1 Managing the Double Bottom Line – The Compartamos Case Mathias Schmit 2 Table of Contents 1. Introduction ............................................................................................................................... 3 2. Expansion.................................................................................................................................... 3 3. Growth Strategy ........................................................................................................................ 4 4. Financing ..................................................................................................................................... 5 5. Profitability ................................................................................................................................ 5 6. Credits and interest rates ..................................................................................................... 6 Bibiography ........................................................................................................................................ 8 Appendix.............................................................................................................................................. 9 Figure A1: Percentage of clients per country .................................................................... 9 Figure A2: Debt-to-equity ratio (end of the year) ............................................................ 9 Figure A4: Net income after taxes and donations (USD) .............................................10 Figure A5: Application of Compartamos interest income (2005) ............................10 Figure A5: real cost of credit (Roodman, 2011) .............................................................11 Examples of credits ...................................................................................................................12 Cost of credits..............................................................................................................................17 Financial statements ................................................................................................................18 Mexico’s economic indicators in 2012 ...............................................................................23 Managing the double bottom line – The Compartamos case 3 1. Introduction In 2013, the Compartamos Group changed its name to GENTERA. The group has come a long way since the projected was started by a group of young entrepreneurs more than 20 years ago. In 1990, Asosiación Programa Compartamos (IAP) was founded as an NGO with the goal of eradicating financial exclusion for the most disadvantaged individuals by providing tailored financial services. Initial focus was on women exclusively but IAP also helped small business to develop thanks to its microfinance offering. Compartamos went public on April 20, 2007. Pre-IPO shareholders sold approximately 30% of their shares. No new share was issued by the bank so all proceeds went to shareholders. The shares that were sold brought roughly 450 million USD. This is 12 times their book value. Moreover, initial investors acquired their shares for about 6 million USD. All in all, these shareholders obtained almost a 100% per year return on investment over 8 years. Most of the acquirers were international investment funds and other commercial investors (Ashta & Hudon, 2009) Back to the present, GENTERA has now activities in 3 countries: Mexico, Guatemala and Peru. It is composed of 5 different companies and has also entered the insurance business. Clients from all companies amounted to 2 675 758 in 2012 and the group generated a net income of 2021 millions of Mexican pesos for a total assets of 22 833 millions of pesos 1. Section 2 presents the expansion of the GENTERA Group and of Compartamos Banco. Section 3 focuses more on the growth strategy. Financing and profitability are then developed in sections 4 and 5 respectively. Section 6 summarizes the debate about Compa rtamos’ credits and interest rates. 2. Expansion After the quick success of IAP, the goal of the NGO was “ to reach the greatest number of people in the shortest time possible” Its high growth pushed IAP to give up on its NGO status in 2000 and to become a non-bank-regulated financial institution. The first name of this institution was Financiera Compartamos but changed to Compartmos Banco in 2006. In 2007, Compartamos Banco went public through an initial public offering (IPO). Its shares started being traded on the Mexican stock exchange. 2010 was the beginning of the diversification process of Compartamos. It became a holding group for several companies and, in fact, the group, which changed its name to GENTERA in 2013, is now composed of 5 different companies. 