Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world
Americas+1 212 318 2000
EMEA+44 20 7330 7500
Asia Pacific+65 6212 1000
Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world
Americas+1 212 318 2000
EMEA+44 20 7330 7500
Asia Pacific+65 6212 1000
That feel-good story ended with the first microfinance IPO, in 2007, involving Mexico’s Banco Compartamos. Founded in 1990 as a nonprofit that followed the teachings of Mother Teresa, Compartamos converted to a commercial bank in 2000, then used investments from the World Bank and Accion International, a financial inclusion organization, to transform itself into the model of a for-profit microfinance company. When it went public, the company had an implied valuation of more than $1.5 billion, providing a windfall to founders and early investors.
The World Bank made $210 million. Accion, which invested $1 million it received from the U.S. government, saw the value of its stake balloon to $350 million, much of which was used to seed additional profit-seeking microlenders. Those gains came at the expense of borrowers who paid interest rates higher than those at other Mexican banks and credit unions and often took on more debt than they could handle. Accion didn’t respond to requests for comment.
For many banks and impact investors, the IPO was like ringing a dinner bell. When India’s SKS Microfinance went public in 2010, the fund management arms of Morgan Stanley and JPMorgan, and George Soros’s Quantum Fund, were among the investors, according to a report from the Consultative Group to Assist the Poor, an industry organization housed at the World Bank. U.S.-based venture fund Sequoia Capital was another early investor.
SKS was the biggest microlender in the state of Andhra Pradesh and was criticized by human rights groups and lawmakers there in 2010 after local media reported more than 200 suicides linked to over-indebtedness. The Associated Press reported in 2012 that SKS managers had been aware debt collectors were forcing borrowers to pawn possessions and harassing them verbally and physically. SKS denied any wrongdoing.
Citigroup, a backer of Accion, has helped channel hundreds of millions of dollars to microlenders, including Compartamos and Jordan’s Tamweelcom, which has reported dozens of delinquent borrowers to authorities, landing them on police wanted lists, legal filings reviewed by Bloomberg News show. A spokesperson for Citigroup said the bank only works with “microfinance institutions whose lending and collection practices are best in class and who treat all borrowers respectfully.” Tamweelcom didn’t respond to requests for comment.
While Citigroup CEO Jane Fraser has been closing some consumer operations in the developing world, the bank remains committed to microfinance—to being what former global director of inclusive finance Bob Annibale once called “the bank to the bank to the poor.” Last year it sold a $1 billion social finance bond as part of a wider pledge to invest $1 trillion in what it calls sustainable finance by 2030. It also arranged $70 million in loans for Compartamos through the U.S. International Development Finance Corp., known as DFC, and the Japan International Cooperation Agency. Citigroup’s mission, the spokesperson says, is “to empower micro-entrepreneurs around the world.”
That’s not how things have worked out for Compartamos customer Cristina Pina. The 58-year-old baker in Villa de Zaachila, Mexico, near Oaxaca, got sucked into a vortex of debt two years ago. After saving to make a $2,500 down payment on a piece of land, she lost her job during the pandemic. She took out a $500 Compartamos loan at an annualized 100% rate to help finish paying for the land and avoid losing her equity. She ended up borrowing from other lenders, some at even higher rates, to repay Compartamos and is now juggling six loans.
“Before you know it, I am borrowing to pay, pay, pay, pay,” Pina says at a coffee shop near the town’s central plaza one day in September, opening a small floral print notebook where she keeps track of past and future payments. “Borrow, pay. Borrow, pay. Borrow, pay. We are stuck, and there is no way out.”
A spokesman for Compartamos, now owned by Gentera SAB de CV, said in an email that Pina has been “a valuable and responsible client” for many years and that the bank allowed her and others to defer payments for three months during the pandemic. Chief Executive Officer Patricio Diez de Bonilla says it’s not always easy to know if customers have other loans. “Before Compartamos,” he says, “they didn’t have access to credit, so it is better than not having credit or going to loan sharks.”
