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Transcript - September 21, 2007
BRANCACCIO: Welcome to NOW.
Our investigative team was looking into one of the great successes of global economics when they came upon a controversy. The success that kicks off our story in the developing world is called micro-credit: lending small sums of money to the working poor—giving people a loan so they can buy a cow or a sewing machine or find other ways to make money. This form of micro-credit was pioneered in Bangladesh three decades ago and has now caught on across the globe.
But here's the controversy: Is it ok to make a big profit from lending to the poor? Or how about this: where does microcredit end and loan sharking begin?
Senior correspondent Maria Hinojosa and producer Na Eng report from Mexico, part of the series we call "Enterprising Ideas".
HINOJOSA: Here in the small town of San Andres in Central Mexico...a group of business women gather for their weekly meeting...on the table are stacks of bills, more cash than many of them had ever seen in one place in their entire lives...
These Mexican women are part of a quiet, worldwide revolution to end poverty. It's touching the lives of tens of millions of people. It's known as microcredit—making small loans to the working poor. And it's ushering in a new way of thinking about how we can break the cycle of poverty.
Some of these women don't know how to read or write... so they're using thumb prints to sign for their loans... loans to start up small businesses...from flower shops to bakeries.
Marcela Gonzalez Lara is the group's leader.
Why was it difficult for you to even think about going to a regular bank to get credit?
LARA: Because there is no place that would give us credit- not when we don't have any proof of income or any paperwork documenting our assets, like our houses.
HINOJOSA: In communities like this one in Mexico, the poor have long been ignored by major banks. In fact, around the world, an estimated three billion people do not have access to the kind of financial services you and I take for granted. That means they can't go to a bank if they wanted to start a new business, buy a home or even deposit money into a savings account.
The market for lending to the working poor is enormous...by one estimate, it's worth 300 billion dollars.
A company called Compartamos, or "let's share" in Spanish, has been very successful at tapping into some of that demand in Mexico. It's making a lot of money along the way. And that success has also made Compartamos the focus of a battle between two fundamentally different visions of how to fight poverty.
DANEL: If we think that capital markets are the devil, we're never going to solve poverty
HINOJOSA: The entrepreneurs behind Compartamos will tell you that it's the lure of profits that will motivate people to lend to the poor.
DANEL: We have to stop looking at this as a zero-sum game and look at how we can bridge business and social objectives together in a successful way.
HINOJOSA: Simply put, the business objective is to make money. But how much profit is too much? That's the question being asked by the company's high profile critics, including Muhammed Yunus, the Nobel Prize-winner who pioneered the idea of modern microcredit thirty years ago.
YUNUS: When you are maximizing your profit—you are not looking at whether the poor people are getting out of poverty. You are always looking at your bottom line, how much money we are making out of this business with the poor people
HINOJOSA: The controversial business decisions at Compartamos are made by its two young, ambitious C.E.O's: Carlos Danel and Carlos Labarthe.
The "two Carlos'es", as they're sometimes called, grew up in the suburbs of Mexico City...both sons of privileged business families who graduated from elite universities...they could have made it big in the corporate world, but they say they had a desire to give back to their country.
HINOJOSA: What motivated each of you when you didn't need to be doing this work to do that kind of work?
LABARTHE: It's—the education I received at home. In a country like Mexico, where you have too much difference between the different people.
And my—all my family all my life has told me you have been very fortunate to have an education, to receive so many things. So you have to give back to your country. You have to give back to poor people in some sense.
HINOJOSA: And then in 1985, while the two were in high school, a devastating earthquake hit Mexico City.... It was a changing event for the young men. They suddenly came face to face with thousands of families that had lost everything in an instant....
DANEL: And it was a moment where, you know, we had a opportunity, in a sense. It was a terrible tragedy. But it was the opportunity to actually volunteer to help out other people. And the experience was so rich, was so good that that became something that we wanted to do.
And so in 1990, they co-founded Compartamos, which began by offering tiny loans to mainly indigenous, rural women in some of the poorest parts of Mexico.
Early on, they found some inspiration on the other side of the world, in Bangladesh. They sent staff members to visit the famed Grameen Bank founded by Yunus.
DANEL: That was our first exposure to real microfinance and what massive outreach it could do.
HINOJOSA: At both Grameen and Compartamos, the borrowers are almost all women. That's because they found that women are generally better at handling credit than men.
Over the years, Compartamos went on to become a large nonprofit supported by international donors. They expanded at a rapid pace, opening up branches throughout Mexico....
Everywhere Compartamos went... women like Sofia Garcia of Pueblo lined up for their services.
Today Sofia runs a stone cutting workshop—and the whole family pitches in. Even her nine year old son helps out after school.
But without the loan from Compartamos, Sofia Garcia probably wouldn't be where she is today. Growing up, her family was so poor that when she was seven years old, she was sent away to clean houses. She married young, at the age of seventeen. And her husband had a serious drinking problem.
