Compartamos: From Nonprofit to Profit
Banco Compartamos portrays itself as the gentler lender to Mexico's poor. Compartamos means "let's share," reflecting the philosophy of its founder, José Ignacio Avalos Hernández. The scion of a cosmetics business family, Avalos, 48, is a devout Catholic who in 1990 converted a nonprofit donating food and clothing to the deprived into one that made loans guaranteed by borrowers' neighbors.
Clients, mostly women, gather weekly in groups of 12 or more. They can borrow only for small businesses, not consumer purchases, and they agree to see that the creditor gets its money back, even if the group has to make up the difference when a member falters. Peer pressure substitutes for motorcycle-mounted collection agents.
In 2000, Compartamos sought greater scale by becoming a for-profit, which led to the founding of the bank in 2006. Today it has a portfolio of $316 million lent to 765,000 clients, dwarfing nonprofit micro-finance organizations in Latin America. Fueled by annual interest rates that can exceed 100%, it is one of Mexico's most financially successful banks, providing investors with an average annual return on equity of 53% over the past seven years.
In its initial public offering in April, of 30% of the company, Compartamos raised $467 million. Like other early investors, Avalos reaped an extraordinary return: The $250,000 he borrowed to invest in 2000 grew in value to $100 million, a quarter of which he sold in the IPO and is using to fund various nonprofits. He remains on the bank's board, but says helping run a for-profit business "is just not me."
Compartamos retains an altruistic public image. In a glossy promotional book entitled Historias de Exito, or Stories of Success, the bank boasts: "Our clients are agents of change who are building a better country and world." Among the inspiring narratives is that of Eva Yanet Hernández Caballero. She poses in one photograph behind a sock-knitting machine in her unassuming home near San Martín Texmelucan. A visit reveals a tale more complicated than the one Compartamos tells.
Hernández, 29, the daughter of a small farmer, says her mother purchased several knitting machines in 1992, but lacked cash for yarn. The equipment remained idle for years. A loan, Hernández thought, would enable her to buy nylon and more machines. She aimed to lure home her brother and two sisters, who she says are undocumented workers with restaurant and hotel jobs in the U.S. Over four years, beginning in 2001, she, her mother, and a sister took out a series of loans ranging from $200 to $1,800, at an APR of 105%. They rolled one into the next and used the money to increase their weekly output from 800 dozen pairs of socks to 1,500 dozen. At their peak, they say they brought in $800 a week, more than enough to sustain an extended family of six.
Then things unraveled. Wholesale customers fell behind on payments. Compartamos' steep interest rates took an unremitting toll, as Hernández and her relatives each missed several $130 payments to the lender. That was a lot for the rest of the 23-member borrowing circle to make up. Resentment surfaced. Soon after Compartamos trumpeted her story in 2005, Hernández and her family were banished from the group.
Lacking capital, she has seen her production and earnings plunge to 500 dozen pairs of socks and $270 a week. Her siblings remain north of the border. Stoic about her tarnished accomplishments, she is uncertain about the future. "It's been a huge effort," she says, "and we're barely afloat now."
Such frustrations are inevitable, says Carlos A. Danel, co-chief executive of Compartamos. However, "the rule is you're liable for each other's loans." The bank's rates are fair, he says, and have fallen significantly in recent years.
Compartamos representatives supervising the groups earn bonuses of up to 120% of their salary based on growth in the numbers of clients and loans. They urge borrowers to seek more credit as soon as they pay off each loan. Nearly 9 out of 10 do so, the bank says. Persistent indebtedness can create daunting burdens for customers, many of whom also have loans from Azteca, loan sharks, and other lenders. Few working-poor clients understand the concept of interest rates, Danel admits. "What matters [to most borrowers] is: How much do I have to pay every week or every month or up front?'"
Although Compartamos may have declared victory prematurely in the case of Hernández, there are other, more promising stories, such as that of Jenny Ramírez, a 24-year-old single mother whose marriage broke up after her husband left for the U.S. Until five months ago, she sold children's clothes from a sidewalk table. Compartamos loans, on which she pays an APR of 105%, enabled her to open a small store. "From the time I was a little girl, I loved money," she says. "I sold bread door to door. I sold Fuller brushes, I sold Avon."
Ramírez' group of 16 women calls itself Avanzando, which means "advancing." Yet even those who seem to be advancing encounter financial obstacles. At an October meeting in the unfurnished front room of a member's home off a dirt alley, the women buzz about a new fee for life insurance. Compartamos loans automatically include an insurance policy. Coverage lasts only for the term of the loan and pays any remaining debt if a borrower dies, as well as funeral costs. The Compartamos representative has told the group that at least 11 of them would have to buy additional insurance at a cost of $5.50 each, or else their group's loans would not be renewed. None of the women want the extra coverage. The cost may sound modest, but not to people teetering on the edge of insolvency. Reluctantly, the women draw straws, and Ramírez and her mother wind up among the unlucky 11 having to pay the extra $5.50.
Ramírez can't contain herself. "You forced us to buy these extra policies, and it's not fair," she says sharply to the bank representative.
Interviewed later, Danel, the co-CEO, says that the representative acted "overeagerly and wrongly" and that in the future insurance purchases will be entirely voluntary. But he stresses that Compartamos is no longer a charity. "A lot of people have suggested that financial inclusion can be a poverty alleviation tool," he says. "We're not out to prove that. We're out to provide financial services as opportunities to these clients, realizing that some people might make better use of them than others."