CASE STUDIES IN DONOR GOOD PRACTICES No. 19 January 2005 Donors Succeed by Making Themselves Obsolete: Compartamos Taps Financial Markets in Mexico by Maggie Dugan with Ruth Goodwin-Groen The support of international and Mexican donors helped Financiera Compartamos grow from a small, non-governmental organization to the largest microfinance institution in Latin America, raising funds in the financial markets while maintaining an unswerving commitment to serving poor women. Overview between the rich and the poor. Despite progress in Compartamos began microfinance operations in 1991 as a rebuilding the economy after the financial crisis of the small non-governmental organization (NGO) in Mexico. mid-1990s, 40 percent of the population was still living With the help of donors such as the US Agency for below the poverty line in 2003. International Development (USAID), the Inter-American Development Bank (IDB), the Consultative Group to Assist the Poor (CGAP), and several Mexican business- men, the NGO became a self-sufficient, regulated finan- cial institution in 2001. No longer reliant on donor funding, Compartamos is now a highly profitable (with 18 percent adjusted return on assets), pro-poor microfinance bank that is fully integrated into the financial sector. It has twice tapped the financial markets, in 2002 and again in 2004, by issuing local-currency bonds. Compartamos expanded its outreach significantly over the past 13 years. As of September 30, 2004, it boasted 100 branches in 22 Mexican states (including four of the poorest); 270,631 active clients; and a loan portfolio of US $79 million with only 0.63 percent of its loans late by more than 30 days. Most significantly, Compartamos has not lost sight of its mission to help poor people, particularly women: over 95 percent of its borrowers live A Compartamos client who is a potter in in rural communities and the bank's average loan size is Oaxaca, Mexico. (Photo: Luis Castaneda US $308. Nunez, June 2004). The institution owes its successful transformation to Compartamos began as a project of the NGO Gente intelligent management that focused on developing skilled Nueva. Inspired by Mother Teresa's commitment to aid human resources, attracting donors that recognized the the poor, José Ignacio Avalos created Gente Nueva in MFI's potential to become a commercial institution 1984 as a youth movement to promote social change and independent of subsidies, and eliciting the right mix of contribute to the economic development of Mexico. In technical and financial support from donors. 1990, it launched a pilot MFI to provide loans to rural Compartamos' donors took calculated risks that helped women in Mexico. Formally established as the NGO the burgeoning MFI stand on its own, rendering further Asociación Programa Compartamos in 1991, it became donor assistance unnecessary. financially self-sufficient in 1997 and a fully licensed The Development of Compartamos banking institution called Financiera Compartamos in 2001. Over the course of its trajectory from NGO to Mexico's per-capita income is the highest in Latin regulated finance institution, Compartamos benefited America, but the country struggles with huge income gaps from the support of several public and private donors. Page 2 A DIRECT Case Study Appropriate Funding two years instead of three, and the MFI's average return Donor funding, which amounted to only US $4.8 million on assets was positive within six months of signing the in grants, enabled Compartamos to mature through grant agreement. successive stages of growth, ultimately preparing it to tap "We always had the goal to reach one million clients, but [at] large-scale commercial funding. the beginning, it was really a romantic goal. CGAP helped us Start-up funding focused on technical skills. In 1990, make it a real target. This was the first time someone linked USAID provided Gente Nueva with a US $50,000 grant investing in us with our performance. CGAP proposed a grant contract linked to three targets and then they stood back and for a pilot microfinance project. The project funded staff watched us perform." training in FINCA's village-banking methodology in the Carlos Danel, co-chief executive officer, Compartamos Mexican states of Oaxaca and Chiapas. In 1993, the IDB extended crucial funding that allowed Compartamos to expand. The IDB's mix of grant (US $150,000) and loan Capitalization funding. In 1999, Compartamos teamed up (US $500,000) funds came with strict reporting require- with investor/partner ACCIÓN to apply for an inno- ments, plus specific instructions on how to use the vations grant from USAID. The US $2 million grant was technical assistance grant. When the IDB first funded disbursed through ACCIÓN in three parts: $800,000 Compartamos in 1993, the MFI had no track record. purchased equity in Compartamos, $1 million was lent to "They trusted us anyway," said Carlos Danel, co-chief Compartamos by ACCIÓN as subordinated debt, and executive officer of Compartamos. "IDB gave us our first $200,000 was extended as a technical assistance grant. real infusion of capital." The latter was used to initiate the MFI's outreach in Mexico City, an essential element of its future growth and "The IDB funding came at a moment when we were thinking long-term outreach. Until that time, Compartamos had as an NGO. We weren't thinking in a massive way, but in a focused exclusively on rural lending and had no products local way. Sometimes it was difficult to follow their rules, but or experience in urban markets. it helped us build a solid foundation." Ivan Mancillas, commercial director, Compartamos "It was [crucial that Compartamos] go into Mexico City to set up branches and develop products that made sense for urban Unrestricted funding. Between 1995 and 