GARCIA: I was desperate and frustrated. I'd ask myself, "What am I going to do with these eight children and no income, and no financial help?" I could barely afford to send my children to elementary school. But once I joined Compartamos I thought to myself, "Yes! That's it! By the grace of God, we're on our way!"
HINOJOSA: Like most Compartamos clients, she began with a loan of just 1000 Pesos—a little less than a hundred dollars.
With the loan money, they bought modern equipment to speed up their work. Once she paid off her first loan, she qualified to get another one for a larger loan size. After six years, she now takes out loans of 20,000 pesos—that's about $1,800 dollars.
GARCIA: I'm so grateful to God, my family, and all the staff at Compartamos.
HINOJOSA: When Compartamos wanted to grow, the "two Carlos'es" felt its nonprofit status was holding them back. So the company sought out private investors and eventually turned into a commercial bank.
Why is Compartamos such a big deal? Because they've done something few other micro-lenders have: they've taken the idea of lending to the poor all the way to the bank. Literally. The company consistently brings in huge profits. And in the process, has won the backing of some of the world's largest banks and investment firms. Where others see misery in the poor, Compartamos sees money to be made.
Today, the company reaches over 700,000 borrowers. And it was rated as Mexico's most profitable bank in 2006. It makes almost all its money from the interest rates charged on its loans.
And how much are those rates? With fees and taxes included-the annual rate adds up to about a 100 per cent. These interest rates are incredibly controversial. People are dismayed by the company's decision to pay for its growth by charging such sky-high rates to women who struggle to feed their families.
When people say, "Well, Compartamos sounds great but, wait a second, they're charging an interest rate of 100 percent on a small loan?"
DANEL: What Compartamos charges is actually well within the range of what all other microfinance institutions and some consumer lenders in Mexico charge. And it's because we're doing $400 loans in a country that has relatively high operational costs.
HINOJOSA: The cost of lending money in Mexico is higher than other parts of the world. And it's not cheap managing such small loan sizes. But still, these interest rates are about three times what most other microcredit groups around the world charge. The question is: at what point is it too much?
DALEY-HARRIS: You do have to cover your cost. I don't think anyone debates that. Then there's the—the other bottom line, the social bottom line, how are our lives changing?
HINOJOSA: Sam Daley-Harris heads the Microcredit Summit Campaign. He says every penny more the poor can keep in their own pockets makes a difference.
DALEY-HARRIS: When women are charged, 100-percent interest, it makes it more and more difficult for them to make the changes that other women who might be paying 20 percent or 30-percent interest are—are able to make.
HINOJOSA: But Labarthe argues that if their clients didn't see the value of these loans, they wouldn't keep returning for more:
DALEY-HARRIS: Clients vote with their feet. 88 percent of our clients come back for a loan. Talks about—we're—we're doing some things right.
HINOJOSA: One thing they're definitely doing right is how they sell the loans to the poor. For customers like Sofia Garcia, it's billed as a monthly rate of between three and 4.5 per cent. That's broken down into bite-size, weekly payments. Sophia, who didn't qualify for loans in the past because she didn't have titles to her house or a car, is grateful to have access to this credit.
YUNUS: Just because they are willing to pay, I don't think that's a justification if you call it microcredit. Because microcredit has a philosophy. Microcredit has a purpose. The purpose is to help people get out of poverty.
HINOJOSA: Muhammad Yunus knows a thing or two about microcredit. Over the years, his Grameen Bank has made loans to some seven million borrowers in Bangladesh, most of them impoverished women. That work led to last year's Nobel Peace Prize.
YUNUS: When I run the micro-credit program, I can choose whatever interest rate I will choose and people will borrow because they are in desperate situation. That's how money lenders flourish everywhere in every country.
HINOJOSA: Yunus sees Compartamos as doing nothing different than what money lenders have been doing for centuries—raking in money off poor people desperate for cash.
YUNUS: There is no justification whatsoever to—charge hundred percent. Only justification is, we want to make money. That part they have to forget. Compartamos has to forget that we are here to make money.
HINOJOSA: Yunus has long been arguing that microcredit should only have one goal: ending poverty.
And while it certainly takes much more than credit to do that—the consensus is that it has been an effective tool. In Bangladesh, studies show that many Grameen borrowers have seen gains in their standard of living, and the children of borrowers are both more likely to go to school and have enough to eat.
DALEY-HARRIS: Microcredit is not a panacea. But it's the most powerful tool we have for helping women, especially, but families, climb out of poverty. Doesn't work every time. But as far as I'm concerned, there's no more potent intervention to cause change in families.
HINOJOSA: It's clear that microcredit has helped Sofia's family.... She says she's able to make enough to both pay back her loans and grow her business. They just put up a new roof on the house... and she's even starting to save for the first time, 100 Pesos a week, or about 10 dollars.
