Microfinance: maximizing returns or social benefit?

By David Bornstein | May 8, 2007

For years, the field of micro-finance has struggled with the challenge of blending a social mission with a need to operate economically viable institutions. Some in the field have argued that, as long as microfinance organizations provide the poor with reliable access to credit, they should seek to maximize returns in order to attract investment capital.

Others, most notably Muhammad Yunus, the founder of the Grameen Bank, and winner of the 2006 Nobel Peace Prize, have contended that microfinance institutions should consciously seek to maximize social benefit, believing that a profit maximizing approach (the default stance in business) will ultimately lead to exploitative practices.

Now, the field has witnessed a major event that will breathe new vigor into this debate: the first IPO of a microfinance organization, Compartamos, based in Mexico. Compartamos, which charges an effective interest rate to poor clients of 105%, earned $57 million in profits last year, and recently netted $407 million in its public offering of 30% of its shares this past Friday. Accion International, a nonprofit organization that supports microfinance organizations and recieves donations from foundations and individuals, had invested $1 million in Compartamos, an investment that is estimated to be worth some $270 million now.

The Compartamos IPO is a historic event that raises many questions. It will clearly generate excitement among investors who are eager to expand into this newly legitimized 'market niche'. But what direction will it take microfinance? Is it ethical (and should it be legal) to earn windfall profits while charging poor people extremely high interest rates? How will microfinance institutions reconcile the drive for profits that is likely to come with the ongoing challenge of running businesses that purport to fight poverty?

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For an interesting discussion in the Yahoo "MicrofinancePractice" Group: See: http://finance.groups.yahoo.com/group/MicrofinancePractice/message/6924