IntRates1   

CompLoans

The key issues for me

For three months I have been studying this IPO and talking to people.  I see three main issues:

1. Compartamos intentionally charged extremely high interest rates year after year in order to generate a massive amount of profit
2. Compartamos shareholders then cashed out much of this profit through an IPO.
3. ACCION was given a $1M grant from USAID in 1999, allowed to shift that money to a for-profit that is owned by ACCION-the-non-profit.  The ACCION for-profit then invested this $1M in Compartamos.  ACCION has now cashed out roughly $150M in cash from that investment and still holds $150M in stock.  The $1M grant from USAID has become $300M in resources held by a for-profit.

The following will describe some of my understandings of these issues, having worked 22 years in microfinance and having thoroughly studied interest rate issues that entire time.  I think graphs are much clearer to absorb than numbers, so I'm showing some graphs, but I have the complete numbers as well.  All this data is taken from the MIX website, including audited financial statements of Compartamos.

The role of interest rates

Interest rates in microfinance need to be higher than "commercial" interest rates paid by the wealthier.  On that, barring ethics issues, we all agree.  There is no other way to come even close to covering costs.

Why?  Because costs are relatively flat... it costs nearly as much to give a $100 loan as to give a $1000 loan.  But income comes from the effective interest rate (APR in the US) that generates income relative to loan size.

As the following graph shows, there is a breakeven point.  Loans below a certain size lose money at a particular interest rate.  Loans above that size generate a profit.   

So... how do we make money on smaller loans?  Raise the interest rate.

We end up with a curve of interest rates vs loan size for our breakeven point.  The interest rates shown below are "typical" for generic markets.  There would certainly be some differences by region or by specific country, but the shape of the curve would remain basically the same.

The circled area above is the main focus area of microfinance, so let's expand that area of the graph:

When I am asked "What interest rate should we be charging in microfinance?" I answer:  "It depends on the loan size!"

Now, on to the history of Compartamos...  click here

This website is managed by Chuck Waterfield.  If you have any questions or comments about the website, please email waterfield@microfin.com