Question 1
Microfinance’s have gained popularity among the many in the low-income category. Microfinance and microcredit facilities targets to provide poor people with small loans. The loan provided attracts low-interest rates and can be paid over a reasonable period without overburdening the poor to eradicating poverty. The services have been popularized by Nongovernmental organizations and social entrepreneurs between 1970s and 1980s.
In Bangladesh Grameen Bank was the first to be established in 1976. The microfinance was founded by Mohammad Yunus, who is an economics professor. The professor targeted to eliminate poverty from the local villager hence, the model adopted by the bank was leading to the low-income population. The people were to be organized into groups; there were no collateral requirements, focus on women as the main clients, practice of direct selling model and establishment systems to allow progressive leading. The practice of continuous leading has helped the Grameen microfinance to scale up and provide services to over 7.5 million villages in the country. Yunus the founder of Grameen bank practices social entrepreneurship with the primary objective of increasing access to the social innovation over growth of the organization for personal profitability.
In the other side of the Banco Compartamos founded by Jose Ignacio in 1990 is a microfinance that targets low-income entrepreneurs. The microfinance for long, operated as a nonprofit organization depending on grants and soft loans from international organizations to provide finances to the low-income population which was mainly rural women. The microfinance demand for more capital has however changed its operation into a commercial enterprise. This way the microfinance has lost much of the initial founding objective of providing financing to the low-income earners to become a commercial microfinance.
Compartamos over dependency on large bank funding with strict payment deadlines risks exposing the poor borrowers. The objective of microfinance’s according to YUNUS Grameen Bank model is to protect the poor from the strict demand of exploitative money leaders. The Compartamos Banco also needs to meet the investor demands of profitability without necessarily looking at the social responsibility of the village banks. The bank’s main focus is on sustainability and efficiency of the business model without necessarily emphasizing on the social impact on the poor as the case with the village banks (Angelucci, Karlan, and Zinman).
Question 2:
Banco Compartamos have evolved from a nonprofit making organization that depends on grants and soft loans from donors into a commercial microfinance that is a publicly traded company. The model has evolved basically to raise more finances to reach a larger population. The company accessed the capital market for more funding; however the company had to convert to a profit making organization that is allowed to trade in the Mexican stock markets. This was done through obtaining the SOFOL license. The company desire to offer insurance and saving services forced them to convert to a fully licensed and regulated bank. This has made the company access more capital hence faster expansion.
The desires to raise more capital led the company to go public. The microfinance became the first to seek initial public offer to attract new investors. The IPO raised $450 million which the chief executive officer argued will be used to provide more credit to the poor population.
Quetion3:
The company has increased its leading base after the IPO. They can reach a larger population due to increased capital. However, making the company public has several impacts to the borrowers. The objectives of the microfinance shift towards sustainability and profitability. The commercial microfinance can access to a larger population of poor people but the loans provided are at high-interest rates. Borrowing from the Compartamos at the moments is not like borrowing when the organization was a village bank. A borrower at present has the responsibility of paying taxes, borrowing fees, and the interest loans. These associated costs make borrowing expensive hence unaffordable to the poor (young).
The commercial microfinance’s also has an obligation towards the investors. This makes the profits idea more important that the social impact objective of micro finances. Pressure from the stakeholders may make public microfinance's to engage in unethical practices that are designed to protect the shareholders. Defaulters may face intimidations and loss of their property to recover the borrowed money (Vargas-Hernandez).
Question 4:
The future of microfinance is critical to the development of any country. Microfinance plays an essential role in empowering the poor in wealth creation; the idea, however, has been hijacked by other entrepreneurs for profit. The main objective of the microfinance is social impact an idea that does not resonate well with the commercial micro finances that are out to tap into a large number of unbanked populations. Even though the commercial micro fiancés have more capital to lead to the borrowers, they lose many benefits associated with microfinance. The pressure from the investors and associated taxes makes it difficult for the microfinance to meet the social impact objective of microfinance.
Village banks on the other side may lack substantial capital base however they remain faithful to the call of impacting to the society. With time Grameen Bank has proved village banks can grow and serve the interests of the poor borrowers with no pressure from investors. It is hence clear that village banks hold the future to for micro finances.
Reference
Angelucci, Manuela, Dean Karlan, and Jonathan Zinman. "Microcredit Impacts: Evidence From Randomized Microcredit Program Placement Experiment By Compartamos Banco". American Economic Journal: Applied Economics 7.1 (2015): 151-182. Web.
Young, Jesse. "Banco Compartamos Analysis". Global Social Enterprise ENTR 2206 -01 (2014):
Vargas-Hernandez, Joss G. "Social Responsibility Of Microfinance Banco Compartamos Case". SSRN Electronic Journal n. pag. Web.
