----- Original Message -----
From:
Ruth P. Goodwin-Groen
To:
Malcolm Harper
Cc:
Development Finance
Sent:
Monday, June 25, 2007 11:35 AM
Subject:
Re: Devfinance: Re: Compartamos IPO issues
Dear Malcolm,
With the greatest respect I beg to differ. I don't think this Compartamos
discussion is peripheral to those who "do" microfinance at all. Many MFIs I know
personally are grappling with these issues from Kenya to Bosnia.
I think this discussion is particularly important because it reflects a deeper
struggle we are all experiencing whether we come from a business, development or
government background. Namely: how to marry the financial resources and
efficiency of business with the poverty focus of development and, governments'
agendas, - so that those who have been excluded from economic growth (at many
different levels) can be included. The status quo of working separately is
simply not working! It is vitally important that we in microfinance
figure this out - for the future of inclusive finance - and also as an example
for other sectors.
Let me illustrate what I mean using the example of business grappling with
development issues. C. K. Prahalad you may remember is business' "Core
Competence" guru who saw profit making as the solution to poverty at "Bottom of
the Pyramid". In early 2005 he met privately with the chairperson of one of the
world’s biggest banks to discuss business opportunities in catering to poor
people. This was the answer:
"The chairperson responded bluntly. “We don’t care about making profits [on such
a business], ”he said, with the bank’s CEO sitting beside him. “There’s
something even distasteful about the idea of making money off people who earn
less than $1 a day.”" (Quoted from: Brugmann J. and C. K. Prahalad (2007) "Cocreating
Business' Social Compact" Harvard Business Review, p. 80)
Brugmann and Prahalad argue in this article that is is the combination of
business with social activism that makes the difference for poor people. Michael
Porter of "Competitive Strategy" fame also wrote in a 2006 HBR that "CSR has
emerged as an inescapable priority for business leaders in every country" (p.
78) So the business world is increasingly trying to figure out how to have a
social conscience - but it is not easy. I could use examples of NGOs unable to
understand government agendas or governments trying to use business'
efficienciency but failing - to illustrate the challenges of all three sectors
working together.
Which ever sector we come from we know we cannot make a real difference to
financial inclusion unless we effectively learn from each other and work
together. But it requires a completely new mind-set for all of us and is really
hard to change traditional cultures of business or development or government. I
think this discussion is part of us creating new ways of thinking - and it is
VERY important to succeed.
Bottom line - I think it is indeed an important discussion!
Ruth
Malcolm Harper wrote:
Dear Rich,
Thank you, for your original paper and for your continuing wisdom.
Amongst all our excited discussions about the IPO, the most impressive moment to
me was at a lunchtime talk last week by Dr Alip of CARD of the Philippines, at
Southern New Hampshire University. Someone asked him what he thought about it.
He said he had never heard of it.
I do feel that the microfinance community consists of two broad types of people.
Those like Alip, who do microfinance, and those like us, who write and talk and
teach and chatter about it.
There is some purpose to what we do, beyond earning our living, but we must
remember that we and our concerns are pretty peripheral most of the time.
Malcolm
----- Original Message ----- From:
<Rrosenberg@worldbank.org>
To: "Development Finance"
<devfinance@ag.ohio-state.edu>
Sent: Saturday, June 23, 2007 6:09 PM
Subject: Devfinance: Compartamos IPO issues
A page of reflections on issues raised in the discussion so far:
1. I'm not sure there's a consensus among us what the core issue is. For me,
it's not the level of profits per se. Chuck Waterfield illustrates graphically
how large they've been, but I think the problem he sees is not the profits but
that they were financed out of the pockets of poor customers. If Compartamos
had made those profits by trading commodity futures I don't think Chuck would be
very troubled, and I'm not sure how many of us would be engaged in a big
discussion about how much profit is "excessive."
--I think the core issue is even narrower: not just the fact that large profits
were made on high-margin interest rates to poor customer, but also the fact that
(a) this was done by a company controlled by pro-bono shareholders whose
mission is not making profits but helping clients, and
(b) it was done during a time when roughly a third of the profits would go
into the pockets of private shareholders, rather than financing other
pro-bono development work.
As to point (a), we can observe that Finsol, an emerging purely private
for-profit competitor of Compartamos, is charging rates that are about as high
as Compartamos, including a profit margin that is only a little lower. I don't
hear a lot of outrage about Finsol. Yes, it is extracting monopoly profits from
poor customers because the market is immature and competition hasn't forced
rates down (yet). But that's what we expect private companies to do. I don't
think very many of us felt it was a moral atrocity for Apple to charge a
high-profit price on iPods when they faced little effective competition. That's
the way immature markets work, and society sets the outer boundaries of
permissible behavior by means of anti-trust laws. I'll grant that there's a
difference, in that Compartamos borrowers are poor and iPod buyers are not. But
suppose we were to tell private business that where poor customers are involved,
successful pioneers won't be allowed make windfall profits when highly risky new
ventures succeed. Most of us would agree that the result would be to hurt poor
people by seriously dampening the incentive for private innovation in developing
products that meet their needs. Far better that we should concentrate our
efforts on making sure that we minimize as much as possible the obstacles that
might prevent competition from developing.
