Are We Drifting Yet?

I can honestly say that it has taken me more than three years to understand and better articulate one of the underlying concerns behind IPO’s in the microfinance industry. I can see now, that for many in the industry, debates about pricing, profitability, capital markets, investors, and welfare of clients, have a common root in one fundamental concern: mission drift.

This CGAP Focus Note shows the same concern by asking questions about the potential consequences of the SKS IPO and where it might lead the industry. And in the center of these concerns lies a popular assumption that I have now heard hundreds of times since the Compartamos IPO, and I quote from the document: “many are wary that excessive commercialization will tilt the gains heavily toward investors at the expense of the poor.”

In essence, it’s a concern about for-profit investors overriding the interest of other stakeholders, mainly the interest of clients, by inevitably pressuring management for higher interest rates and quick profits, therefore drifting from the mission of serving the best interest of clients.

I think that it’s a sensible concern, and it’s certainly a possible outcome, but I definitely don’t think it’s as inevitable as some suggest it will be for SKS, or as some predicted for Compartamos. SKS has been public for three months, and it’s probably too early to tell, but Compartamos has been public for 42 months (three and a half years), so perhaps a look at what has happened can be helpful.

In the past 42 months, Compartamos has grown from serving 614,000 clients to serving 1.75 million, a 191% increase in outreach. Of those, 98% are (still) women and loan size has increased marginally 0.002% (in pesos), currently at 391 USD per borrower.

Although we have been painfully slow, we have made progress in our goal of offering voluntary saving services (on top of our client’s current savings), and our portfolio has diversified to hold 13% of the total in housing loans. We also currently serve more than 700,000 clients with voluntary micro-insurance products.

Our internal culture has been sustained, if not improved, from being named the fifth best company to work for in Mexico in 2007, to number 1 in 2010. Transparency is now not only a voluntary trait, it’s a regulatory requirement.

Efficiency is 17% better with a cost per client of 125 USD, still well below the average of 176 USD for Latin-American MFIs, and pricing has continued to drop steadily, as it did before the IPO, to 68% average APR (plus VAT). Profitability has been moderated as well, and ROE is now at 41%, three quarters of what it was before but still significantly above average for all the reasons we explained in our paper “Letter to our peers” in 2008.

But perhaps more importantly, the competitive market in Mexico has fundamentally changed, whereas 42 months ago a couple dozen MFIs in Mexico served barely a million customers, today more than 3.8 million are being served by hundredths of MFIs, including staple names like Grameen-Carso.

So it looks like at least some of the assumptions and predictions have not materialized. Interest rates did not go up, they continued to go down, and lower interest rates meant lower profitability. Growth continued and was sustained and loan sizes did not increase nor did Compartamos move up-market. Product diversification continued and efficiency improved. The market became more competitive, less concentrated, and not only because of the availability of capital but also because of unprecedented interest from new entrants. And while the S&P 500 is down about 21% since our IPO, Compartamos share price has increased by 120%.

Now, this is not to say that tapping into the capital markets and becoming a public company doesn’t bring plenty of challenges, like increased visibility and regulatory exposure, less strategic flexibility and yes: potential mission drift. But the issue is that the risk of drifting from our mission did not start when we did our IPO, it started the day we founded the institution.

Many of us have witnessed mission drift in MFIs all around the world, and even though sometimes the drift has come because of pressure from investors, it has also happened from pressure from donors, regulators, managers, staff and even clients themselves. So mission drift is not an exclusive risk of commercial MFIs, it’s a risk in all MFIs. And just as we tend to overstate the effect we can have in poverty alleviation, we also tend to overstate the risk for-profit investors bring to microfinance.

But of course no discussion on mission drift can be complete without realizing that we talk as though there was actually a unified mission for the industry whereas in reality there isn’t. Individual MFIs have individual missions but as a group we have failed miserably at being specific about what our individual missions are. Especially when it comes to being specific about our goal to create social value.

We can all easily understand financial goals, but when it comes to social goals there are thousands of definitions of what we mean by social, anywhere from financial inclusion to poverty eradication. And perhaps we should respect the fact that what some consider worthwhile social goals, others may dismiss as not being ambitious enough. That might well be the case with the stated social goal of Compartamos: to provide access to financial services to as many people as possible in the least amount of time. But it would be wise to avoid passing judgment on mission drift or hold individual institutions accountable for goals they have not set out to achieve.

So will the SKS IPO lead this innovative, cutting edge MFI to drift? I have no idea. Based on their past performance and behavior, I don’t expect they will, but I don’t know, time will tell.

But what I do know is that if you do an IPO, you’re not inevitably doomed to drift.