| If you are looking for one of the very few genuine 'high | | | | are lower, but still results in very high management |
| yield investment opportunities,' you couldn't do much | | | | costs as a percentage of loan amounts. |
| better than microfinance - that is loaning money in | | | | The result is impressive. As of June 2008 (latest |
| small amounts at high interest rates to small business | | | | statistics available), CompartamosBanco's |
| people in developing countries. The great thing about | | | | non-performing loans were only 1.38% of the portfolio, |
| this investment is you can earn great returns and do | | | | much lower than most traditional banks making |
| good, helping entrepreneurs in the developing world, at | | | | unsecured loans to borrowers who are much better |
| the same time. It is something myself and a few of my | | | | qualified according to traditional models. Non-performing |
| clients have been investing in for several years now. | | | | credit card loans in Mexico are now running at above |
| It might sound risky, but there are now a number of | | | | 10% in major card issuers such as Banamex, a |
| stock-market listed companies you can invest in who | | | | subsidiary of Citibank. |
| do this as their primary business - and they are doing it | | | | Since the Initial Public Offering in april 2007, |
| very well. | | | | Compartamos have added a new kind of responsibility |
| The borrowers typically have no formal credit history | | | | to the bank's stated goals. That is, to offer transparent |
| and have often been passed over for loans by | | | | and up to date information on the company, its |
| mainstream banks, but they usually have excellent | | | | operations and financials to its shareholders. As a |
| business acumen - and a way to turn a profit quickly. | | | | result, they host market conference calls and meetings |
| Many of the borrowers are women. Audited statistics | | | | for shareholders. |
| show collection rates on the loans are excellent, often | | | | Shares and sharing out |
| far exceeding those of mainstream banks. This is | | | | Compartamos says its mission remains unchanged, |
| because micofinance works on a different, more | | | | quotes some statistics to defend itself against the |
| personal basis using peer group support and credit | | | | social activists who compare it to a loan-sharking outfit. |
| management. Borrowers feel responsible to other | | | | Its management is convinced that by pursuing profits it |
| people, rather than to faceless banks. | | | | will be able to provide financial services to many more |
| Microfinance, simply the granting of small loans, has its | | | | poor people far more quickly than it would if it had |
| origins in the social movement. It has long been | | | | continued to act as a charity. |
| supported by low-interest loans and subsdidies from | | | | By charging an interest rate that generates a profit, the |
| non-governmental organisations, foundations and so on | | | | bank can grow fast and provide many more |
| over recent years. You've probably heard "give a man | | | | "micro-entrepreneurs" with the finance they need, even |
| a fish and you feed him for a day... teach him to fish | | | | at interest rates that by the standards of developed |
| and you feed him for a lifetime." | | | | countries seem unacceptably high. Compartamos also |
| The idea of microfinance has always been that rather | | | | argues that its profits will build a microfinance industry. |
| than helping people with short term financial aid, you | | | | The more it earns, the more attractive microfinance will |
| can help them grow and develop their family | | | | be to investors, and the more capital will flow in. |
| economies so they can gradually break out of the | | | | The evidence tends to support this claim: since |
| poverty trap and move on to greater things. Often | | | | Compartamos re-launched as a profit-making entity, |
| one-man businesses are able to scrape together a | | | | seven new regulated microfinance businesses have |
| few bucks, but can never break out of the poverty | | | | begun to compete with it in Mexico, many of them |
| trap because of lack of working capital. Microfinance is | | | | financed by profit-seeking capitalists. Greater scale and |
| a way of tackling this vicious circle. | | | | competition are driving down interest rates - in |
| The original backers of microfinance initiatives were | | | | Compartamos' case, from 115% seven years ago. |
| not seeking to make a profit, so much as to do good. | | | | "For profit" microfinance is making big inroads |
| However, many found that the bottom line was that | | | | elsewhere too. The first for-profit (but not listed) |
| the microfinance institutions were generating healthy | | | | microfinance institution, was Bolivia's BancoSol. In India |
| profits. A typical case of sharing Wealth wisdom - and | | | | SKS, another for-profit lender created by Vikram |
| what goes around, comes around. Helping others | | | | Akula, a former McKinsey partner, is backed by |
| generate wealth can bring more wealth your way, and | | | | Sequoia, a leading Silicon Valley venture-capital firm. |
| certainly not just in financial terms. | | | | Competition |
| Once traditional financiers saw that these 'social | | | | Competition for the likes of CompartamosBanco |
| movements' were turning a very respectable profit, of | | | | comes in various guises. Credit Unions, for example, |
| course they wanted a slice of the action. In recent | | | | have been highly popular in Latin America despite their |
| years, this has attracted more private capital to | | | | high failure rate. The main problem with credit unions is |
| microfinance. Many venture capital firms, investors and | | | | that they are not managed by professional bankers |