1 On December 31, 2012, 1 Mexican pesos (MXN) was worth 0.0581 EUR and 0.0768 USD Managing the double bottom line – The Compartamos case 4 3. Growth Strategy Compartamos’ growth strategy was primarily based on increasing its outreach to increase its clients’ base in the shortest time. In 2012, the entire group totalized 2 675 758 clients, an increase of 9% compared to the year before. The great majority of these clients are borrowers from Compartamos Banco, which remains the central company in the group. Figure 1: Number of borrowers and depositors at Compartamos Banco 2 2 Source: MIX Market data 0 200000 400000 600000 800000 1000000 1200000 1400000 1600000 1800000 2000000 2200000 2400000 2600000 2800000 Number of borrowers Number of depositors Managing the double bottom line – The Compartamos case 5 For 15 years, Compartamos was not a bank and could not attract deposits. First deposits appeared in 2007 after it obtained a banking license the year before. However, the number of depositors really started to take off only by 2011. Nowadays, this number remains very low compared to borrowers. Women were the principal target of Compartamos. They accounted for 100% of borrowers in 1996 and still 93.76% in 2012. In that context, Compartamos Banco has developed tailored products like “Crédito Mujer” whose amounts range from 2500 and 30 000 Mexican Pesos and whose term is 16 weeks. It targets women who are part of a group of 12 to 50 members. From a geographical point of view, in spite of a clear willingness to grow internationally in the Americas, GENTERA remains highly focused and dependent on the Mexican market 3. 4. Financing Compartamos has been able to attract and to generate enough funding to cope with its fast growth. At the beginning of its existence, the NGO relied above all on grants and soft loans to finance itself. Between its creation in1990 and 2000, total amount of that type of financing amounted to 6.3 million USD. Conversely, these grants and soft loans disappeared after 2000, year in which the NGO became a commercial company. As developed in the next section, Compartamos generates high revenues and earnings. Until 2004, the company retained all earnings to fund its expansion and improve its outreach. It was hence growing mainly thanks to internal funding. According to Hudon & Périlleux (2011), most of the productivity gains generated by the company was kept as self-financing. Compartamos has attracted few depositors since it obtained its banking license (see figure 1). Deposits are not an important source of funding for the company. However, deposits are considered cheap funding and there is thus a lot of room for further growth financed by developing the deposit-taking business. About the company leverage, the debt-to-equity ratio was below 0.5 before 2000 and increased after the NGO became a commercial company but has always stayed under 2, except in 2001 4. 5. Profitability Compartamos is a profitable microfinance institution. The company has consistently generated positive net incomes 5 and free cash flows. Moreover, its returns on assets and on equity are very high compared to other financial institutions 6. 3 See Figure A1 in the Appendix 4 See Figure A2 in the Appendix 5 See Figure A3 in the Appendix 6 Average ROE for the banking sector was 7.46% as of January 2013 (NYU Stern data) Managing the double bottom line – The Compartamos case 6 Figure 2: Compartamos Banco indicators of profitability 7 The bank high revenues come mainly from its interest income, i.e. the interests paid by borrowers. Furthermore, Compartamos is highly profitable because the interest rates applied to its loans are much higher than necessary to cover its costs and also much higher than other financial institutions, both traditional and microfinance ones. As an illustration, in 2005, interest income amounted to 88.3% of gross loan portfolio. Similarly, 23.6% went directly to profit. On the other hand, 50% served to cover operating expenses and the cost of funds 8. A quick sector comparison gives a better idea of the level of Compartamos’ interest rates. In 2005, Compartamos adjusted interest yield was 86.3% while the median yields of low-end and village banking microfinance institutions were respectively of 35.4% and 4.2%. Even at the Mexican level, Compartamos’ interest yield is in the top tier but is not the highest one though. However, as seen on the figure above, a large proportion of interest income serves to cover operating expenses. In fact, loans made by Compartamos are usually very small and fixed expenses such as administrative costs cannot be fully reduced to match the size of the loan. In 2012, the average loan balance per borrower was 452 USD. 6. Credits and interest rates Examples of credits offered by Compartamos Banco can be found in the appendix. The amounts of these credits are relatively low. Most of the time, the loan is smaller than 30 000 pesos, with a maximum of 100 000 pesos. Moreover, the maturity is quite short. Most loans are repaid within two years. Before analyzing Compartamos’ interest rates in more detail, it has to be said that all Mexican microfinance institutions have raised their interest rates because of the heavy inflation and 7 7 Source: MIX Market data 8 See Figure A4 in the Appendix 0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% 70,00% ROA ROE Managing the double bottom line – The Compartamos case 7 devaluation in 1995 that was the result of the economic crises in 1976 and 1882. However, Compartamos still stands in the highest part for interest rates in Mexico. There is much debate about Compartamos interest rates. As developed in the previous section, the adjusted interest yield was around 86%. However, some experts and associations claim that interests paid by its clients are much higher than this yield. One way to look at these very high interest rates is to blame Compartamos for generating excessive profit by charging interest rates that are unfair to their customers who come mainly from the poorest segments of the population. Another way is based on the market theory: if there is an agreement between the bank and the borrower, it