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From:
ALVARO RODRIGUEZ ARREGUI
· Why is this IPO so significant? What does it mean for the microfinance industry in general?
It has proven that the microfinance industry is capable of generating both social returns and returns on investment. Simultaneously, it’s a powerful validation of the commercial approach to microfinance. Compartamos was one of the first microcredit lenders in the world to issue debt in the capital markets for institutional investors. It is among the fastest-growing MFIs – total loan portfolio and net income have grown at a CAGR of 67% and 75%, respectively, over the last five years (ended 12/31/06). It has set a very ambitious goal to reach one million clients by end-2008. The success and lessons of its IPO will be watched carefully by both the microfinance industry and the international capital markets. The reaction of the capital markets to the IPO was identical to all occasions when a new area of outstanding opportunity is discovered. In Mexico there has already been a second IPO of a financial services company sailing under the microfinance flag. Other MFIs may seek to emulate Compartamos’s lead in accessing international capital, which would imply that they, too, would be compelled to demonstrate excellent management, fiscal transparency, solid, sustainable growth, and other business best-practices.
· Is this success something to be expected of microfinance institutions going forward?
Compartamos’s offering should be viewed as exceptional in the industry, due to the organization’s innate (and exceptional) strength and growth; favorable domestic and international markets for such a public offering, and other factors that came together to make the IPO succeed. That said, Compartamos proves what is possible by following a best-practices commercial approach to microfinance; we believe that others will emulate it. All involved in microfinance should be celebrating the success of the Banco Compartamos IPO because this will mean that many entrepreneurs will come into the industry more energetically, bringing competition, more options for clients, further efficiencies and lower prices and the ultimate beneficiaries will be the billions of lower income people that today have no access to financial services.
· Why are Compartamos’s interest rates so high?
Compartamos’s interest rates must be viewed within the context of overall Mexican interest rates. Compartamos’ rates are, in fact, relatively reasonable for that market, and are within the mid-range for microfinance institutions in Mexico. Compartamos’s interest rates are substantially higher than those of a typical bank because of the high transaction costs of microcredit lending. The high interest rates in Mexico compared to the rest of Latin America respond mostly to structural issues which need to be tackled as a system. The basic reasons are low average loan size – in Mexico, based on a study done by ProDesarrollo and commissioned by the Ford Foundation, the average loan balance is aprox. $400 and in the rest of Latin America is aprox. $8,500 and on a relative basis (loan balance as a percentage of GDP) the difference is much greater – together with higher costs (the average salary in Mexican MFIs is, for example, eight times higher than the average one in Bolivia). It should be added that Compartamos’s returns from those interest rates have fueled the institution to more than double its reach over the last three years – from 350,000 to 850,000 clients. What is more important for the long run goals of microfinance: to bring an immediate benefit to those that are currently served or to reach the still unserved as quickly as possible? Compartamos has 850 thousand clients, but there are more than seven million families that are still lacking access to financial services in Mexico alone. Compartamos is gradually reducing interest rates. Compartamos, like any other market leader in any industry, has to be sensitive about aggressive price reductions so that it is not interpreted as predatory pricing and to make sure no permanent damage is inflicted in smaller weaker players and allow the industry to develop. Deep access to financial services to the poor will only happen through an industry wide effort – one single player cannot achieve this on its own; not in microfinance, not in any industry.
· Why didn’t Compartamos reduce its return on equity by lowering interest rates?
Compartamos has always set its sights on becoming large enough to make a difference to poverty on a national scale. The only way it was able to do that was through retained earnings. If Compartamos would have produced the same ROEs as any other financial institution, given the high perceived risk of microfinance, it would have been impossible to raise capital. Today everyone is lining up to invest in Compartamos, but this wasn’t the case long ago. Only three years ago, even while having a track record of being able to produce high returns, Compartamos fell short of raising P$200 million pesos in debt financing even though it had a guarantee from the IFC. In 2006, when we raised the initial $6 million in capital to launch Compartamos when it became a regulated finance company, we had a very tough time to raise the funds. There is another MFI in Mexico that is about a third of the size of Compartamos and has Net Income of about a tenth of Compartamos’ results – i.e. this institution is much less efficient than Compartamos. If Compartamos was as inefficient as this competitor its ROE would be much lower, would this eliminate the controversy? But then, with a lower ROE in Compartamos, where would we be in terms of the depth and breadth of access to financial services in Mexico. As a result of Compartamos’ high returns, there’s been an additional very positive outcome, which is the soar in the establishment of new microfinance enterprises in Mexico. This is bringing competition in droves. The difference of new entrants in microfinance between ROE of 50% and 15% is measured in lost generations of the poor. It is urgent to reach the poor with a wide offer of financial services. We cannot wait for Compartamos to do it alone, thus competition has to be mobilized.
