When Development is Too Successful

At a recent conference of microfinance and microenterprise development organizations, one microfinance institution's IPO this past April was a hot topic. Compartamos is a microfinance institution (MFI) in Mexico that has had wild success since its commercialization in 2000 (10 years after its establishment as a non-profit). Commercialization is the latest trend in microfinance; it refers to the conversion of a non-profit MFI into a for-profit through for-profit investment. Seven years after commercialization, the MFI’s successful IPO was a landmark in the microfinance industry, bringing in hundreds of millions of dollars. Part of this success owes to the incredibly high interest rates Compartamos charges its clients.

The controversy over this phenomenon is three-fold. First, there is the issue of Compartamos’ high interest rates (86 percent on average). What are the ethical implications of this from a development standpoint? Second, is commercialization a good thing for microfinance? Third, if so, how do we reconcile the earning of profits with their usage? That is, how do we ensure that Compartamos makes the right decisions about using the profits (to invest in their clients, offer new products, lower interest rates, or other things).

MFIs usually have higher interest rates than regular banks owing to the high risk of default of their impoverished or near-impoverished clients. These clients don’t have the same motivation to repay loans as clients in the developed world, who have credit ratings and other consequences to worry about. In 1995, when the devaluation of the Mexican peso wreaked havoc on all sectors of Mexico’s economy, Compartamos drastically raised interest rates to stay afloat. Tack on the lack of direct competition to Compartamos, and you get interest rates that are sometimes over 100 percent on tiny loans. Yet, as the rest of Mexico’s economy returned recovered, Compartamos didn’t lower their rates. They remain higher than normal even now.

The best argument for the commercialization of MFIs is that it can bring in more and different types of money. Whereas money from grants and loans from NGOs or governments is thereby diverted from other socially responsible uses, commercial capital is diverted from other uses that are probably not socially responsible. To grow the services and diversity of microfinance products, it is important to attract this capital from disinterested parties. However, since the IPO, Compartamos has what it euphemistically calls a “double bottom line” – it has the interests of shareholders as well as clients in mind. Richard Rosenberg, author of the CGAP Reflections on the Compartamos IPO, summarizes this conflict of interest nicely: “One cannot be too shocked if a for-profit corporation starts acting like other businesses.” The real money coming in, raising Compartamos' value to over $1.5 billion, comes from the investors. If Compartamos acts in the direct interest of its clients by lowering interest rates (which it has proved would have to be a conscious decision; it’s not being driven by competition), it runs the risk of shareholders pulling out.

Hence the stickier ethical issues of Compartamos’ decisions in using its profits and navigating a course of economic success while keeping development goals in mind. My recent arrival on the development scene affords me a straddle stance between the academic and practical worlds of international development. When we study the developing world in the classrooms of our liberal arts universities, we take a cultural, sociological, or humanitarian interest in the problems of development. Economists and practitioners, on the other hand, take a cold, technical- or business-oriented approach. We speak of Compartamos’ “clients;” these are people, specifically Mexican men and women in rural areas taking out a loan to purchase new tools for their ceramics business or farm equipment. Consider taking out a loan to purchase something you couldn’t otherwise afford, and then having to pay it back twice over. While it’s true that these clients are often able to get very high returns on these small investments, the line is a fine one between benefiting clients and exploiting them with unnecessarily high interest rates, the profits of which may eventually accrue to wealthy shareholders. A business orientation is the best way to effect economic development. This is only true for development narrowly defined and measured in specific variables. Whether a program is considered a success depends upon the indicators that tabulated. The tabulators must take care not to lose sight of the accompanying qualitative information, and Compartamos should take care not to lose sight of its qualitative development goals.

Head First: An unlikely blogger tells nothing

On titles
Those who know me, and by tautology the only people who'll be reading this first post, may have some ideas about why I'd name my blog "Head First." In the spirit of restraint in posting personal information on the internet (telling nothing), I'll leave that mostly to your imaginations. On the off-chance that you're reading this and you don't know me, your loyalty just might repay you with understanding. A few key intangible nouns to consider might be risk, precociousness, rationality, and intransigence.

On motivations
Blogging does not come naturally to me. I'd often thought of it as exhibitionist, frivolous, juvenile, and possibly even narcissistic. But over the past few years I have been forced to realize that it is now a viable form of popular intellectualism, public dialogue, and even academic discourse. Not only does anyone who takes themself seriously write a blog (for better or for worse), but the major national newspapers feature blog sections inviting users to participate in discussion.

Yet the newfound popularity and credibility of blogs is not what motivates me to open this one. Rather, it is my own desire to maintain critical faculties that are quickly draining from my porous brain in post-college life. A friend and fellow blogger told me that blogging is good for you--like writing class and therapy rolled into one, he said. Practice clear expression and get out your thoughts. It sounds so warm and fuzzy, how could anyone disagree with the benevolence of that?

On expectations
Well, if this first post is any indication of what's to come (and I don't mean for it to be, content-wise), then my blog will be self-important and narcissistic. But what I expect from it is not wide acclaim. It is a chance to distill my often nebulous and changing views on people, politics, and culture in a way that strengthens or challenges them. And, if the experiment works, maybe after some practice it will be worth the read.