means that both can benefit from the transaction. The question that this argument raises is whether clients actually know how much they are paying. In any case, it very complicated to assess to what extent Compartamos considers the interests of borrowers and clients while making decisions (Rosenberg 2007) Waterfield (2008) states that borrowers at Compartamos actually pay 129% of interests. His observations and calculations are based on the use by Compartamos of the “flat interest method”. In short, a borrower normally pays back the principal and pays interests on the amount that has still to be reimbursed. The flat rate method works differently. Instead of calculating the interests on the amount still outstanding, interests are calculated on the principal. So one who borrows 10 000 pesos would pay interests on these 10 000 pesos even if he has already paid back 5 000 pesos. Interestingly, Compartamos does not actually use a flat rate when it calculates the interests. It only advertises it. Compartamos advertised a 4% monthly interest rate. However Waterfield noted that, as explained above, this rate is flat. Furthermore, it is calculated on a 4 weeks basis, so not a full month. Over a one-year period, clients pay basically one more month of interests. The flat rate, the 4-weeks months plus the taxes on added-value and some other indirect costs actually make the interest rate paid by borrowers reach 129% in 2008. Following Waterfield work, Roodman (2011) also calculated the actual interest rate paid by clients. He calculated the effective rate for the “Crédito Mujer” 9 . His results are even higher than Waterfield’s ones. The calculated real cost of borrowing is of almost 200% (195.29%) when forced savings are included 10. There are clearly significant differences between the advert ised interest rate, the bank’s yield and the actual cost to the client. These numbers should be used depending on what is being measured. However, these huge interest rates have generated lots of reactions. One from the founder of Grameen Bank and Nobel prize-winner Muhammad Yunus is particularly harsh 11 . He refuses to associate Compartamos Bank to microfinance. He claimed that “ They're absolutely on the wrong track ” and “ their priorities are screwed up. ” About the bank’s interest rates, he sai d that “ Microcredit was created to fight the money lender, not to become the money lender .” Furthermore, since the Compartamos IPO, the entire sector of microfinance faces tough criticism from some scholars. Hudon et al. (2011) speak about an “ethical crisis” in the field. 9 See appendix 10 See Figure A5 in the Appendix for a decomposition of Roodman’s results. 11 BloombergBusinessweek Magazine (2007), Online Extra: Yunus Blasts Compartamos, 12 December 2007 Managing the double bottom line – The Compartamos case 8 Bibliography Angelucci, M., Karlan, D. & Zinman, J. (2013), Win Some Lose Some? Evidence from a Randomized Microcredit Program Placement Experiment by Compartamos Banco , May 2013 Ashta, A. & Hudon, M. (2009), To whom should we be fair? Ethical issues in Balancing Stakeholder Interests from Banco Compartamos - Case Study , CEB Working Paper N°09/036, Centre Emile Bernheim, Solvay Brussels School of Economics & Management, Université Libre de Bruxelles BloombergBusinessweek Magazine (2007), Compartamos: From Nonprofit to Profit , 12 December 2007 BloombergBusinessweek Magazine (2007), Online Extra: Yunus Blasts Compartamos, 12 December 2007 Bloomberg website (http://www.bloomberg.com) Damodaran website (http://pages.stern.nyu.edu/~adamodar/New_Home_Page/home.htm) Dumont, G. & Schmit, M. (2013), Tier 1 MFIs Financial Performance: Cash-flow statement analysis , Version 1.0, 28 February 2013 Gentera website (http://www.gentera.com.mx/wps/portal/Gentera/Inicio) Grupo Compartamos Annual Reports (2012, 2011, 2010) Hudon, M. & Périlleux, A. (2011), Performance Management of Double Bottom Line Institutions: Evidence from Banco Compartamos’s Productivity Distribution , CEB Working Paper N°11/056, Centre Emile Bernheim, Solvay Brussels School of Economics & Management, Université Libre de Bruxelles Hudon, M. & Sandberg, J., The Ethical Crisis in Microfinance: Issues, Findings, and Implications , Business Ethics Quarterly Innovation for Poverty Action website (http://www.poverty-action.org) Macro Economy Meter website (http://mecometer.com) MixMarket website (http://www.mixmarket.org) Oanda website (http://www.oanda.com) Roodman, D. (2011), Does Compartamos Charge 195% Interest? , Center for Global Development, David Roodman's Microfinance Open Book Blog, 31 January 2011 Rosenberg, R. (2007 ), CGAP REFLECTIONS ON THE COMPARTAMOS INITIAL PUBLIC OFFERING: A CASE STUDY ON MICROFINANCE INTEREST RATES AND PROFITS, CGAP, Focus Note N°42, June 2007 The International Bank for Reconstruction and Development / The World Bank (2013), Doing Business 2014 – Economy Profile: Mexico , 11 th Edition, Washington Waterfiled, C. (2008), Explanation of Compartamos Interest Rates , Version 2, 19 May 2008 Managing the double bottom line – The Compartamos case 9 Appendix Figure A1: Percentage of clients per country (Source: Compartamos annuial reports) Figure A2: Debt-to-equity ratio at end of the year (Source: MIX Market Data) 93% 2% 5% Mexico Guatemala Peru 0 0,5 1 1,5 2 2,5 Managing the double bottom line – The Compartamos case 10 Figure A4: Net income after taxes and donations in USD (Source: MIX Market Data) Figure A5: Application of Compartamos interest income