Online Extra: Yunus Blasts Compartamos

Muhammad Yunus, who won the Nobel Peace Prize in 2006 for his pioneering work in extending credit to the working poor in Bangladesh, is aghast at the business strategies employed by a onetime charitable microlender that has become Mexico's most profitable bank, Banco Compartamos (BMOSF).

"They're absolutely on the wrong track," says Yunus. "Their priorities are screwed up."

Diametrical Views of Microlending

During a telephone interview from his office in the Bangladesh capital, Dhaka, the Vanderbilt University-trained economist—famous for creating a model for making small, affordable loans to the working poor—complained about the spreading commercialization of his work.

Yunus, 67, says he fears that his innovation has been twisted to benefit investors, rather than the poor. But he has particularly unforgiving words for microlender Compartamos. At one point during a conversation, Yunus objected to the mention of Compartamos and microfinance in the same sentence. "When you discuss microcredit, don't bring Compartamos into it," he instructed. "Microcredit was created to fight the money lender, not to become the money lender."

Clearly, many disagree with Yunus. Banco Compartamos' April, 2007 initial public offering and 53% average annual return has energized several lenders and investors who hope to replicate elsewhere around the world the bank's success in generating profits from such a seemingly unlikely source: the working poor.

Investors Say Everyone Benefits

Among Compartamos' early investors were wealthy bankers, the private sector investment arm of the World Bank, and a Boston-based nonprofit, Acción—itself backed by millions of U.S. tax dollars from the Agency for International Development.

Compartamos co-Chief Executive Officer Carlos Danel and some of those original investors say that commercial microlending not only benefits them, but profits generated enable a swift expansion of services to more borrowers than a donation-dependent charity could ever hope to reach.

But banks driven by profit, argues Yunus, charge excessive interest that only fattens bottom lines. Compartamos charges rates that can exceed 100% yearly once Mexico's 15% value-added tax is figured in. Yunus' Grameen Bank charges 20%, and plows all but 10% of its revenues back into operations. Globally, nonprofit microfinance institutions average interest rates of 31%.

Lenders Defend High Interest Rates

In Mexico, interest rates average 81%, in part because of Compartamos' dominance in the market, but also because Mexico's loan sizes are small and, say the lenders, costs are relatively high.

Grameen also uses savings deposits, rather than investment capital, to ensure plenty of funds for extending credit to the poor. Compartamos, which only became a full-fledged bank in 2006, is just now starting to take deposits. Compartamos also is experimenting with slight lowering of interest rates in selected regions of Mexico, to determine whether more people would seek loans.

Jose Luis Martínez Bixano, 31, Compartamos' regional manager in San Martin Texmelucan, thinks he already knows what the impact would be in his territory of 5,600 borrowers: An interest rate drop of only 1% from the monthly rate, now 4%, would enable him to extend credit to 1,000 more people, he asserts.

But Compartamos' co-CEO, Danel, considers rates now charged borrowers "appropriate for the product that we provide the client." He adds that interest rates have fallen 30% over the past six years "because we believe that as we gain efficiency we want to transfer that to the client."

Danel dismisses criticism from traditionalists such as Yunus. "In the end the idea is to grow aggressively and to reach as many people as possible in a short amount of time. It's not popular for everyone, but we think that for our situation, this institution, it works."