1998, lending. We couldn't reach our goal [of serving one million Compartamos received approximately US $300,000 in poor Mexican women] without this component." grants from six Mexican lenders. In addition to these Carlos Danel, co-chief executive officer, Compartamos grants, Alfredo Harp Helu, president of Banamex, the Citicorp subsidiary in Mexico, became an advisor to Compartamos and donated US $1 million to the MFI from Building Technical Capacity his own pocket, together with a US $300,000 grant from the Banamex social development fund. These donations Compartamos' donors and investors were seasoned helped Compartamos maneuver through a challenging professionals with the technical expertise needed to growth period. develop the institutional capacity of the young micro- finance institution. Two donors in particular, Alfredo Performance-based funding. In 1996, CGAP gave Harp Helu and CGAP, oriented the MFI in its early stages Compartamos a US $2 million, three-year grant. How- toward becoming a self-sufficient, commercial institution ever, in 1996, CGAP began using a performance-based serving the poor over the long term. model for MFI grants, and Compartamos was a strong candidate for testing the model. The first tranche of the Acquiring a banking mind-set. Banamex President grant was designated for installing accounting and Alfredo Harp Helu was Compartamos' first link to the management information systems. Successive funding private financial sector in Mexico. Harp brought tremen- was conditioned on Compartamos meeting three dous banking expertise to Compartamos, helping it performance benchmarks: (1) an arrears rate below 10 modify its lending techniques, strengthen supervision percent, (2) client growth of at least 25 percent annually, (and thus, portfolio quality), and raise its effective and (3) a specific annual target for return on assets for monthly interest rate to cover the cost of over 50 percent each of the three years. inflation. Compartamos outperformed the minimum CGAP "I had the feeling that supervision and control was key for the thresholds on every count. Its portfolio at risk over 90 development of the business. I helped them build systems." days was 2.3 percent in 1997 and dropped to 0.1 percent Alfredo Harp Helu, president, Banamex, and private donor to Compartamos by 2000. The goal of 39,000 active clients was reached in A DIRECT Case Study Page 3 Building management capacity and an international institution (specifically, a limited-scope financial network. When Compartamos applied to USAID for institution). It stopped soliciting donor funding, and in funding in 1995, five years after its initial training grant, October 2000 when it received its license for lending, the agency refused the request and suggested instead that Compartamos invited investors and private funders to Compartamos management attend the microfinance become equity partners. By the end of 2000, the MFI had training course at the Economics Institute in Boulder, raised US $5 million from shareholders. Four years later, Colorado. In 1996, Ivan Mancillas and Co-Chief Execu- as of third quarter 2004, Compartamos had multiplied this tive Officer Carlos LaBarthe attended the Boulder course, equity eightfold from retained earnings. where they were able to network with experts and other microfinance practitioners. Since then, 90 percent of the Total Clients vs. Average Loan Size, 1995-2003 Compartamos management team has attended the training course, deepening the skill base of its team. 60% Building efficient business systems. When CGAP began 50% working with the MFI in 1996, Compartamos did not even know the exact number of loans or total funds in its 40% own portfolio. "We didn't hide this fact," said Danel, "but 30% they were patient and helped us build a system so that we would know." CGAP Senior Advisor Rich Rosenberg 20% sensed that the Compartamos management was smart, 10% serious, and eager to learn. He was impressed with how, even at the earliest stages, Compartamos managed loan 0% repayment. "You have to be on the ball to get loans 1995 1996 1997 1998 1999 2000 2001 2002 2003 repaid. When you see people who are active, aggressive, and creative about that process, it's an encouraging sign. Grow th in Number of Clients It's probably the best single proxy of program perfor- Average Loan Balance as % of GNI per Capita mance and management capability." Source: World Development Indicators database (WB Intranet). CGAP advised Compartamos to take the time necessary Bond issues. In July 2002, Financiera Compartamos to establish a lending system required to reach a large issued a 200 million MXN bond (US $20 million) scale, including training loan officers, making loan guaranteed by the organization's financial strength. The decisions, following up on delinquent loans, and bond issue targeted retail investors to provide additional especially managing information. CGAP worked with the loan capital to increase the MFI's outreach. The three- co-directors to orient them on the basics of microfinance, year, 13.1-percent bond received an A+ rating from and then stepped out of the way. "[GCAP] didn't try to Standard and Poor's (S&P). In the first tranche for 100 drive us in another direction," said Danel. "They helped million MXN (US $10 million), 20 percent of the us do what we wanted to do, but better." investors were institutions and 80 percent were individuals. In the second tranche (issued in November Tapping the Financial Markets 2002 for 50 million MXN), institutional investors Mexican banking regulations put savings out of reach for purchased 50 percent of the bonds. The majority of the MFIs that were neither banks nor credit unions. So MFIs third and final tranche (issued in April 2003) was like Compartamos had to find a way to access