in 2005 (Source: Waterfield 2008) - 20000 000 40000 000 60000 000 80000 000 100000 000 120000 000 140000 000 160000 000 180000 000 1/1/96 1/1/97 1/1/98 1/1/99 1/1/00 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/12 23,60% 11,32% 3,40% 13,60% 36,40% 0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% 70,00% 80,00% 90,00% 100,00% % of gross loan portfolio Operating expenses Cost of funds Loan loss provisions Taxes Profit Managing the double bottom line – The Compartamos case 11 Figure A5: real cost of credit (Source: Roodman, 2011) Managing the double bottom line – The Compartamos case 12 Examples of credits 12 Tu Crédito Individual: Customer Type: Male/Female Use: Buy goods, grow his business or invest in equipment Security: Personal and/or collateral* *Subject to analysis of the customer’s credit history, amount and real estate ownershi p. Amounts: Between $10,000 and $100,000 Terms: Six to 24 months Payment Frequency: Monthly or bi-monthly Requirements: Be between 23 and 70 years old Present the original and a copy of your valid photo ID (voter’s registration card) Proof of residence (original and copy) Must own a business or be engaged in legitimate commercial, production or service activities Proof of time you have been in business Benefits When you take your Seguro de Vida Integral, we offer you the option to insure your spouse. Participation in events and competitions We pay off your debt in the case of death Invitations to training programs, free of charge, that provide guidance on improving your business management practices We offer you more than 21,000 pay points, and over 9,000 loan collection points 12 $ stands for Mexican pesos as it is used on Compartamos’ website Managing the double bottom line – The Compartamos case 13 Tu Crédito Mujer: Customer type: Female that belongs to a group Use: Short-term financing for working capital and/or to invest in business or commercial activity Amounts Cycle First Between $2,500 and $6,000 Second Between $2,500 and $14,000 Third Between $2,500 and $20,000 Fourth and above Between $2,500 and $30,000 Periods Eight bi-monthly periods Payment Frequency Frequency Payments Weekly 16 payments Every two weeks Eight payments Requirements Valid voter’s registration card as an official photo ID (original and copy) Proof of residence (original and copy) Must have your own business or operate an economic activity, although this product can also be granted to women who want to start a new business Benefits We renew your credit immediately No opening, administrative or arrears fees Possibility of increased loan amounts Improve your home with our Crédito Mejora Tu Casa Loans Free Life insurance We offer a toll-free Helpline with medical, legal and educational assistance Promotions and events designed exclusively for you We offer you more than 21,000 pay points, and over 9,000 loan collection points Managing the double bottom line – The Compartamos case 14 Simulation Managing the double bottom line – The Compartamos case 15 Tu Crédito Mejora Tu Casa Use Grow his business and/or make home improvements Amounts Minimum $5,000 Maximum $30,000 Periods Minimum Six months Maximum 24 months CM Frequency Frequency Periodo de Solicitud Weekly From the first week to the 12th week Every two weeks From the 1st fortnight to the 5th fortnight Payment Frequency Every two weeks or monthly Requirements Voter’s registration card as an official photo ID (original and copy) Must be up to date with “Tu Crédito Mujer” and/or additional payments Must be sponsored by a member of the Tu Crédito Mujer Group and have the solvency needed to meet your payment obligations Provide proof of earnings, purchase/sales notes and invoices, among others, if available Managing the double bottom line – The Compartamos case 16 Simulation Managing the double bottom line – The Compartamos case 17 Cost of credits * Without IVA (1) APR (Annual Percentage Rate). Annual rate, it reflects costs the institution charges to clients, including ordinary fees. Compartamos does not charge any ordinary fee to its clients. (2) CAT (Total Annual Cost). CAT is shown for illustrative purposes only, and to be compared only with similar credit products from other financial institutions. APR and CAT were calculated as Nov 1, 2013. Information concerning products is subject to change. P r o d uc t L o a n a m o unt (m x p ) M a t ur it y A P R (1) C r é d it o M uj e r (W o m e n C r e d it ) $ 6, 01 1 16 we e k s 77.3% 115.5% * C r é d it o A d ic io na l (A d d it io na l C r e d it ) $ 3, 00 3 11 we e k s 76.8% 114.3% * C r é d it o I nd iv id ua l (P e r s o na l C r e d it ) $ 10 ,0 07 12 m o nt hs 72.5% 102.2% * C r é d it o C o m e r c ia nt e (M e r c ha nt C r e d it ) $ 5, 00 5 10 e v e r y t wo we e k s 82.9% 126.0% * C r é d it o M e j o r a T u C a s a (H o m e I m p r o v e m e nt C r e d it ) $ 10 ,0 04 12 m o nt hs 69.2% 96.0% * I t d o e s n ́t a p p ly I t d o e s n ́t a p p ly I t d o e s n ́t a p p ly I t d o e s n ́t a p p ly I t d o e s n ́t a p p ly I t d o e s n ́t a p p ly A v e r a g e C A T (2) we e k ly p a y m e nt A v e r a g e C A T (2) b iw e e k ly p a y m e nt A v e r a g e C A T (2) m o nt hly p a y m e nt I t d o e s n ́t a p p ly I t d o e s n ́t a p p ly I t d o e s n ́t a p p ly I t d o e s n ́t a p p ly Managing the double bottom line – The Compartamos case 18 Financial statements Managing the double bottom line – The Compartamos case 19 Managing the double bottom line – The Compartamos case 20