Markets for the poor in Mexico

Helping the poor may be virtuous, but when the poverty industry starts losing "clients" because the market is performing good works, watch out, warns the Wall Street Journal.

For instance, Compartamos Banco is a Mexican bank that specialises in micro-financing for low-income entrepreneurs in a country that never used to have a financial industry serving the poor. Compartamos not only figured out how to meet the needs of this excluded population, but also how to make money at it. As a result, the bank has been growing fast:

In 2000, to raise new capital, it formed a for-profit company to utilise private-sector capital as well as loans and grants from government agencies and charities.

In 2002, it issued $70(R540) million (in debt, and four years later its client base had grown to more than 600,000.

After 10 years, Compartamos was financing 60,000 micro-borrowers.

With an average loan size of only $450(R3500), it now has more than 900,000 clients – 15 times as many as it had in 2000.

This strong growth suggests that the bank's for-profit model makes both borrowers and lenders better off. Yet the triumph is not good news for everyone. In the economic sector that Compartamos serves – those making about $10(R75) a day – the international charity brigade is at risk of becoming obsolete, says the Journal. Perhaps this explains why people who make their living giving away other people's money are badmouthing Compartamos for the vulgar practice of earning "too much" profit.

However, says the Journal, allegations of earning "too much" profit can be evaluated only by the market, when innovative new entrants see they can provide services at a better price. This has been happening since for-profit microfinance began to emerge, and the result has been greater competition. Rates have decreased, and the demand for and availability of services have increased.

Source: Mary Anastasia O'Grady, Markets for the Poor in Mexico, Wall Street Journal, June 30, 2008.

For text: http://online.wsj.com/article/SB121478119445214333.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 8 July 2008