CrediClub
37%
FinComún
19%
Compartamos Banco
19%
Alternativa 19
del Sur
18%
Progresemos
16%
Solución Asea
15%
Apoyo Económico
12%
CrediSelect
11%
Te Creemos
8%
CAME
5%
FinAmigo
4%
Bienestar
2%
Banco
Forjadores
–5%
SEFIA
–6%
CrediClub
37%
FinComún
19%
Compartamos Banco
19%
Alternativa 19
del Sur
18%
Progresemos
16%
Solución Asea
15%
Apoyo Económico
12%
CrediSelect
11%
Te Creemos
8%
CAME
5%
FinAmigo
4%
Bienestar
2%
Banco
Forjadores
–5%
SEFIA
–6%
Compartamos is now the largest microlender in Latin America, with more than 2.5 million customers. It has 40% of Mexico’s microfinance market and is one of the country’s most profitable financial institutions, posting a return on equity in 2019 and 2021 that exceeded 20%, according to company filings, almost double what Mexican banks earn on average.
Despite those profits and advertised charges for microloans that put its annual interest rates well above 80%, Compartamos continues to receive U.S taxpayer money from development bank DFC. Pooja Jhunjhunwala, a DFC spokeswoman, declined to comment about Compartamos but said the agency has a robust vetting process and is committed to funding only those lenders that are both financially solvent and socially responsible.
But those due diligence reviews downplay consumer protection, according to half a dozen current and former DFC executives who asked not to be identified because they aren’t authorized to speak about the program. Microfinance lenders are required to open their books to show their long-term viability, the executives say, and they’re asked questions to ensure they aren’t involved in child labor, human trafficking or environmentally damaging businesses.
They’re also supposed to follow client-protection standards developed by the industry-funded Smart Campaign, which include transparency and responsible pricing, according to Jhunjhunwala. Yet the reviews contain few specific guidelines about what debt loads, interest rates, profit levels or collection tactics should be considered unacceptable, the former executives say. The Smart Campaign said in 2020 that it was suspending operations, ending its certification program and handing off its library of resources to two other industry-funded groups.
Sophie Sirtaine, CEO of the Consultative Group to Assist the Poor, said in an email that although microloans have helped millions of low-income people around the world, policy makers, investors and lenders can do more to protect borrowers. “Development funders should incorporate consumer protection considerations in their funding’s due diligence,” she said. She cautioned against focusing on capping interest rates. Doing so, she noted, might “make it unviable to serve excluded or underserved segments and may push responsible providers to close.”
After the Compartamos IPO, donors pressured microlenders to release balance sheets and loan terms. MFTransparency, a consumer-advocacy group, pressed for responsible pricing and published details about costs and profit margins. But as the industry became more commercial, the lenders’ transparency faded, says Chuck Waterfield, who founded the group in 2010. After it published a report showing some microlenders making profits of more than 25%, the pushback intensified, Waterfield says. By 2015, lenders had become so reluctant to release information about the cost of loans that he disbanded the organization.
Waterfield says that when he spoke at conferences and described business models that would allow a reasonable profit, “someone from an impact investing firm would come up and tell me, ‘You’re right about all that.’” Then they’d tell him they had clients who wanted 25% returns.
$2,067
$225
2009
2018
$2,067
$225
2009
2018
Cambodia is a poster child for what can go wrong. The loan portfolio of microfinance companies there has increased about 13-fold in the decade that ended in 2021, to $8.7 billion, according to the Cambodia Microfinance Association, as lenders expanded into offering new credit products, including household finance and loans to small and medium-size businesses. In 2009, LOLC Cambodia, one of the country’s largest microlenders, reported that micro loans accounted for 99% of its gross loan portfolio and household finance just 1%. By 2018, micro’s share fell to 65% and household finance grew to 22%, according to a Bloomberg analysis of data compiled by the Microfinance Information Exchange, or MIX, an industry initiative.
