A risk we can all afford

These days, the wealthy might want to learn a thing or two from the poor. Mexico’s CompartamosBanco is a microfinance institution that raised eyebrows in April 2007 when it shed its nonprofit mantle and became a publicly traded entity. Since then, its stock price has not been able to avoid a hit from the global financial crisis; but when it comes to determining its true value, Compartamos might have a distinct advantage.

Microfinance, especially lending to microentrepreneurs with no collateral, is labour-intensive and costly—in Compartamos’s case, around $152 a year per client, with an average loan of $450. By charging an interest rate that generates a profit, the bank can grow fast and provide many more “micro-entrepreneurs” with the finance they need, even at interest rates that by the standards of rich countries seem unacceptably high. The bank now has over 900,000 clients, and expects to reach over 1m this year, up from the 61,000 it had in 2000, after a decade as a traditional non-profit outfit. Read the rest of the article in The Economist…

Raising capital on the backs of microentrepreneurs comes a little too close to the ethical line for some; but what Compartamos might lack in that respect, it makes up by the fact that it puts the effort into the groundwork to provide the information needed to properly assess risk. To add to the competitive advantage of proper information, Compartamos is as committed to their clients’ ability to generate revenue as the clients themselves – leading Mexican entrepreneurs to vote with their ledgers and helping Compartamos reach the one million client goal:

Mr. Alvarez also mentioned that the one million client goal is also an indicator of the Company’s excellent execution of the business model. “Our clients have very good credit quality, with NPL’s of only 1.38% at June 2008. In the midst of the banking industry’s financial crisis, Compartamos is consolidating as the strongest microfinance institution in Mexico in terms of growth and with excellent future potential.”

It has never been a secret that financiers depend on properly assessing and supporting the financial health of their clients. Non-collateral loans are risky, but Compartamos maintains a tight connection between financier and client – a connection that is the missing element preventing the financial crises from passing. Having that connection makes microfinancing a risk we can all afford; and in the case of Compartamos (and its recently inspired competitors), a risk that contributes to needed institutional development for entrepreneurs in developing markets.