Strength in Variety

Mexican society shows that institutional investors support microfinance when solid performance is evident

Fifteen years ago, while doing social work in rural nutrition and health at the Mexican NGO Gente Nueva (New People), Carlos Danel, Carlos Labarthe and a small group of volunteers discovered what some people called “microfinance.” It happened when they got involved with a communal banking program of the United States Agency for International Development (USAID). This discovery led to the creation of Compartamos, a microlending program that five years ago became a limited finance company (Spanish acronym SOFOL). During its first 10 years, Compartamos grew to be one of the largest microfinance companies in Latin America. During the eighth Inter-American Forum on Microenterprise in Santa Cruz, Bolivia, in October 2005, Compartamos received the Award for Excellence in Microfinance in the category of regulated institutions that make microfinancing available to a large number of entrepreneurs.

In 2005 the organization succeeded in expanding its services to the greater part of Mexico and bringing credit to women in rural areas, where 95% of its clientele reside. An average loan is US$308, and part of Compartamos’ value is in financing loans with resources from capital market investors more than from donor organizations.

Compartamos’ early days were not easy. Banks always requested solid collateral to finance the organization’s plans, and Compartamos had to wait until its third anniversary to become regulated, in 1990, and begin its first growth cycle. This occurred when the Inter- American Development Bank (IDB) financed one of its programs. With those funds, Compartamos achieved operational self-financing by 1995, and within two years began to turn a profit.

However, financial challenges remained. Outside of the banks, Compartamos’ growth came from retaining earnings and donations, which brought Danel and Labarthe to the decision to turn it into a SOFOL in 2000. Since then, it has all been smooth sailing. While in the 10 years from 1990 to 2000, Compartamos’ microfinance operations had mobilized US$6 million among 60,000 clients, in the five years after becoming a SOFOL, the portfolio had reached US$130 million and the number of clientele surpassed 400,000. “It’s not that we are pioneers; we have taken advantage of other models, such as the Acci On Network and the Microfinance Network,” says Labarthe.

The Mexican organization reached a landmark in 2004 when its portfolio surpassed 310,000 clients, it had 100 branches throughout most of Mexico, and the number of staff surpassed 1,300. The results, though not exceptional, were significant, with an outstanding performance in capital returns and assets. That year, when the organization won CGAP’s Transparency Award, Compartamos also inaugurated its training center with a capacity to train 250 employees in a one-year program.

There is a compelling reason behind this process: Compartamos has become an attractive investment instrument for the Mexican financial market. It issued its first bonds in 2002, beginning with US$20 million, all sold to individual investors. “It was an important moment of maturity because in the first three years [as a SOFOL] it was a struggle,” Danel Compartamossaid.

“But with the first bond issuance, we helped the [microfinance] industry to be seen as worthy of receiving money from capital markets.” That capital helped finance development in later years and also allowed the organization to stop depending on bank financing, an expensive alternative for capitalization. By the end of 2005, Compartamos was known for its sound financial discipline; it had repaid 75% of its 2001 issuance and was able to cancel the rest by February 2006.

In the midst of this process, an important event occurred: In October 2005, Compartamos again issued bonds for another US$50 million, and this time the demand not only exceeded the issuance by some 300%, but the buyers were institutional investors such as mutual funds and pension funds, and no longer the individual investors who acquired the first issuance. Financial Times labeled the issuance “Sustainable Deal of the Year.” “We are the first to issue debt backed with its own guarantee,” Labarthe says. “And we have shown the finance sector that this is an activity worth investing in. In five or 10 years we will speak of the niche that microfinance has in the finance sector and no longer view it as a separate activity.”

For 15 years, Compartamos focused on lending working capital and microcredit, but that money will now finance new projects, such as the microinsurance program initiated in June 2005 together with Citibank/ Banamex, Mexico’s largest bank. At the end of the third trimester of 2006, Compartamos and Citibank/Banamex will begin the second phase of this initiative, based on voluntary enrollment. In that phase, each client can buy coverage of US$1,300 by paying US$0.20 per week.

Compartamos’ latest challenge is to reach 1 million clients by 2008, in regions not yet covered in Mexico (such as the Northwest) and to continue expanding its assets, which surpassed US$170 million in 2005. The year 2006 should mark a new milestone if, as targeted, the microfinance institute surpasses 600,000 clients, opens 35 additional branches, expands its microinsurance and creates new credit tools, besides finalizing the steps to becoming a bank. All in all, the challenge is the same as from the start, 15 years ago. “The big motivation is the social and financial return that we generate: money reaches the people in the most direct way possible,” Danel concludes.