Compartamos in Context

Yesterday, I tentatively pinned a 195%/year price tag on Compartamos's microcredit. That raises a question: is 195% a lot? From many perspectives, the answer is obvious. But it is worth asking whether I have, within the Mexican context, unfairly singled out Compartamos. To check that, I ran a rough calculation on data on Mexican microcreditors that I downloaded from the Mix Market. (Thanks to Mix Market's Scott Gaul for simplifying my job.)Yesterday I distinguished between what Compartamos credit costs the borrower and the revenue that Compartamos earns. The latter leaves out the effects of VAT, forced savings, and compounding. And I estimated that Compartamos grosses 79.1%/year on its standard loan product. Now, that assumes that every borrower pays back in full. If we adjust for the Compartamos's reported loan loss rate of 2.64% in 2009, assuming it grossed --100% on 2.64% of its portfolio (a complete loss of principal) and 79.1% on the rest, then its gross portfolio yield---earnings as share of outstanding debt stock---should have been 74.3%. (That's in my Compartamos spreadsheet, on the right.) In fact, Compartamos reported a gross portfolio yield of 72.8%. Not a bad match between theory and data!The point is: knowing a microcreditor's gross portfolio yield and loan loss rate, which I can get from the Mix Market, I can reverse the calculations to back out a weekly interest rate and effective annual rate.This exercise, however, requires one giant assumption, whose necessity highlights the lack of a thorough MFTransparency assessment of Mexico: I must assume that, aside from the interest rate, every microcreditor offers the same terms as in Compartamos's Crédito Mujer: 16 equal installments in 16 weeks, 10% savings required up-front, no other fees. (I also assume the same VAT, which I hope is not controversial.) Probably this assumption is most realistic for creditors with average loan sizes similar to Compartamos's. Those are its peers.If you grant that assumption, then Compartamos looks average by Mexican standards (spreadsheet here):Effective annual percentage rate (APR) vs. average loan size, Mexican creditors reporting to Mix Market, 2009The real question then is why microcredit is so expensive in Mexico. I know some partial answers. High inequality in Mexico makes loan officers expensive relative to the small loans poor Mexicans can handle. And as Carlos Danel emphasized to me a few years ago, credit is expensive for everyone in Mexico. Maybe it has to do with monopolies or oligopolies in the banking industry.And at least in the case of Compartamos, a high profit rate also figures. Compartamos has defended its historically high profits as allowing it to grow faster and as attracting competition and building a dynamic industry in Mexico. Others see matters differently. I'll stray no farther into that debate today.