Microfinance Experts Criticize Mexican Bank

Banco Compartamos(BMOSF Quote) posted a 14% increase in quarterly profit on Friday, but leading microlending advocates say the bank's gains have come at a detriment to the poor Mexican citizens it purports to help.

During a conference call Monday from the Asia-Pacific Microcredit Summit, several advocates chastised those who charge "loan-shark" interest rates and criticized Compartamos' initial public offering last year. Microlending should be performed by banks and nonprofits that operate within the country, they say, and better oversight is needed to ensure competitive rates and ethical collection practices.

"Microfinance doesn't need the capital markets," says Muhammad Yunus, who won a Nobel Peace Prize in 2006 for his work as founder of Grameen Bank, a microlending pioneer for impoverished Bangladeshis.

Such charges have implications not just for profit-hungry microlenders but for socially responsible investors who want to put their money to good use and also see healthy returns. While the commercialization of microlending has expanded the availability of loan capital, Yunus predicts it will "lead to a lot of speculation and an eagerness to hike up the prices."

Interest rates on microfinance loans vary widely, depending on the market and size of the loan. Chuck Waterfield, founder of Microfin, a microfinance software company and former microenterprise director of the anti-poverty group CARE, estimates that the typical loan in Bangladesh has a 20% to 25% interest rate, due to broader availability, while those in Latin America are in the range of 40% to 45%.

In Mexico, where Compartamos dominates the microfinance market, interest rates are often above 100%.