Microfinance: doing well by doing good?

Felix Salmon writes,

Outsize Returns From Investing in Microfinance

In April, Mexico’s Banco Compartamos went public, raising $450 million. By the end of the first day’s trading, the bank was worth more than $1.8 billion, and the people who had invested money in the bank during its early days found themselves sitting on enormous profits. It was a glorious day for Mexcian capitalism – except for one small problem: Banco Compartamos is a microfinance institution, devoted to improving the lives of the poor. What was it doing, then, improving the lives of already-rich private shareholders instead?

Development group CGAP was one of the early supporters of Compartamos, although it gave grants rather than equity capital, so it made no profit on the IPO. The group has now released a comprehensive report by Richard Rosenberg about what happened, and whether the outsize IPO profits came at the expense of the poor people Compartamos was founded to serve. In a word, it seems, the answer is yes.

The Compartamos numbers are stunning. It has a return on equity of more than 50% – something more or less unheard-of in the banking world. The interest rates that it charges borrowers are more than 100% per annum…

Story here.

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