West Palm Beach Microfinance has inspired great enthusiasm and interest in many quarters. It is a strategy that marshals resources in hard to finance areas at a time where private solutions seem to constantly trump real programs. The jury is still out. I have reservations partly because it is hard to figure how poverty is reduced by debt, but that’s for another time.
The question here is “interest” itself and the “success” of Compartamos (we share in Spanish) as a former NGO turned private bank in Mexico calls all of this to the forefront. In the last year since this microfinance outfit went public it has made $80M in profits with a portfolio that has grown to $400M and is returning equity at 40%, according to an article in the Times by Elizabeth Malkin.
To create this “success” the bank charges an interest rate of 90% per year. That’s predatory.
Furthermore, more than a quarter of the interest goes to profits. That allows this bank to outstrip other Mexican banks return on equity by almost 3 times. Yowza!
Accion International, a Boston based NGO that provides technical assistance and assists in building microfinance institutions invested $1M in Compartamos when it went for profit in 2000. Accion sold out its 18% stake at the time of the public offering a year ago for $135M. Migawd!
The profits and efficiencies are not being shared with the borrowers, and that’s just plain wrong.
This is high finance and all that goes with it in the disguise of microfinance and warrants a much closer look before this becomes the model for all that is to come.