· How does this IPO validate or repudiate ACCION’s business model?
This IPO and the value of investment realized are powerful confirmation of our business model. Our commercial approach to microfinance calls for the engagement of commercial entities and, in particular, national and international capital markets, in order to reach scale and extend financial services to more clients. We believe that only through a commercial approach can we reach the estimated 750m to 1 billion entrepreneurial poor of the world who could benefit from microfinance. Compartamos opened 66 offices throughout Mexico in 2007, in order to more effectively serve customers. It intends to serve more than one million clients by the end of 2008. The Compartamos IPO is a perfect example of the commercial approach at work. Some may say that Compartamos should have stayed with social sources of funding, but this would have doomed Compartamos to staying small and growing slowly. There are a limited amount of social funds in the world. These social funds have a very important demonstration role, as they pioneer new microfinance organizations and initiatives. The challenge to bring financial services to every corner of the world is a very large one and we need the help of the financial market to tackle it.
· What are Compartamos’s prospects following the IPO?
Compartamos believes that there will be continued steady demand for its financial services in Mexico for the foreseeable future, due to the high percentage of urban and rural households (~14 million) who are un- or under-served by current institutions. They also believe that the Mexican microfinance market is under-served vis-à-vis other Latin American markets. These gains will allow Compartamos to achieve its strategic goals, which include continuing to expand its loan portfolio and other financial services, including savings; and to open additional service offices through the country in areas where they believe new offices can accommodate growing numbers of clients. Expanding its geographic coverage and network of service offices will allow Compartamos to gain market share and reach its goal of having over one million customers by end-2008. Compartamos had alternatives to bring in a strategic investor instead of doing the IPO. We went with the IPO alternative for two reasons: 1) to demonstrate to the capital markets and the entrepreneurial community that it was profitable to do microfinance and 2) because we would secure that the Compartamos mission and governance would remain untouched. The result has been the drive of new entrepreneurs into the field. This will bring competition, better service, more products and lower prices. Also, the Compartamos governance with a true commitment to its mission remains the same as pre-IPO. Before the IPO Compartamos already had an independent Chair and corporate governance best practices – Latin Finance magazine awarded Compartamos with the best corporate governance practice of all Latin American companies that performed an IPO in 2007.
· What is the role of profit in microfinance?
Through history we have come to associate profit with greed and serving the poor with sacrifice. So now that microfinance has shown that it can perform as well as conventional finance, a part of the development community is confronted with cognitive dissonance. But in focusing on the by-products of serving the poor, they’ve taken their eyes off poverty itself. The fundamental objective of microfinance is to roll back poverty. In order to succeed against poverty, and not just alleviate some symptoms, four key attributes are needed: · Massive scale. There are 3 billion people surviving on $2 dollars a day or less. If we deploy an intervention that reaches 100,000 people, we will have failed in relation to the scale of the problem. · Permanence. Our intervention must serve the poor of today and their children and grandchildren. Accordingly, it must survive the career span of its current champions. · Continuous efficacy – a model that provides better and better service over time. · Continuous efficiency – a model that gets cheaper and cheaper over time.
Only business can deliver these elements consistently, and not just one business, but a competitive industry. To create an industry you must be able to demonstrate returns sufficient to attract many players. This is the great achievement of microfinance: to show that something of high impact for the poor can be delivered with a profitability high enough to create a whole industry.
· Is it right for private individuals to benefit from the IPO, especially when public money was used to launch the institution?
All donors are excited that the funds they provided have now blossomed into an institution serving more than 700,000 clients and on its way to a million and more. The small amount of public sector money that was put into Compartamos (about $2 million) has generated a portfolio of $300 million. This is an extraordinary success from a donor point of view. Most donor projects have a negative yield. The profits of the IPO have gone to: non-profit institutions (ACCION International, and the Compartamos NGO), a development bank (IFC) and individual investors who put their own money into the organization in 2000. The non-profit and public institutions, who used public money, will continue to serve their charitable purposes with the returns. As the individual investors put forth their own money, the issue of use of proceeds from public money does not arise. Finally, the use of public sector money to support private businesses (and their shareholders) is not at all unusual. Consider public support to aerospace, medicine, defense, telecommunications, agriculture, biotech, etc., etc. The question should be whether this was a good use of public sector money, and the answer is clearly a resounding yes. The individuals that made a profit for themselves was thanks to the fact that they put their own capital at risk. Their success has inspired others to do the same. As we have more and more entrepreneurs wanting to serve the poor, we will have a much better chance at eradicating poverty. The choice is between microfinance under a market system (market forces set pricing) or command & control system (a bureaucrat sets the prices). History has already shown which works best, for EVERYBODY (including the poor, e.g. workers in USA and Europe vs workers in Cuba).
