A month ago I wrote a post singling out the Mexican state of Chiapas as a potential site of a coming repayment crisis. No, this is not a follow-up announcing that it has begun, nor am I rooting for one to start. In my next post, I will review the options that the Mexican microfinance sector has to avoid it, and what the global microfinance community can do to help. But for now, let’s dig a bit deeper into what a Chiapas crisis might mean, and why I continue to focus on Mexico, as opposed to the broader issue of excessive credit and over-indebtedness.
Let’s be blunt: not all countries are created equal. Some remember my warning three years ago about the danger of a credit crisis in Andhra Pradesh. Back then I compared a possible crisis in India to the crisis in Bolivia a decade before: "India is no Bolivia – if the bubble bursts there, the entire global microfinance sector will find itself reeling." Well, Mexico is no India.
A full-blown crisis in Mexico would be unlike anything we’ve seen, easily surpassing the negative impact of Andhra Pradesh. Consider, for a moment, what coverage of a Mexican microfinance crisis would look like. Certainly, there would be client horror stories. In Andhra Pradesh it was suicides; in Chiapas it may be something else, but the stories will be there. It takes more than just those stories to get people's attention. Chiapas has it all: high interest rates, large profits, official connections, and finally, the strong multi-level connections between Mexico and the United States.
The interest rates at Mexican MFIs start in the high double-digits and regularly exceed 100% APR. Much has been said about interest rates of the undisputed leader in Mexico, Compartamos Banco. And although its loans are cheaper than most of its competitors, the average interest rate of 104% (77% excluding VAT)[1] is still very high comparatively—so high that the general public is unlikely to be convinced by any argument, no matter how good, that justifies those rates. And even if in normal times the conversation could be diverted by pointing to stories of clients doing well, in a time of crisis such efforts would be drowned out by the client horror stories circulating in the media.
It’s not just interest rates that are high in Mexico. The profits of Mexican MFIs are among the highest anywhere. This is particularly highlighted by Compartamos, which has held the title of the single most profitable large commercial MFI in the world for five of the past six years.[2]] At nearly $100 million, its annual dividend payment to investors is larger than the balance sheets of most MFIs. To be sure, there’s nothing new here – the argument over Compartamos high interest rates and very high profits has been around since before the company’s IPO in 2007. But these two factors would become downright toxic when juxtaposed with media reports of impoverished and suffering borrowers coming out of Chiapas, where Compartamos has extensive operations.
Finally, add to this mixture the large amounts of official funding channeled from multilateral agencies in Washington DC (one report cited $64 million being lent to Compartamos by IFC and IADB in 2010), a significant equity stake held by one of the biggest promoters of microfinance in the US (Accion), and the extensive negative press on Compartamos that’s already out there. The result would be a PR nightmare for the whole sector.
And yet, as bad as it may seem, this confluence of factors is not my main reason for focusing on Mexico. Indeed, what makes Mexico so special has nothing at all to do with microfinance. The real danger from Mexico is its hold over the public consciousness in the United States. With its long northern border and a huge diaspora on the other side, Mexico has unique influence in the United States, spanning from culture to cuisine to politics and nearly everything in between. Indeed, I can’t think of any developing nation that commands such a large presence in a developed country. And unlike the Indian diaspora in the US, which comes mostly from an educated middle class that has little to no connection with microfinance clients back in India, most Mexican immigrants come from the same poor families that comprise MFI clients back in Mexico.
One should thus fully expect that a microfinance repayment crisis in Mexico would become an important news topic in the US, generating public and political awareness many times greater than the crisis in Andhra Pradesh ever did. Meanwhile, the strong voice of Mexican-American voters in a number of states could act as the channel to turn the resulting public outcry into political action. Diasporas have a way of combining well-organized lobbying with the ability to put a human face on events taking place far away. One should thus fully expect to hear client horror stories that touch directly upon American families, including those involving US citizens.
In the face of this pressure, how many politicians would be willing to stake political capital to defend practices that come with this seemingly toxic combination of high interest rates, high profits, and official funding? It’s not difficult to imagine scenarios that would result in major rollbacks to USAID's microfinance funding, along with probable repercussions to IADB and the World Bank's efforts in the sector. Such a chain of events is also unlikely to go unnoticed in Europe. The result would put into question the core sources of funding for the sector not just in Mexico, but around the world. After all, DFIs are ultimately political entities susceptible to changing political winds, and if they were forced to change course, it’s equally unlikely that private funders would be there to pick up the slack. Tim Ogden laid out a picture of how a local PR crisis could become a global funding crisis back in 2011.
Thus far, despite the fallout from Andhra Pradesh and elsewhere, funder support for microfinance has remained strong. That does not mean it is inevitable. It would be unwise to test their resilience again by letting a brewing storm in Chiapas go unchecked.
[1] Planet Rating, Social Rating of Compartamos Banco, Aug 2011
[2] MIX Market, return on assets (ROA) compared to other Banks and NBFIs with $50+ million assets