Compartamos set up a for-profit company in 2000, pro-bono (NGO or IFI) organizations controlled the majority of the shares, but a third of the company was in the hands of private investors. Compartamos continued to fund its rapid growth by charging interest rates that were much higher than what was necessary to cover its costs. Roughly a third of the exceptional profits created by this policy accrued to private for-profit investors. It appears to us that there were alternative ways to fund growth without relying on such high charges to existing borrowers, and that using those alternatives would have been more consistent with the social objectives of the controlling shareholders.
- The aid money granted to Compartamos in its early years did not wind up in private pockets: those grants, and all the profits and capital gains accruing to the shares that were purchased with those grants, have remained in not-for-profit entities where they will be used for development purposes, not private gain.
- All of us who are involved in commercial transformation—that is, moving microfinance operations from not-for-profit to for-profit institutional forms—need to think more clearly and realistically about the consequences of the resulting changes in governance incentives.