Saturday, February 01, 2014

On the effects of for profit micro-lending (at Compartamos, Mexico)

Ever since its public offering, there's been a debate on the supposed morality of the profitability of Banco Compartamos (CGAP) to which I offer three points:

  1. Compartamos' clients chose (ie but weren't forced to use) Compartamos, not their competitors
  2. Compartamos grew dramatically faster than their competitors because they were tremendously profitable and reinvested those profits.
  3. Given Compartamos' interest rates were competitive with others, it isn't Compartamos that should be held accountable, but their supposed not-for-profit competitors who have chosen to divert profits towards expanding bureaucracies, lavish management compensation packages or highly unprofitable business models.
From a recent study on the effects of microfinance loans from Compartamos on their clients (PDF from via Freakonomics):
Our results suggest modest but generally positive average effects on our sample of borrowers and prospective borrowers. We make five broad inferences. First, increasing access to microcredit increases borrowing and does not crowd-out other loans. Second, loans seem to be used for both investment—in particular for expanding previously existing businesses—and risk management (through a reduction in asset fire sales). Third, there is evidence of positive average impacts on business size, reliance on/need for aid, lack of depression, trust, and female decision making. Fourth, there is little evidence of negative average impacts: the only “negative” impacts are reductions in asset purchases and temptation goods, and these results have normatively positive or neutral interpretations as well. Fifth, the positive effects are not sweeping or transformative. Although some of the AIT effects are economically large, and all of the statistically significant effects are likely large in treatment-on-the-treated terms, we find statistically significant effects on only 12 of the 35 more-ultimate outcomes we evaluate, and no positive effects on household/business income, consumption, or wealth.

These results, taken together with a paper showing strong price elasticities of demand for Compartamos credit (Karlan and Zinman 2013), contribute to a strong business and policy case for lowering interest rates: profits do not decrease, and social impact presumably increases (slightly). One missing piece for this case is evidence on heterogeneous treatment effects. If average impacts mask dispersion where some (potential) borrowers are much better off and others worse off, this would have important implications for modeling and policy concerned with the effects of expanded access to credit on inequality. We are undertaking further research to identify the presence or absence of heterogeneous treatment effects from Compartamos credit and hope that others will pursue similar inquiries in other settings.
I'd add a few additional thoughts. There has been tremendous pressure on Compartamos to reduce its interest rates but as this study suggests, the social impact of decreasing those rates would be "slight":
  • Wouldn't this mean that forgoing that additional profitability would mean fewer people would be served?
  • Does the "slight" improvement offset the benefits the additional borrowers that would otherwise be served?

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