By 2020, one in five adults had a microloan, according to a report by industry group Microfinance Index of Market Outreach and Saturation, also known as Mimosa, which gave the country its worst credit-saturation score. When the National Bank of Cambodia imposed an 18% rate cap in 2017, lenders increased loan sizes and tripled commission fees, exacerbating the problem, according to an International Monetary Fund report.
Cambodia is also one of the only countries that requires microfinance borrowers to post collateral such as land titles. In a 2020 survey of borrowers, 45% said seizing asset collateral was the second-most common means of collecting delinquent loans after verbal reminders, according to the Mimosa report. It warned that “client protection regulation needs substantial strengthening to ensure long-term market sustainability.”
One borrower who could have used some protection is a 47-year old widow named Nan who took out a $4,500 loan from LOLC Cambodia three years ago to repair her one-room wooden house. Nan, who asked that her last name not be used because she feared retribution, stopped making her $129 monthly payments after Covid-19 ripped through the country and her daughter lost her job as a garment worker. That’s when loan officers on motorbikes started showing up at night in her village in central Cambodia, telling her to go out and find money to repay them. When she couldn’t borrow any more, she says, they pressured her to sell her home and land to repay the debt. She sold the property two years ago and moved in with her daughter.
“They forced me to go out to find money for them at night” and wouldn’t leave until she paid them, says Nan, sitting in a makeshift bedroom under a house built on stilts, protected from the elements only by sheets of corrugated metal. “They came like they wanted to rob us.”
LOLC said in an emailed statement that it never received any complaints from Nan and that it does not pressure borrowers to sell their homes to satisfy their debts.
Regardless, Nan says she sold her land for $9,000, substantially less than the $20,000 it was worth, because the loan officers told her she had to sell quickly. She says she used the proceeds to pay back LOLC Cambodia and others she’d borrowed from, and to settle another microfinance debt.
Nan is one of thousands of women forced to sell their land or homes to repay microloans, according to estimates by the Cambodian League for the Promotion and Defense of Human Rights. The group, known as Licadho, has been documenting reports of abuses by microlenders for years. “This is a massive crisis that demands urgent action from investors and regulators, as well as relief for borrowers,” says Naly Pilorge, the group’s outreach director.
LOLC Cambodia started in the 1990s providing cheap loans to poor rural women. It was founded under another name by Catholic Relief Services, a U.S.-based charity affiliated with the Catholic Church. As microfinance became more profitable in Cambodia in the 2000s, when the country had one of the fastest-growing economies in southeast Asia, foreign capital poured in. Developing World Markets, a U.S.-based impact investor, bought the lender in 2010 and sold it to LOLC Holdings Plc in 2014. By September, its average loan size had increased more than fourfold to about $3,000. Last year, the lender said it plans to more than quadruple its loan book by 2025 and boost net profit by about 350%.
500
400
300
200
100
0
Gross loan portfolio
Microfinance
Household
Small/medium enterprise
$500M
400
LOLC didn’t report what share of its portfolio was for microfinance in 2015
300
200
100
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Microfinance
Household
Small/medium enterprise
Gross loan portfolio
$500M
400
LOLC didn’t report what share of its portfolio was for microfinance in 2015
300
200
100
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Microfinance
Household
Small/medium enterprise
Gross loan portfolio
$500M
400
LOLC didn’t report what share of
its portfolio was for microfinance in 2015
300
200
100
0
2009
2018
Majority-owned by the family of Ishara Nanayakkara, LOLC Holdings is one of Sri Lanka’s most profitable listed companies and a recipient of more than $500 million in loans and guarantees from development banks, a review of filings shows. It was set up with the help of the World Bank’s IFC in 1980 to provide lease financing for construction equipment but now calls itself the world’s largest multi-geography microfinance platform, with operations in Myanmar, Indonesia, the Philippines, Pakistan and elsewhere. In 2020, LOLC Holdings sold its 70% stake in Cambodia’s biggest microfinance institution, Prasac, for $603 million.
