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Interview with Rich Rosenberg

Rob Katz — Tue, 12 Feb 2008 08:56:03 -0500

CGAP just posted an interview with microfinance expert Rich Rosenberg in which he discusses whether or not microfinance interest rates are exploitative. Worth a read.

Lance, you contribute a lot

Abigail Keene-Babcock — Fri, 19 Oct 2007 11:17:19 -0500

Lance, you contribute a lot of valuable thoughts about why and how business works, and why business knowledge is incredibly important to stress whenever non-profits wish to get involved in private sector activities, and to adopt private sector strategies. It is a good reminder to all who work in this space that priorities should not be determined or ranked without consideration for the entire process, underlying mechanisms, and a clearly-defined objective of specific end-results.

reply

lance durham — Thu, 18 Oct 2007 20:26:12 -0500

i read the article; the way that the authors see the world is not the same as the way investors see the world. a quick review will demonstrate how different those worlds are:

first, investors don't actually look at returns, they look at risk-adjusted returns. when they look at compartmentos, they don't just see the profits...they see taxes, a culture/business environment they don't understand/is corrupt, they see the "heavy devaluation and inflation of 1995", they see a business model that hasn't yet been proven commercially, etc. and, perversely, they even see the risk of public backlash against them doing "too well" or the non-profit majority shareholders deciding to run things differently from how they would run it.

second, the article states that investors had other ways to capture profits on their investment beside dividends (via the IPO for instance). this statement is quite odd...finance texts, professors and practitioners all agree that the fundamental value of a firm's equity is the discounted value of the firm's dividends. if there are never any dividends, the company is worth nothing; if there are high dividends today and in the future, the company is worth a lot. ...so, all that is to say that there is no way to get a rewarding IPO price without the reality (or at least the promise) of impressive dividends.

third, the authors appear to have no problems with a high interest rate...provided the firm remained a non-profit and ALL of the profits remained available for making more loans. it would not appear that the authors have any worry about "usury" or being unfair to the borrowers (which would have been my concern). ...i don't quite understand a train of thought that says: "it's OK to be unfair to person A, provided that this unfairness helps person B." this would have been my problem with 100% interest rates; i'm surprised that it wasn't theirs.

forth, firms don't just issue dividends carelessly, they put a lot of thought into it. they should only pay out dividends if and when the return that the firm can get in their business is less than the return that the owners can get in some other investment. so, if compartmentos could make better risk-adjusted returns than their investors can get elsewhere, they should keep the money (all of the money) inside the firm.

fifth, investing firms and management have a legal responsibility (a fiduciary duty) to ensure that the interests of the people who invest with them are fulfilled; they are required to maximize everything according to their investors' desires. now, a majority owners can instruct the company to operate in any way they desire, so this could mean that the company pays no dividends/keeps all the interest for other loans. however, this is not a pathway to the BIG CAPITAL...this is a guarantee that the firm remains, effectively, a charity; big capital does not (and cannot because of their fiduciary duty) "invest in charities".

...personally, i think this all rides on what kind of error you are more comfortable with. are you (1) more comfortable charging less, raising a small amounts of capital and delaying growth toward new customers who need your loans? ...or are you (2) more comfortable charging a lot, raising lots of capital and hastening growth toward new customers who need your loans? ...with children dying of fully treatable diseases, i am more comfortable with option #2 than #1; development (as i view it) is about speed [subject to certain environmental and social constraints].

Durham, I agree with you.

Ana Escalante — Wed, 17 Oct 2007 11:18:28 -0500

Durham, I agree with you. The thing is that as the CGAP study says (which I recommend you read) is that the concern is not the large profits per se, but rather that in the case of Compartamos, specifically is that the large portion of those profits, were created by charging higher-than-necessary interest rates to borrowers, not operational costs. What do you think?

nice post

lance durham — Tue, 16 Oct 2007 23:59:56 -0500

just as there is such a thing as "too much profit", there is also such a thing as "too little profit". where the boundary lies remains an open question and i think it's quite the ethical quagmire.

....if i hurt my borrowers directly by charging "too much", is that really any better than hurting other people (who are not my borrowers) indirectly when i can't give them loans because i charged "too little" and therefore was not able to raise the capital to serve them as well ???

...personally, i am quite uncomfortable with either result! does anyone out there know where the boundary between "too much" and "too little" sits?

Hard Questions for Microfinance: How Much Profit is Too Much Profit?

Ana Escalante — Tue, 16 Oct 2007 08:50:18 -0500

Microcredit is generally considered a step forward in the war against poverty. Giving small loans to impoverished people helps transform lives – read the annual report of any MFI for details. While I am a firm believer that microfinance is a good thing, does it remain "good" when the people who are lending start making huge profits?

I have been following discussions inside the microfinance field, specifically regarding the Compartamos IPO.

"Carlos Danel and Carlos Labarthe, the CEOs of Compartamos, a nonprofit-cum-commercial bank which charges an annual interest rate of nearly 100 percent, believe that only the lure of profits will motivate people to lend to the poor. Today Compartamos reaches 700,000 borrowers and 88 percent of its clients come back for more loans. In 2006, it was rated as Mexico's most profitable bank”

via PSD blog and iPienso. I also read the Microfinance Gateway reports from CGAP and Microcredit Enterprises. These reports caused me to reflect upon the debate, and I came to the following conclusion: while poor people are in need of credit and willing to pay high interest rates, that in and of itself doesn’t justify charging such rates and earning huge profits out of them.

Compartamos started in 1990 as a non-profit organization lending small amounts of money to indigenous Mexican women. Today, Compartamos has turned into a giant, for-profit bank with more than 600,000 clients. Compartamos' transition from NGO to for-profit bank sparks controversy – while many indigenous women in Mexico are grateful for the programs, now the bank is targeted by critics. Among these critics are Chuck Waterfield, Jonathan Lewis, and Mohammad Yunus - Nobel Prize winner and pioneer of microfinance.

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