| even banks have been investing in closely held | | | | and they lack the rigid systems in place at for-profit |
| microfinance initiatives, while other microfinance | | | | businesses. |
| institutions have floated on stock markets in order to | | | | The evidence demonstrates, however, that where |
| raise equity capital. | | | | there is a profit motive, things begin to look a lot better. |
| One of the leaders in this field is CompartamosBanco, | | | | Witness another successful non-traditional finance |
| a Mexican microfinance institution changed its | | | | business in Mexico: Banco Azteca. Banco Azteca |
| non-profit status to become a commercial bank | | | | does not fit the definition of a microfinance lender, as |
| through an IPO worth more than a billion dollars on the | | | | they lend mainly for consumer purchases rather than |
| Mexican stock market in 2007, after realising it could | | | | to finance wealth-creating activities. But nonetheless, it |
| help a lot more people that way. | | | | has been very successful in what might be called |
| CompartamaosBanco was incorporated in 1990, and | | | | 'sub-prime' lending - offering banking services to the |
| has grown into the largest microfinance bank in Latin | | | | unbanked who have no formal credit histories. |
| America serving well over 1,000,000 clients - most of | | | | Part of Grupo Elektra, which runs electrical goods |
| them lady entrepreneurs who previously did not have | | | | stores all over Mexico and Central America, Banco |
| access to working capital loans. Their clients use these | | | | Azteca was founded at the beginning of the |
| funds to expand their businesses and invest in | | | | twenty-first century with the aim of providing banking |
| equipment and materials, improving the quality of life for | | | | services to the unbanked in Grupo Elektra's traditional |
| them and their families. | | | | markets. The Elektra stores had an existing portfolio of |
| Is it right to Profit from the Poor? | | | | borrowers who had established credit records by |
| Of course, a big moral question pops up here. Is it right | | | | buying electrical goods and domestic appliances and |
| to profit from the poor? Perhaps more importantly, | | | | paying weekly, and it was logical to offer them banking |
| where does one draw the line between microfinance | | | | services such as personal loans and credit cards. |
| and old-fashioned loan sharking? | | | | Since most of the customers do not have traditional |
| Some of the other public faces of microfinance, such | | | | bank accounts, they have to make their weekly |
| as Muhammad Yunus, Nobel preace prize winner and | | | | payments in cash in the stores, or Banco Azteca |
| founder of another successful microfinancier, Graheem | | | | sends collectors out on motorbikes all over Mexico |
| Bank of Pakistan, remain firmly committed to the | | | | and Central America to pick up a few pesos weekly. |
| non-profit model. They believe it is wrong to profit from | | | | How to Get Started in Microfinance Investing |
| lending money to the poor. | | | | What if you decide you would like to invest a part of |
| Mexican CompartamosBanco, however, points out | | | | your portfolio in turning "poverty into profits?" |
| that since going public they have been able to reach | | | | Let's start with the most conservative way - a simple |
| out to ten times as many borrowers and lower their | | | | bank deposit. Banco Azteca in Panama is currently |
| interest rates too. In terms of social responsibility, | | | | paying 8% on US dollar CDs, much higher than the |
| 60,000 of their borrowers attended free "personal | | | | typical rate offered by other Panamanian banks. |
| finance 101" type classes last year. If only the | | | | Another way to get started right now would be to buy |
| sub-prime lenders in the USA had been so responsible | | | | shares in CompartamosBanco. It is quoted on the |
| as to teach their borrowers what was really involved | | | | Mexican stock exchange and most full service brokers |
| in the small print they were signing! | | | | should be able to buy shares for you on this exchange. |
| High interest rates are the norm in developing countries, | | | | If not, then the brokerage house we typically work with |
| where the cost of managing debts is much higher than | | | | in Panama can certainly buy them for you - in the |
| in countries with a more developed financial | | | | name of a tax-free Panamanian entity of course! |
| infrastruccture. CompartamosBanco, for example, | | | | A more adventurous, but potentially more rewarding, |
| spends $152 per year per borrower on administrating | | | | way to invest would be to become a funding source |
| their credit portfolio, against an average loan size of | | | | for a microfinance business. This is something that |
| $450. | | | | would require further research on your part and good |
| This is not because they are inefficient - it is simply | | | | contacts in Latin America and the Caribbean, and the |
| their business model, and the way they avoid bad | | | | good thing is that the investment can be handled |
| debts. For example, borrowers do not have bank | | | | entirely offshore. In order to diversify risk, I would |
| accounts from which weekly repayments could be | | | | recommend doing this as a syndicate with other |
| direct debited automatically. They are working in an | | | | like-minded investors. A couple of people have already |
| informal cash economy. Bank representatives typically | | | | expressed to me an interest in this - so if you would |
| meet every borrower every single week to collect | | | | like to know more, please feel free contact me via the |
| repayments sometimes as low as $5 each. This | | | | website listed below. |
| model works in developing countries where salaries | | | | |