PRASAC
29%
LOLC
27%
Chamroeun
19%
AMRET
17%
AMK
15%
MNK
15%
Sathapana
14%
HKL
14%
KREDIT
12%
WB Finance
11%
ACLEDA
10%
Borvor Finance
6%
Maxima
5%
NongHyup Finance
2%
First Finance
1%
IPR
1%
PRASAC
29%
LOLC
27%
Chamroeun
19%
AMRET
17%
AMK
15%
MNK
15%
Sathapana
14%
HKL
14%
KREDIT
12%
WB Finance
11%
ACLEDA
10%
Borvor Finance
6%
Maxima
5%
NongHyup Finance
2%
First Finance
1%
IPR
1%
While Nan and many other borrowers lost income during the pandemic, LOLC Cambodia posted a record net profit of $45.4 million in 2020, up 33% from the previous year. Its return on equity that year was 28%, more than three times the average for commercial lenders in Cambodia. Despite reports about abusive practices, it has received more than $25 million from French and Norwegian development banks since 2020, a review of their portfolios shows.
U.S. officials were so concerned about borrowers in Cambodia losing their homes that many argued against subsidizing microlenders that accepted land titles as collateral. “It’s unethical to create secured lending to the poor based on mortgages or land titles because the poor, by definition, can’t repay,” says Wade Channell, a former senior economic adviser at USAID. “What you end up creating is a homelessness project.”
Still, investors kept pouring into Cambodia. The IFC arranged $425 million in loans in the past two years to three microlenders implicated by Licadho in land sales. LOLC wasn’t among the recipients. The IFC said it had received assurances from government regulators that there hadn’t been any forced land sales. It said it vets all recipients according to strict guidelines regarding responsible finance, particularly in overheated markets like Cambodia, and is working with local microlenders to bolster client-protection principles. “We have become much more selective about who we do business with in Cambodia” and have stopped funding some lenders, says Martin Holtmann, an IFC microfinance official, declining to identify which lenders were cut off.
Proparco, a subsidiary of France’s taxpayer-funded development bank, said it had halted new investments in Cambodia a few years ago because borrowers were over-indebted. But it said it had found no evidence of “systemic unethical behavior,” and it defended its existing investments in LOLC and two other microlenders. “We are only rolling over our positions with existing clients with whom we are really confident on the client-protection front and with their responsible attitude,” says Jeremy Brault, Proparco’s director of financial inclusion. “Some worrying reports have been out in the press, that is why Proparco has been, and still is, very focused on the reliability of the institution to avoid such cases.”
LOLC Holdings said in an email that it hasn’t received any complaints from borrowers about pressure to sell their homes. “We have a rigorous policy on fair and ethical business practices which is compliant with the regulatory requirements as well as global best practices,” the company wrote. The firm said its profit projections are based on expanding lending to small and medium-sized businesses.
The Cambodia Microfinance Association said in a 2021 report that it had found no evidence that forced land sales were a widespread problem. In 2020, the central bank asked microlenders to restructure delinquent loans during the pandemic. While that may have helped borrowers temporarily, it also meant interest kept piling up.
“I wanted everything to be over,” says Madhuka Kumari, a 30-year-old mother of five, sitting on the veranda of her sister-in-law’s house near an elephant preserve in central Sri Lanka. “Everyone was shouting at me. Dying felt like the only option.”
Kumari had borrowed $425 from LOLC Finance, a Sri Lankan lending unit of LOLC Holdings, to start a small business selling mats. When heavy rains made roads impassable and she fell behind on her monthly $30 payments, loan officers came to her house near the town of Minneriya, she says, shouting at her in front of her family and neighbors, telling her she had to sell her possessions, threatening to report her to the police. That prompted quarrels with her husband, who hadn’t known about the loan. In 2018, after months of despair, she poured kerosene over her head and set herself on fire as her children slept. She was five months pregnant at the time.