capital purchased by the same types of investors. markets to fund growth. Compartamos adopted a strategy In 2004, Citigroup/Banamex placed a first tranche of 190 of building a profitable business model so that it could million MXN (US $16 million) in a bond issue totaling eventually become licensed and issue bonds. However, 500 million MXN (US $44 million). The issue received Compartamos first got its feet wet in the commercial AA local ratings from S&P and Fitch, thanks to a 34- sphere by pursuing bank loans, which still account for 40 percent guarantee provided by the International Finance percent of its liabilities. Issuing debt opened the door to a Corporation. All of these funds have been used solely to larger and deeper pool of funding in local currency at the finance portfolio growth. right price, allowing Compartamos to grow rapidly and diversify its funding base. Balancing growth, profitability and client interests. Compartamos' remarkable success in the bond market is Equity funding. In 1998, Compartamos began the based on its high profitability, low debt-to-equity ratio, transformation from an MFI to a licensed banking and prudent fiscal policies. For example, it funds much of Page 4 A DIRECT Case Study its 60 percent annual asset growth from retained earnings. institution serving poor people to do so profitably and To date, it has paid about 4 percent of current book value also remain true to its mission. in dividends to equity investors, 66 percent of which are socially responsible investors. Compartamos considers References these dividends to be largely symbolic: they are the Monica Brand. "The Business of Fighting Poverty: ultimate signal to investors that microfinance generates Microfinance as Social Enterprise." Stanford Business real profits. The MFI has financed both its growth and Magazine, May 2004, www.gsb.stanford.edu/news/bmag/ dividend payments by charging high annual interest rates: sbsm0405/ feature_global_microfinance.shtml. approximately 88 percent in 2004, down from 120 percent in 2000. There is much debate within the microfinance Monique Cohen, with CGAP staff and Deena Burjorjee. The Impact of Microfinance. CGAP Donor Brief, no. 13. community about whether its interest rates should be Washington, DC: CGAP, July 2004. further reduced. However, Compartamos believes that consistent significant growth and a financial institution Lucy Conger. "To Market, To Market." Microenterprise that is prudent, stable, and holds a long-term vision best Americas. September 30, 2003, www.iadb.org/sds/mic/ serves the greater needs of its clients. micamericas/ eng/3/index.htm. Pete Engardio. "Small Loan, Big Dream." BusinessWeek Advice to Donors from Compartamos Online. October 14, 2002, http://www.keepmedia.com/pubs/ BusinessWeek/2002/10/14/27347?extID=10026. Upon reflecting on their experience of the transition from an NGO to a fully regulated financial institution, the managers of Nimal A. Fernando. Transformation of Nongovernment Compartamos offer the following advice to donors: Organizations into Regulated Financial Institutions: 1. Understand an MFI's goals. Some donors are reluctant to Expectations Fulfilled? Manila, Philippines: Asian let go of their own agendas, and end up driving an MFI in a Development Bank, 2004. direction it wouldn't normally choose. Listen to the MFI and help it achieve its goals, not yours. Jennifer Meehan. "Tapping the Financial Markets for Microfinance: GF-USA's Promotion of This Emerging Trend 2. Help strengthen management. Undertake due diligence and Next Steps." Unpublished draft report for Grameen and work closely with the MFI to build a transparent relationship based on trust. Support training and technical Foundation, September 2004. assistance. Richard Rosenberg, with Joyita Mukherjee and Robert Peck 3. Keep contracts simple. Keep contracts short and to the Christen. "CGAP Appraisal of Compartamos." Unpublished point. Propose grant contracts linked to simple, clear, and report for CGAP, Washington, DC, 1996. credible performance targets. 4. Keep reporting requirements concise and focused. Richard Rosenberg. "Compartamos Completion Report." Reports are important, but can steal time and distract an Unpublished report for CGAP, Washington, DC, March 2001. MFI from doing what must be done to reach performance targets. Require information that is truly useful and helps Websites the donor monitor overall performance, not day-to-day activities. ACCION: www.accion.org 5. Don't require specific consultants. If a donor has taken Bellanet: www.bellanet.org time to study and understand the institution and its goals, it should be able to recommend advisors and technical Compartamos: www.compartamos.org experts. But do not require that MFIs work with specific Maggie Dugan is a writer and business innovation consultant and consultants. trainer. She thanks the following individuals for their contribution to 6. Ensure the MFI can run a consistent and profitable core this case study: from Compartamos, Carlos Danel and Carlos business, then help it access commercial funding. LaBarthe, co-chief executive officers, Ivan Mancillas, human Tapping capital markets allows an MFI to diversify its resources director, and Carolina Velazco, project manager; Alfredo funding. However, the institution must have the systems in Harp Helu, president, Banamex; and Richard Rosenburg, senior place to run a commercial operation at scale before such advisor, CGAP. funding is feasible. Conclusion Donors looking to support a success story like Compartamos must plan on making themselves obsolete from the outset. Successful MFIs use donor funding to become self-sufficient. Not only has Compartamos become fully integrated into the private financial sector of Mexico, it has proven that it is possible for a financial