Mexico´s largest microfinance lender, Banco Compartamos has more than 2.5 million customers with an average loans of US$360. Through an effective alignment of its business model and operating model, this lender has profitably served millions of lower income households by providing access to credit where other banks can´t reach.
Compartamos was founded in 1990 as an NGO with the purpose of offering credit to population segments without access to commercial banks, and in 2000 the organization was reconstituted as for-profit company. Their value proposition is founded on the premise that people at the base of the pyramid can be credit-worthy clients despite their lack of previous credit history or verifiable income sources. Nationwide data on Compartamos´s clients shows that in spite of a 90-day group delinquency rate of 9.8%, the ultimate default rate is near 1%.
Compartamos offers various financial products, including different types of loans and insurance schemes, but its core financial product, representing close to 80% of its portfolio, is Crédito Mujer, a loan which targets lower income women with some type of microbusiness or entrepreneurial activity. A key characteristic of the Crédito Mujer loan, is that it requires women to take up a “group loan” (with a minimum of 10 women participating in each group), where all the women share a joint-liability for the total amount borrowed by the group. Correspondingly, all the individual´s payments are pooled and a single weekly/biweekly loan repayment is deposited by the group. Whenever a member is unable to make her payment, others have to pitch into the pool to cover her part, or their loan will miss its payment schedule.
The “group loan” structure allows Compartamos to do minimal underwriting process before offering loans – with only a quick credit check done to verify no fraud has been committed by a borrower – thus reducing its credit issuance costs. This simple underwriting methodology serves as an underwriting system because group loans establish a system of incentives for borrowers to self-select (ie. the women don´t want uncredit-worthy women in their groups) and to promote good behavior (issuing individualized reports on credit behavior to credit bureaus, offering renewed access to loans and lowering rates to repeat clients with good previous experiences).
Another important element for Compartamos to be able to produce consistent profits is that it charges higher interest rates than conventional banks. For example, Crédito Mujer charges an interest rate with a 110% APR, compared to personal credits available in commercial banks within the 20-40% APR range. However, for many women this high interest rate can be more palatable than alternatives: informal channels (which can have as high or higher interest rates) or no access to credit.
Furthermore, Compartamos´s infrastructure is much simpler than that of most commercial banks. Despite having a presence throughout the country, Compartamos´s branches are not like conventional commercial bank branches, but rather they operate as offices for client service and loan processing. All cash disbursements and cash collection is done through convenience stores and other commercial banks, which dramatically simplifies their operations, so that they can focus on loan promotion and issuance.
Compartamos´s business and operating model are highly complementary, since business model is based on offering very small loans, and the operating model allows these loans to be profitable by keeping loan underwriting and collection costs very low. Furthermore, by accumulating a large data set of the creditworthiness of a broad customer base, it has built a unique know-how that gives Compartamos an edge over its competitors which it can use to do even better risk underwriting in the future.
- Povery Action. https://www.poverty-action.org/sites/default/files/publications/compartamos.pdf
- El Economista. http://eleconomista.com.mx/sistema-financiero/2013/05/15/microcreditos-impulsan-compartamos
- Compartamos. https://www.compartamos.com.mx/wps/wcm/connect/?MOD=PDMProxy&TYPE=personalization&ID=NONE&KEY=NONE&LIBRARY=%252FcontentRoot%252Ficm%253Alibraries&FOLDER=%252FProductos+y+Servicios%252FCredito%252FCAT%252F&DOC_NAME=%252FcontentRoot%252Ficm%253Alibraries%252FProductos+y+Servicios%252FCredito%252FCAT%252FCAT_ESP.pdf&VERSION_NAME=NONE&VERSION_DATE=NONE&IGNORE_CACHE=false&CONVERT=text/html&MUST_CONVERT=false
- Compartamos. https://www.bmv.com.mx/docs-pub/infoanua/infoanua_603599_2014_1.pdf
- Bancomer BBVA. https://www.bancomer.com/personal/crediton-nomina.jsp