Kumari’s husband doused the flames and got her to the hospital. While she was there, she says, loan officers showed up at her bedside and demanded payments.
LOLC denied that its agents put any pressure on Kumari or visited her while she was in the hospital. “This incident was due to a domestic dispute and not due to over-indebtedness,” a company spokesperson said in an email, adding that it had received no complaints. Kumari said it was the aggressive tactics of LOLC’s loan officers that pushed her to attempt suicide.
Aggressive collection tactics are common in Sri Lanka’s microfinance market, according to a 2019 report by Juan Pablo Bohoslavsky, an independent UN expert on foreign debt and human rights. He wrote that he had been told about numerous instances in which women were pressured into trading sexual favors or had offered to sell their kidneys to repay loans.
The aggregate amount of loans in Sri Lanka rose more than 50-fold from 2006 through 2020 to more than $3.2 billion, according to central bank data. LOLC Finance is one of the country’s biggest and most profitable microlenders.
In 2018, after newspapers reported on the suicides and protests around the country, the government said it would write off the debts of 75,000 women in areas affected by drought, and the central bank capped interest rates at 35%. Critics argued it was too little, too late as the waiver didn’t cover many of the country’s most indebted borrowers and the rate cap applied only to new loans. In the run-up to the 2019 election, leaders of both major parties promised to cancel all microloans, prompting many borrowers to stop repayments. But lawmakers failed to deliver on that pledge, leaving thousands of women burdened with unmanageable loans.
“It was the suicides that brought it to the top of the political agenda,” says Indrajit Coomaraswamy, Sri Lanka’s central bank governor at the time. He says canceling all debt would have wreaked havoc with microlenders’ balance sheets. “There was no easy fix,” Coomaraswamy says. “In Sri Lanka, microfinance hasn’t worked out as well as it could have at helping people at the bottom of the pyramid get out of poverty. There is also a big gap when it comes to consumer protection. This has meant that vulnerable women have not got the protection they deserve and are suffering as a result.”
Hema Bansal, a consultant for Dutch development bank FMO and the former Asia director of the Smart Campaign, agrees with that assessment. “The concept of consumer protection needs more attention from the Sri Lankan central bank and microfinance industry,” she says. “There are big issues of over-indebtedness, multiple lenders pushing loans. The regulator is not equipped to deal with the crisis.”
Meanwhile, Kumari is worried LOLC may still take her to court to retrieve the money she owes. Scarred from her burns and still in pain, she needs further medical treatment, which she can’t afford. Her husband has been mostly unemployed since the pandemic began, and she often goes house to house, begging for food.
“I don’t know what will happen to me now,” she says.
Bloomberg compiled data from development banks and lenders for its analysis of microfinance trends. The data from financial services providers, or FSPs, come from the Microfinance Information Exchange (MIX) Market maintained by the World Bank. The information, which is self-reported and runs from 1999 through 2019, contains performance metrics for FSPs that target the unbanked in developing countries. Bloomberg looked at annual filings submitted by FSPs over 10 years, from 2009 through 2018, because most FSPs stopped reporting data in 2019, and those that continued submitted quarterly reports only through the third quarter of that year. A few FSPs that submitted annual reports twice in the same year were excluded.
To ensure consistency, Bloomberg confined its analysis of MIX Market data to those FSPs that reported data for every year during the period: 175 for-profit providers out of 362 that submitted data in 2018, 168 nonprofit ones out of 332, and four firms for which status could not be determined.
