Behind its gentle image is a tough, highly lucrative bank. Banco Compartamos portrays itself as the gentler lender to Mexico’s poor. Compartamos means “let’s share,” reflecting the philosophy of its founders, the two Carlos’. The non-profit Grameen Bank model and the commercial for-profit Banco Compartamos have many differences, the fundamental distinctions between them is in their funding methods. Grameen Bank funds microloans primarily through local funds usually from savings deposits, while Compartamos Banco takes a funding approach that is similar to that of traditional commercial banks, including engaging in an IPO to fundraise.
Both institutions aim to reduce poverty, they both believe that reaching scale and financial sustainability is important. Business Model. While Grameen Bank pursues a social model (village bank), Banco Compartamos pursues a commercial model (commercial microfinance). Banco Compartamos believes that only a commercial microfinance business model could achieve this while Grameen Bank believes the profit should not be taken from the poor in order for the poor to really escape poverty. Institutions find it difficult to balance social impact and financial returns.
Compartamos Banco argues that the best way for microfinance to help the poor is for it to make a great profit. Compartamos also argues that its profits will build a microfinance industry. The more it earns, the more attractive microfinance will seem to investors, and the more capital will flow in. Evolution. Banco Compartamos was established initially as a non-profit microfinance institution. But because they wanted to scale, the “two Carlos” decided to make a shift and hold a SOFOL license. So then, they could reach capital markets that before as a NGO were not available to get.
This license allowed them also to be a for-profit Microfinance Institution. Further on in 2006, Compartamos became a commercial bank, since before they were limited to only offering credit for working capital. In order to offer more services, such as savings and insurance programs, they decided to transition to a commercial bank. The transition of Banco Compartamos also meant that their interest rates grew, and so did their capital. In the look for more capital and funds, “the two Carlos” decided to go public, which incremented the number of their investors. Pro-poor”.
The lending practices of Compartamos are not “pro-poor”. Despite the fact that in the origin of the Microfinance Institution was non-profit, and they had a well stablished social motivation. Their transition to a commercial bank, has made them care more about the “business” itself, rather than the individuals and the community. This evolution made of Compartamos a mainstream bank. The only purpose of microfinance institutions should be to help the poor out of poverty, and make a social impact in the community.
Banco Compartamos’ target should only involve the poor, with micro and small scale activities and consequently restoring the dignity to its beneficiaries, so they could see the importance of being masters of their destiny. Despite the fact that Compartamos stands out as an institution that produces extraordinary value for both shareholders and clients precisely because it has followed a fully commercial model with a double bottom line, it does not embrace the “ideal” social motivation and incentive.
Compartamos concerns more about the investors and the shareholders than the actually borrowers, the ones that should matter the most. IPO’s Impact. The Initial Public Compartamos refers to the first time a company publicly sells shares of its stock on the open market. The tremendous success of the Compartamos’ IPO has provoked debate and reflection about the commercial model of microfinance. The IPO Banco Compartamos received, gave it the advantageous access to capital markets for borrowing and raising additional equity.
In other words, Banco Compartamos had capital to loan to their clients in a short period of time, rather than in a long period of time. In short, Compartamos might have reduced interest rates somewhat, but instead used profits to achieve unprecedented outreach and to position itself for even greater outreach in the future. The IPO showed the capital markets that doing business with the poor can be profitable, which opens the way for huge amounts of capital to move into the fight against poverty.
Village Banking vs. Commercial Microfinance. In my judgment, I believe that the future of microfinance globally relies on the perfect balance between village banking and commercial microfinance. In other words, I consider that village banking should adopt the idea of “big scale”, like Banco Compartamos, so their social impact would be maximized. Additionally, village banking could evolution to a for-profit bank, this way it would be financially sustainable, therefore the bank would not depend on other people’s generosity.
However, in no way village banks should profit from the poor. The profit should not be taken from the poor in order for the poor to really escape poverty. Additionally, MFIs should highly encourage savings, since it is the pathway out of poverty. To be successful, MFIs must cut costs. But many of their expenses – which are passed along to users – are inevitable. In other words, MFIs should start using systems like MPeso, so they could cut back in expenses; and, consequently, have their interest rates decrease.
