Big banks get rich from poor women in the developing world

Ring the dinner bell

The roots of today’s microfinance industry go back to a $27 loan. It was 1974, and Yunus, who had a doctorate. in Economics from Vanderbilt University, was looking for ways to lift people out of poverty. In the village of Jobra, he met farmers and artisans too poor to benefit from bank credit who financed their businesses with small loans at usurious rates. Yunus helped them refinance at a much lower rate by calculating the total debt of village business owners and lending that amount to 42 women who agreed to act as co-guarantors. This model – small, low-interest loans to groups of borrowers – became the Grameen model. He also started a global movement.

Grameen Bank founder Muhammad Yunus in Mograpara, Bangladesh in 1997. Photographer: Robert Nickelsberg/Gamma-Rapho via Getty Images

This welfare story ended with the first microfinance Initial Public Offering, in 2007, involving Mexico’s Banco Compartamos. Founded in 1990 as a non-profit organization that followed the teachings of Mother Teresa, Compartamos converted to a commercial bank in 2000, then used investments from the World Bank and Accion International, a banking organization. financial inclusion, to transform into a for-profit model. microfinance company. When it went public, the company had an implied valuation of over $1.5 billion, providing a boon to founders and early investors.

The World Bank won $210 million. Accion, which invested $1 million it received from the US government, saw the value of its stake ball to $350 million, much of which was used to seed other profit-seeking microlenders. These gains came at the expense of borrowers who paid higher interest rates than other Mexican banks and credit unions and often took on more debt than they could bear. Accion did not respond to requests for comment.

For many banks and impact investors, the IPO has been like ringing the dinner bell. When India’s SKS Microfinance went public in 2010, the fund management arms of Morgan Stanley and JPMorgan, as well as George Soros’ Quantum Fund, were among the investors, according to a report by the Consultative Group to Assist the Poor. an industry organization housed at the World Bank. US-based venture capital fund Capital Sequoia was another early investor.

SKS was Andhra Pradesh state’s largest microlender and came under fire from human rights groups and lawmakers in 2010 after local media reported more than 200 over-indebtedness-related suicides. the Associated Press reported in 2012 that SKS officials knew that debt collectors forced borrowers to pledge their assets and verbally and physically harassed them. SKS has denied any wrongdoing.

Citigroup, an Accion backer, has helped funnel hundreds of millions of dollars to microlenders including Compartamos and Jordan’s Tamweelcom, which has reported dozens of delinquent borrowers to authorities, putting them on search lists police, legal documents reviewed by Bloomberg News. A Citigroup spokesperson said the bank only works with “microfinance institutions that have best-in-class lending and collection practices and treat all borrowers with respect.” Tamweelcom did not respond to requests for comment.

While Citigroup CEO Jane Fraser has closed some consumer operations in developing countries, the bank remains committed to microfinance – to be what former global director of inclusive finance Bob Annibale once called ” the bank to the bank of the poor”. Last year, he sold a $1 billion social finance bond as part of a broader pledge to invest $1 trillion in what he calls sustainable finance by 2030. He has also arranged $70 million in loans for Compartamos through the US International Development Finance Corp., known as DFC. , and the Japan International Cooperation Agency. Citigroup’s mission, the spokesperson said, is “to empower micro-entrepreneurs around the world.”

This is not how things went for the Compartamos customer Cristina Pina. The 58-year-old baker from Villa de Zaachila, Mexico, near Oaxaca, was sucked into a whirlwind of debt two years ago. After saving up to make a $2,500 down payment on land, she lost her job during the pandemic. She took out a $500 Compartamos loan at a 100% annualized rate to help her finish paying for the land and avoid losing her net worth. She ended up borrowing from other lenders, some at even higher rates, to pay off Compartamos and is now juggling six loans.

“Before you know it, I’m borrowing to pay, pay, pay, pay,” Pina said at a cafe near the town’s central square one day in September, opening a small floral-print notebook in which she keeps track of past and future payments. . “Borrow, pay. Borrow, pay. Borrow, pay. We are stuck and there is no way out.

Cristina Pina, a 58-year-old baker in Villa de Zaachila, Mexico, on the property she bought with microfinance loans.

Cristina Pina, a 58-year-old baker in Villa de Zaachila, Mexico, on the property she bought with microfinance loans. Photographer: Alejandra Rajal/Bloomberg

A spokesperson for Compartamos, now owned by Gentera SAB de CV, said in an email that Pina had been “a valued and responsible customer” for many years and that the bank had allowed her and others to defer payments. for three months during the pandemic. Managing director Patricio Diez de Bonilla says it’s not always easy to know if customers have other loans. “Before Compartamos,” he says, “they didn’t have access to credit, so it’s better than not having credit or resorting to loan sharks.”

Benefits of Compartamos Banco

Return on equity for Mexican lenders, 2018

Source: MIX Market Data

Compartamos is now the largest microlender in Latin America, with over 2.5 million customers. It holds 40% of the Mexican microfinance market and is one of the country’s most profitable financial institutions, posting a return on equity in 2019 and 2021 that exceeded 20%, according to company filings, nearly twice what Mexican banks earn on average.

Despite these profits and the advertised fees for microloans that put its annual interest rates well above 80%, Compartamos continues to receive US taxpayers’ money from the development bank DFC. Pooja Jhunjhunwala, a spokeswoman for DFC, declined to comment on Compartamos, but said the agency has a robust vetting process and is committed to only funding lenders who are both financially and socially solvent. responsible.

But these due diligence reviews undercut consumer protection, according to half a dozen current and former DFC executives who asked not to be identified because they are not authorized to speak about the program. Microfinance lenders are required to open their books to show their long-term viability, executives say, and are asked questions to ensure they are not involved in child labor, human trafficking humans or businesses harmful to the environment.

They are also expected to follow industry-developed customer protection standards. Smart campaign, which include transparency and responsible pricing, according to Jhunjhunwala. Yet the reviews contain little specific guidance on debt levels, interest rates, profit levels or recovery tactics that should be considered unacceptable, former executives say. The Smart Campaign said in 2020 it was suspending operations, ending its certification program, and handing over its resource library to two other industry-funded groups.

Sophie Sirtaine, CEO of the Advisory Group to Assist the Poor, said in an email that although microloans have helped millions of low-income people around the world, policymakers, investors and lenders can do more. to protect borrowers. “Development funders should incorporate consumer protection considerations into their funding due diligence,” she said. She cautioned against focusing on capping interest rates. This, she noted, could “render service to excluded or underserved segments unviable and could cause responsible providers to shut down.”

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The notebook Cristina Pina uses to keep track of her loan repayments. Photographer: Alejandra Rajal/Bloomberg

After the Compartamos IPO, donors pressured microlenders to publish balance sheets and loan terms. MFTransparency, a consumer advocacy group, has pushed for responsible pricing and released details on costs and profit margins. But as the industry became more commercial, lender transparency faded, says Chuck Waterfield, who founded the group in 2010. After a report was released showing some microlenders were making profits of more than $25 %, the pullback has intensified, says Waterfield. By 2015, lenders had become so reluctant to disclose information about the cost of loans that he disbanded the organization.

Waterfield says that when he spoke at conferences and described business models that would make a reasonable profit, “someone from an impact investing firm would come up to me and say, ‘You’re right about all of that'” . Then they would tell him they had clients who wanted 25% returns.

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