Jana Malaeb
Profesor Bacq
Global Social Enterprise
24 October 2018
Case Study: Banco Compartamos
Since the foundation of the Grameen Bank in 1983, the perception on the success of microfinancing shifted positively due to the economic improvement of areas in developing countries. The purpose of microfinancing is to extend banking activities to individuals and communities that would typically be rejected due to their low-income status. Therefore, with these loans, poor individuals are more capable of opening their businesses, increasing their income, consumption and output which stimulates the overall economy (Suzuki 130). With 2 million borrowers at the Grameen Bank by the 1990’s, Carlos Danel and Carlos Labarthe seeked to replicate this model by founding Compartamos as an NGO to provide microfinance services to the impoverished in Mexico.
Despite the Carlos’ study on the Grameen bank, the greatest distinction between Compartamos and Grameen actually falls in their business models. Grameen bank is a for-profit village bank associated to a social business as all their profits are retained in the business itself for expansion. Unlike commercial banks, the interest rates charged by Grameen range from 0% to 20% and are restricted to completing transactions only in the local branches they open themselves in villages around Bangladesh (Vargas-Hernandez 2). Additionally, Grameen Bank has maintained high rates of repayment even without collateral on loans which means that borrowers do not lose any assets in case of default (Suzuki 132). On the other hand, with their Initial Public Offering (IPO) in 2007, Compartamos was the first micro financing institution to join the private sector and gather investors. This commercialized version of microfinance allowed Compartamos to reach more clients throughout Mexico due to their connections with other commercial banks in the area and their ability to collect over $458 million from investors (Maria San & Valenti 2). This also entails having high interest rates that can reach 200% and large profits that are used to pay off investors. Clearly, the village banking of Grameen Bank functions proportionally different than the commercial banking of Compartamos despite their parallel social mission.
However, Compartamos was not founded as a commercial bank and went through several evolutionary shifts to get to where it is today. As mentioned previously, Compartamos was initially founded as an NGO and received aid from international agencies such as USAID. However, after visiting and learning about the amount of people the Grameen bank was able to help, the Carlos’ shifted their focus to scalability and increasing the amount of funds they receive. Therefore, to increase the availability of capital, Compartamos got a SOFOL license which allows them to become for-profit. This transition drastically increased their number of clients by 10x their size, making it the “fastest growing MFI in Latin America” (Clark 3). Despite this massive expansion, they were still unsatisfied with the amount of funds they have to have in order to provide further financial services, such as insurance. To combat this issue, Compartamos became a commercial bank in 2006 generating large profits and continued to do so by going public again in 2007 with IPO that gathered private investors as well as NGOs that used their profits from Compartamos to help alleviate poverty through their organizations. Thus, Compartamos’ greatest innovation is arguably their transition to becoming public and their ability to expand funding. Due to this, Compartamos has 1.75 million borrowers today.
Unfortunately, the commercialization of Compartamos’ model through its transition to an IPO is the greatest contributor to the criticisms it receives as a microfinance institution. This is due to Compartamos’ interest rates that can reach up to 100%, their flat-line method that significantly increases interest expenses and their high return on equity (ROE) (Suarez 13). Compartamos claims that high interest rates are needed to be able to sustain the bank and be able to create a more selective clientele that would be more committed and less likely to default. However, in terms of sustainability, with such larger funding from investors and organizations, Compartamos does not need to further exploit the poor to pay larger sums as well to maintain the business. Grameen bank was able to depict this by their own sustainability with interest rate s that are 10% of the amount charged by Compartamos (Vargas-Hernandez 3). Additionally, attempting to create a more selective and devoted clientele is counterintuitive to the purpose of microfinancing which is to provide loans to marginalized individuals. When comparing Compartamos to Grameen, it’s evident that their models are more directed for different audiences. With their IPO, Compartamos is able to generate large profits that are first paid out as dividends to stockholders whereas all of Grameen’s profits are retained earnings that help expand the bank itself (Suarez 12). Therefore, it’s conveyed that Compartamos is seen as a profitable investment venture for companies whereas Grameen is more focused on generating funds to give out more loans to the poor. Despite the monetary expansion Compartamos received with the IPO, the additional capital had marginal increase in benefits for the borrower.
Due to these factors, the future of microfinance globally should be through village banking rather than commercial banking. My initial inclination to this is portrayed in the name itself. Microfinancing should be dealing with the microeconomy which is centralized around the activities of individuals, households, and markets. Commercializing it makes a business model that is meant to be conserved between borders to be blown up to the macroeconomy and its ever-changing markets. This massive inflation of a microfinancing institution hinders its efficiency since dealing with specific developing communities requires several exclusive approaches due to cultural, social, political and geographic differences across borders. Therefore, having a commercial bank generalizes the needs of the various communities rather than catering them to the location to optimize the amount of people being alleviated from poverty.
Although it can be argued that commercial banks would be able to expand and help people globally, this goal could also be achieved through the replication of village microfinance banks in various regions across countries and communities. Additionally, commercial banks come with greater legal attachments to companies and investment, and thus, less transparency. For example, after having their IPO sale that generated $450 million, the Carlos’ did not disclose their own profit from the sale (Clark 1). The lack of transparency increases the skepticisms on the true intentions of the business and the motives of its financial activities. Maximizing profit and maximizing social impact are mutually exclusive; if a bank is looking for profit, they will not achieve the optimal amount of social impact in alleviating poverty. Thus, through the comparative study of the Grameen Bank and Compartamos, village banking is the future of microfinance institutions globally.
References
Blackboard Bancos Compartamos Case Study
Clark , Shannon. Compartamos Banco and Grameen Bank: A Case Study on Microfinance. June
2016
Maria San, Jose, and Alessandra Valenti. “Compartamos: Moving Away from a Cashless Bank
Model.” IBGC Working Paper 13-05, Oct. 2013
Suarez, Eugenio, et al. Analyzing the Mexican Microfinance Industry Using Multi-Level
Multi-Agent Systems. Trinity University , Jan. 2009
Suzuki, Yasushi, et al. “The Grameen Bank ‘Empowering the Poor’ Model of Microcredit: An
Institutional Comparison with the Traditional Mode of the Japanese Banking System.”
The Journal of Comparative Asian Development, vol. 10, no. 1, 20 June 2011, pp.
129–156., doi:10.1080/15339114.2011.578487.
Vargas-Hernandez, Joss G. “Social Responsibility of Microfinance Banco Compartamos Case.”
SSRN Electronic Journal, vol. 3, no. 2, 2014, doi:10.2139/ssrn.2533019.