● For-profit ● Nonprofit ● Unknown profit status
●●● Did not report every year
Includes microfinance
$6.8B
L&T Finance
$487M
LOLC
$2.4B
BRAC
Bangladesh
$3.5B
ACLEDA
$67M
Tamweelcom
$789M
AMRET
$3.5B
Banco
Mercantil
$5.6B
Bandhan
$2.0B
PRASAC
$1.2B
Compartamos
Banco
● For-profit ● Nonprofit ● Unknown profit status
●●● Did not report every year
Includes microfinance
$6.8B
L&T Finance
$487M
LOLC
$3.5B
ACLEDA
$67M
Tamweelcom
$3.5B
Banco
Mercantil
$5.6B
Bandhan
$2.0B
PRASAC
$1.2B
Compartamos
Banco
● For-profit ● Nonprofit ● Unknown
●●● Did not report every year
Includes microfinance
$487M
LOLC
$6.8B
L&T Finance
$3.5B
ACLEDA
$1.2B
Compartamos
Banco
$2.0B
PRASAC
$5.6B
Bandhan
$3.5B
Banco Mercantil
$67M
Tamweelcom
● For-profit ● Nonprofit ● Unknown
●●● Did not report every year
Includes microfinance
$487M
LOLC
$6.8B
L&T Finance
$3.5B
ACLEDA
$1.2B
Compartamos
Banco
$2.0B
PRASAC
$5.6B
Bandhan
$3.5B
Banco
Mercantil
$67M
Tamweelcom
Of the 347 FSPs that provided data every year, 10 didn’t report gross loan portfolio information for one or two years. They were included in the analysis since they provided other information over the 10-year period. Only 145 FSPs reported what percentage of their total loan portfolios was for microfinance, and the analysis of changes in portfolio composition was restricted to that smaller group. Multiyear analyses of specific items, such as average loan balance or gross loan portfolio, were adjusted for inflation. Analyses focusing on a specific year, such as comparing return on equity in Cambodia in 2018, were based on FSPs reporting that year.
To understand the flow of money to microlending institutions, Bloomberg also collected data from five of the largest development banks that made it publicly available. Those include the World Bank’s International Finance Corp. (IFC); the U.S. International Development Finance Corp. (DFC); the Netherlands Development Finance Co. (FMO); the European Investment Bank (EIB); and the French development bank Proparco. The data show how much money these institutions provided to FSPs from 2011 through 2020.
For DFC, Bloomberg manually downloaded all publicly disclosed projects categorized as “finance,” “equity investments” or “investment funds” on the bank’s website. Only active investments that DFC made public as of April 22, 2022, were included. For IFC, all publicly available investments categorized as “financial investments” were downloaded from the bank’s website and filtered for sectors that included “microfinance.” Only board-approved amounts are included, and there could be a time lag between when the budget was approved and when the money was disbursed, during which the amount might have changed. Because exact amounts disbursed couldn’t be determined, approved amounts were used instead. FMO loans were programmatically downloaded from the bank’s website using the keyword “micro” after filtering for “financial institutions.” Proparco sent Bloomberg an accounting of financing to institutions that provide microfinance, among other financial services. EIB sent a list of investments just for microfinance.
Overall, it’s impossible to discern what portion of the development bank money is going for microfinance as opposed to other types of financial services. Bloomberg reviewed every loan from the development banks and assessed which ones to count based on publicly available descriptions and documents. In doing so, all forms of support were counted, including loans for operational efficiency as well as funding to help FSPs offer a wider range of financial products. Investments in FSPs that make microfinance loans or have in the past were included, even if their business now focuses on small and medium-size enterprises. Investments in fintech and microinsurance companies that are building infrastructure for the microfinance industry were also counted. But loans to FSPs that lend only to small and medium-size enterprises and have no history of microlending were not included.
The data from the development banks came in different formats and were cleaned and standardized. Funding amounts in other currencies were converted to U.S. dollars as of Dec, 31, 2021, using Bloomberg’s foreign-exchange calculator. Financial assistance from development banks that went to multiple countries was categorized as “multi-country global” so it would not be counted twice.