So I'd agree with Clement Wan to the extent of saying that I'd have a hard time
characterizing Compartamos profits as "excessive" IF purely private capital were
involved. But that's not the case we're all discussing. The Compartamos
capital was NOT purely private. The majority of it belonged to public-purpose
shareholders--the Compartamos NGO, ACCION, and IFC. For me, the proper question
is not whether the profits would have been excessive for a private pioneer
company, but whether the high profits coming out of the pockets of poor people
were defensible IN LIGHT OF THE MISSION OF THE MAJORITY SHAREHOLDERS. Dealing
with the real set of facts in the Compartamos case, I find it quite possible to
formulate reasonable judgements about what's excessive or not. The criterion is
whether the interests of borrowers were given as much weight as they should have
been by pro-bono shareholders whose objective was supposed to be welfare of
beneficiaries, and for whom profits were supposed to be judged in terms of
whether they promoted that objective or not. Reasonable people might disagree
about the answer to that question, but I don't think there's anything
fuzzy-headed about it.
As to point (b), before 2000 when none of the profits would go to private
pockets, but rather would finance service to more borrowers and other
development beneficiaries, I thought that Compartamos' high profits were a
reasonable strategy, given that there weren't a lot of alternatives around then
for financing rapid expansion of outreach. The problem came when the
Compartamos commercialized in 2000 and took on a minority of private
shareholders, and began to have a lot of financing options in addition to
retained earnings. From that point on, there was an issue of balancing private
benefits against public purposes. For every dollar of additional profit paid
for by poor borrowers, about 30 cents would eventually go into private pockets,
not finance further pro bono work.
I've probably gone on too long on this point, but I'd summarize it by saying
that I don't think this is really an issue about commercial microfinance, but
rather a much narrower issue about transformation: when not-for-profit
microfinance operators bring in private investors, how should they handle issues
like high profits?
2. When I look at the topics announced for the forthcoming ACCION internet
workshop, I get the impression they're not very interested in discussion the
above topics, and people who are expecting the workshop to be a place to air
them may feel disappointed. Obviously, I think the interest-rate-and-profit
issue is important, and wish ACCION had addressed it more forthrightly, but
ACCION and Compartamos are bothered that most people are focusing only on the
problems and not on all the good things about the IPO. I think this is a fair
complaint. For instance, the CGAP paper that I wrote was almost exclusively
devoted to argument about the problems people were raising, and devoted very
little space to the IPO's large upside in attracting interest from real
commercial capital, which is available in vastly greater quantity that the
social-investor and IFI capital that has financed the vast majority of
microfinance equity investment in recent years. ACCION will be publishing a
paper soon that gives the very real benefits of the IPO a more ample discussion.
3. Back to downsides: I and others have raised concerns about whether the IPO
and reaction to it will hurt MFIs elsewhere who are charging interest rates that
look "high" but who are making much more modest profits. I think the public
discussion of the deal so far, not only in the microfinance listserves but also
in the mainstream press, bears out this concern. For instance, a recent Dow
Jones story lumped Compartamos together with other MFIs when discussing concerns
about high interest rates; there was zero recognition of the fact that the vast
majority of other MFIs whose interest rates look high have profits that are much
lower than Compartamos's, so their interest rates are driven overwhelmingly by
costs rather than profits. Chuck is right that this is a matter of degree, and
that Compartamos is really an outlier when it comes to the level by which its
charges exceed its costs. The fact that is has produced such high profits for
shareholders makes it a perfect club for critics of microfinance interest rates
to use in bashing the industry, most of which doesn't deserve bashing.
4. Chuck points out correctly that ACCION's profits went into a for-profit
vehicle. But saying that and no more could give the mistaken impression that
those profits are going to be diverted into private pockets. I think that's
highly unlikely. We need to remember that the for-profit vehicle is 100% owned
by the ACCION not-for-profit, and that all the value built up in the for-profit
vehicle goes back to the not-for-profit vehicle. Of course there are ways to
hive off not-for-profit assets of not-for-profits or their subsidiaries to
benefit private parties. But there are two reasons why I don't expect that to
happen. First, US law is pretty strict on that point. Just as importantly, I
know the character of the principal players in ACCION. I have argued privately
for years that they should have been more aggressive in pushing for a reduction
of Compartamos interest rates. But they are honorable people of huge talent who
could be making a ton of personal money in private pursuits, and are running
ACCION instead because they care about development and justice for poor people.
I'm not worried that they're going to countenance some kind of scam to divert
the value of their wholly-owned subsidiary into private pockets. Yes, I thought
that private parties got more than they should have out of Compartamos, but
let's remember that ACCION is a minority shareholder there who didn't have the
power to dictate policy. Some part of the reason they never made a fuss about
the interest rates was deference to other shareholders, the biggest of whom was
the Compartamos NGO.
5. Finally, I've known the guys who run Compartamos for a long time. I have
privately criticized their interest rate policy since shortly after
commercialization, but I can guarantee that the policy was not driven by their
desire to get as rich as they could. I can assure everyone that their pro-bono
justifications for the policy were both substantial and sincerely believed. And
I still don't really know what they would have done about interest rates if they
rather than their board had controlled the company. Discussion of the huge
profits will inevitably lead some readers to a contrary impression about their
motivations, which is very unfortunate. I think the profits and their source
need to be discussed, but let's not yield to the temptation of demonizing the
people involved--the evidence simply doesn't support that. I've gotten
considerable criticism for being too nice to ACCION and Compartamos in the CGAP
paper I wrote, but I find that I'm still completely comfortable with the balance
I drew there, with the exception of not having discussed the benefits of the IPO
enough.
Enough.
Rich Rosenberg
