In the evolving world of doing good and doing well new tensions emerge all the time between the 'old' players that used to occupy the social impact space and some of the new faces on the block. The example that keeps coming up on my radar is that of Compartamos, a Mexican company that since 2000 has taken the micro-lending model into the for-profit sector and in so doing has made a bundle of money.
In April of 2007 about one third of the company was offered to the public in an IPO that generated nearly $500 million. The IPO created waves, not just because it placed the company's value above the billion dollar mark, proving that there is money to be made in servicing the world's underserved, but also because a host of critics vocally denounced the company's tactics and operations. The media attention ensued from the likes of The Economist, The Wall Street Journal, and of course The New York Times.
Criticism of Compartamos generally focus on two things: the moral argument that they are making too much money off the poor; and second, that Compartamos charges such high interest rates that instead of 'replacing' the local money lender, they have actually become one.
Advocates of Compartamos point out that micro-finance has had limited reach and effect to date because non-profit models are simply not as scalable as for-profit ones since they don’t have access to the same large sums of capital. Also, they note that interest rates on Compartamos loans have decreased steadily over the last several years as Compartamos' cost has decreased due to its for-profit orientation.
While I think there are some valid concerns and a debate is always welcome, it is hard for me to believe that the negative here outweighs the positive. A lot of the emotion has been stirred up here and in my mind it's not really because of the interest rates but because of the idea that someone is making money off the poor. After all, as The New York Times point out Compartamos's interest rates are in line with what other non-profits charge in Mexico, saying "Compartamos’s rates are only a few percentage points higher than Pro Mujer’s [a non-profit], for example".
That Compartamos cost in providing the loans is actually lower than it used to be and then it is for your typical non-profit only proves the point that we must have for-profit institutions entering spaces like these to lower cost and increase competition. Yes, for now interest rates on the loans have not decreased. But with a $1 Billion dollar valuation I have to believe that someone out there is saying "I can do that". As soon as they do, competition will take over and with it interest rates will likely come down over time as will profit margins (as they do with almost every industry as it matures).
Last, I think there is validity in asking "how much is too much" profit, especially when a business is targeting poor customers, but the greatest moral question in my mind should not be around how much money is being made, but rather how well the customer is being served compared to what services were available to them previously. Since businesses had largely ignored these customers until very recently, to me the answer seems clear.
I'd have to agree with you here. It doesn't seem as though anyone at The Economist or NYTimes stopped to consider the plight of the farmers and tradesmen receiving the loans before Compartamos came along. I'm sure these recipients would tell you that some money is always better than none. Any time the phrase "for-profit" comes into a sentence people have a tendency to get suspicious(sometimes with good reason). A lot of people in the non-profit world also can have a tendency to fall into a romantic mindset that given enough time every problem can be solved with enough hard work and dedication through traditional charitable routes. While that might be a good goal, it's not realistic and it's not fair to the people you're trying to help. Just as with life in general, we often have to compromise to get the best outcome and Compartamos is a great example of that.
Posted by: Brendan | July 09, 2008 at 11:12 AM