Microfinance Experts Criticize Mexican Bank

"It's not a market rate," Waterfield says, "it's what-a-market-can-bear rate."

Waterfield's firm is collecting data on lenders' microloan rates in developing countries to add transparency and boost competition. The smaller the loan, the higher the interest rate, because the cost of servicing those debts is much higher.

Compartamos notes that its customer base operates on relatively small loans and that if its average loan size were double the current level, it could slice interest rates in half. The bank argues that its rates may seem high compared with those in other markets but are on par with those of other Mexican lenders.

Carlos Danel and Carlos Labarthe, co-CEOs of the bank, also note that the Mexican economy is pervaded by informality, unemployment, weak property rights, inability to size or price assets, feeble legal recourse and a lack of consumer credit history. These factors make servicing small debts even more costly and difficult than doing so in more developed markets.

"A plea for lower interest rates is in fact a plea to increase the size of our loans significantly," they say in an open letter defending the bank's business. "Doing that can only have two outcomes: the over-indebtedness in our clients or moving to a different segment of the market, which amounts to mission drift."

Still, Yunus argues that lenders should "look at it from the cost side, not the market." He estimates that interest rates should factor in the cost of acquiring funds, plus 10% for other business expenses. He said 10% to 15% is "slightly on the high side," while those who tack on more than 15% have "just left the microcredit area and joined the loan-shark area."

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