· Is Compartamos a pro-consumer institution?
A pro-consumer institution follows certain principles, including: · Transparency in pricing – Compartamos has always been extremely clear with clients about the fees and interest rate it charges. · Fair pricing – Interest rates have been set with aim of rapid reach of new clients paramount. They will gradually come down. · Dignity of treatment and ethical treatment – Compartamos is a leader in training its staff to operate ethically and provide service respectfully · Avoiding reckless lending – Compartamos’ lending methodology ensures that its clients will not become over-indebted. · Complaint resolution – Compartamos is a model for other institutions on this front, with a hotline and call center for consumer complaints.
In addition, Compartamos is committed to continual innovation in products to bring more life-altering financial services to its clients – most recently savings services, home improvement and life insurance. The final proof of Compartamos’ service to clients is its low delinquency rate and rapid client growth, showing that it is providing a service that clients value and are willing to tell others about. * * *
De:
Chuck Waterfield Thanks, Alvaro. I appreciate your efforts on this. The end of the week will be fine as for timing. Chuck
From:
ALVARO RODRIGUEZ ARREGUI I have put something together to send you. It just has taken a bit longer than expected to run this by ACCION because people have been traveling. I’ll get something to you by the end of this week. Regards, ARA
De:
Chuck Waterfield Thanks for your quick response, Alvaro. The very clear goal of the paper, as we have been planning internally, is to start the paper with some background on the Compartamos IPO, but then to have the majority of the paper address broader issues on the implications of commercialization on the future of microfinance. I agree with you that there has been a wide range in the quality of discussions that have taken place, and we’ll take care in selecting high-quality material for the paper. Another goal of the paper, as stated below, is to allow all sides to argue their positions in their own words. We will do this by extracting quotes from public materials that have been available in the past ten months. If you do have any articles you’ve written, or presentations you’ve made, other than your contributions during the ACCION webinar, we would appreciate you sharing them with us for possible inclusion in the paper. Regards, Chuck
From:
ALVARO RODRIGUEZ ARREGUI Chuck, Thanks for including me into this. I have followed the discussions and I’m aware of the Ford Foundation paper. I think the discussion of the commercial approach of microfinance is very important (I do not like to just revolve it around Compartamos IPO because I think the topic is much greater than that single event). I have seen profound and intelligent discussions about the subject with arguments in favor and against the commercial approach. I also have seen very poor discussions on the subject that revolve around fundamentalism or erroneous data and facts or simply people that do not understand what an IPO is. I hope the paper that you produce stays away from fundamentalist arguments, points of view that are based on wrong data or on a lack of understanding of what an IPO is. Regards, ARA
De:
Chuck Waterfield Dear Alvaro, Though we’ve not met, I’ve been fairly closely connected with ACCION for about twenty years, and have provided training to much of your staff, and have done ACCION’s USAID matching grant evaluations, and internal advising. I’m currently working on a paper sponsored by Ford Foundation about the Compartamos IPO. The remainder of this letter explains why I’m writing to you. The Compartamos IPO of April 2007 generated a great deal of discussion and debate about the influence of IPOs on the future of microfinance. Since then, there have been continuous email discussions, published papers, news articles, and panel presentations. Virtually all of this has been in the English language, despite the fact that the IPO involved a Mexican financial institution that is regarded as a leader in Latin America, if not globally. Many people either have not been able to follow the discussions due to language or because the topics were difficult to absorb when jumping into the middle of the discussions. Therefore, MFI Solutions (my company) , working together with a partner company and under the guidance of a volunteer advisory committee, is pulling together all of the key points raised in the discussions, thus distilling eight months of material into a digestible 30-page document. The document will be produced in both English and Spanish and then made available as a free PDF download from authorized websites. We have received support from the Ford Foundation’s Mexico City and Santiago offices to produce and translate this document. Our goal is to condense down and present quoted materials that have been previously shared publicly. Although the Compartamos IPO is the particular event that inspired the discussion, material selected for the document will be that which primarily discusses the broader implications of the event. The document will be broken down into topics that can be absorbed in a moderate amount of time, and by readers who choose to read only selected sections. The document will strive to present the arguments from all sides in the original author’s own words. As you have contributed to the discussions and debates on these topics, we would like you to share any material that you have already previously publicly disseminated that you consider useful for inclusion in this document, or for inclusion in a list of web-available materials. We do have a limited timeline for publication of this document, so I do hope you can reply by 22 Feb. Once we have a final draft of the paper, we will send it to you for your comment, prior to publication. If you have any questions or concerns, please feel free to contact me anytime by e-mail. Regards, Chuck |
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