The Banco Compartamos' Ipo

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Ethics and Governance of Microfinance Institutions

The Banco Compartamos' IPO (A)1
In April 2007, a Mexican Microfinance company stunned the world by issuing shares which were priced at twelve times book value and which were oversubscribed thirteen times! When Carlos Danel and Carlos Labarthe founded their NGO they could not possibly have dreamed that they would be so successful.

Compartamos AC was an NGO established in 1990 as a not-for-profit institution to provide microcredit to poor people. During the period 1990-2000, this NGO received donor funds of $6.3 million. Donors included the CGAP, a donor organization associated with the World bank2, as well as Accion International who was financed by US Aid. Thus, donor agencies were the principals and Compartamos AC was the agent whose mission was to aid the poor by offering them credit.

In 2000, a for-profit finance named company Financiera was

Figure 1: Organisational relationships
Public funds Development bodies : CGAP, IFC

Compartamos

formed with a paid-in capital of $ 6 million. The goal was to make the management more professional and Private funds

Accion

68% Compartamos (for-profit)

Compartamos AC (NGO)

32%

aggressive to reach its targeted outreach to

ensure financial sustainability thorough economies of scale. The shareholders of Financiera Compartamos included the NGO, Compartamos AC, as well as Profund, Accion International and IFC, the private lending arm of the the World Bank group. Together, these agencies with

1

The case has been prepared by Professor Arvind Ashta of the Burgundy School of Business (Groupe ESC Dijon-Bourgogne) for classroom discussion and study. 2 The CGAP is housed at the World bank but is an independent body. It is currently presided by an executive of the World Bank and its governing members include also the IFC, another member of the World Bank Group.

development missions had 68% of the shares in the for-profit Financiera Compartamos. The rest of the shares were predominantly with directors and managers with some outside private holding. Figure 1 shows the relationships between the different bodies.

Thus we can resume that public funds given to agencies were given to an NGO, who in turn invested it in a for-profit agent. Thus the finance company was a for-profit agent of a line of not-for-profit principals. Although, this raises some governance issues, it must be reminded that many public agencies sub-contract a good part of their mission to private companies. Here, the mission of the development agencies was to raise the standard of the poor. The mission of the Mexican NGO was to raise the standard of the poor by aiding them to get credit. The mission of the for-profit was to give credit to the poor in a financially sustainable manner. The idea was to attain independence from the vagaries of donor financing. No grants were made to the finance company. Accion made a loan to the finance company in 2000 but it was paid back

The for-profit Financiera Compartamos really made high profits, primarily from high interest rates and low operating expenses. It charged high interest rates of 86% p.a., net of taxes on its loans to the poor. With VAT, this was 99% p.a. Interest rates are high because transaction size is small. Interest rates are high for many competing Mexican consumer finance companies also. Thus, Financiera Compartamos is not alone. At break-even level, Financiera Compartamos would still have charged interest rates of over 60%. At the same time, the operating costs remained lower that those of comparable MFIs and consumer lending institutions. The high interest rates and lower operating costs led to high profitability. Financiera Compartamos ' ROE of 55% p.a. is higher than that of most MFIs in the rest of the world (average ROE of 7.5%) and higher that those of most MFIs and consumer lenders in Mexico.

The high profitability financed outreach and growth rate doubled from 24% per...
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