GARCIA: I'm adding to my house, little by little, that's something I couldn't have dreamed of before.
HINOJOSA: But while anecdotes are nice, the truth is, neither Compartamos nor its critics have made a serious effort to study whether or not Compartamos loans have improved their customers' lives.
DALEY-HARRIS: Why wasn't more invested in getting a—a baseline and being able to tell how most of the clients are doing, instead of just the individual stories alone?
RECEPTIONIST: Banco Compartamos, Buenos tardes.
HINOJOSA: This past spring, the firestorm over Compartamos took a dramatic turn. The company raised eye brows when it sold a 30 percent stake in a hugely successful initial public offering on the Mexican stock exchange. The reception from big investment firms exceeded everybody's expectations.
DALEY-HARRIS: It's an extraordinary moment that—investors have a—such a high price for a portion, a third in this case, of a micro finance institution. Groundbreaking in that way. But it also brings to bear some of the more difficult aspects of how it happened.
HINOJOSA: The sale raised a whopping 468 million dollars, creating a huge windfall for the original shareholders. Some of those shareholders were nonprofit microcredit groups. But individual investors walked away with millions.
Danel and Labarthe wouldn't tell us how much they each made, but they see no reason why investors shouldn't enjoy strong returns...
DANEL: When we talk about social enterprise we believe that within the creation of economic value there have to be profits. And those profits have to go back to investors.
Most of them in the history of Compartamos have been reinvested. But some have gone. And now, through the IPO, they have gone into the pockets of investors. And we see this as the perfect alignment with the incentives that the private sector and the capitol markets have of looking for a return on their investment.
HINOJOSA: Muhammad Yunus'Grameen bank is also a for-profit business. But there's a big difference. Any profits there go directly back to the borrowers, who are also owners of the company. Not so at Compartamos.
YUNUS: I wouldn't mind any investor coming from anywhere wanting microcredit program, provided they understand micro-credit is a social business. Non-dividend business. So—there's—the moment they want to make it—profit-making opportunity, then, of course, I will say, you are on the money-lender side. Because your aim is the money-lending aim. Your thinking is the money-lender thinking. So, I—I do not associate with you. I want to battle with you and to fight you.
HINOJOSA: Yunus also worries that the commercial approach at Compartamos will damage the credibility of the microcredit movement.
Muhammad Yunus says that when socially responsible investors and the general public learn what's going on at Compartamos, there's gonna be a backlash.
LABARTHE: I see it as the opposite. Exactly the opposite.
We think this model of social enterprise is very powerful and, at the end, is really what we need not just in Mexico but I think in the world to tackle poverty. Because at the end it's—it's not a problem of money. The money, if you see the—the—the wealth of the world, is there.
It's a problem of distribution. It's a problem of opportunities. Now, when we talk about the social enterprise, it's exactly trying to align those—those things. To align the wealth of the world with the needs of the poor people. That's—that's what will end poverty.
HINOJOSA: Recently, microlending as an investment idea has gained a lot of momentum. A small but growing number of international banks and investment firms are realizing that microcredit can also be good business. Citigroup, Morgan Stanley, Deutsche Bank, TIAA-CREF all have backed multi-million dollar microcredit deals...
Sam Daley-Harris sees an important place for mainstream investors seeking a profit...but he hopes they demand strong social returns as well.
DALEY-HARRIS: We're clear about the market incentives and the financial return for the investor. I think we have to be more clear about the social returns.
HINOJOSA: Meanwhile, the staff at Compartamos are hussling to get more clients and roll out new financial products, including savings, insurance and housing loans. The company is on track to meet its goal of reaching one million clients in Mexico by the end of the year 2008.
But Muhammad Yunus vows to fight the spread of this corporate model of microlending.
YUNUS: Some people are saying that Compartamos is the future. I always said Compartamos is the past. This is what we want to say goodbye to. I hope this will disappear very soon. We should create a world where—nobody should be a poor person as fast as we can.
HINOJOSA: As for Sofia Garcia, who never had a chance to step into a classroom, her greatest dream is to see at least one of her kids make it to college.
GARCIA: My wish is that all my children get ahead with their careers and that we're all okay, and things get even better.
BRANCACCIO: You can find out more about microcredit and the controversy over Compartamos on our website; PBS dot org is the place to start. Now we're going to bring you up to speed on some important developments in an ongoing story.
It's nice for citizens of a democracy like ours to have open communications with their government. Emailing your Congressman is one thing. Quite another is the government sifting through your emails, even it's a birthday greeting to your Aunt Muriel.
There's evidence the government's been intercepting billions of emails as part of its terrorist surveillance program.
This August Congress passed legislation which broadly expanded the government's authority to eavesdrop on American citizens —without search warrants.
BROSNAHAN: Your e-mails, my e-mails, and everybody else's e-mails were evidently going to a government room.
BRANCACCIO: James Brosnahan is an attorney. He represents this man, Mark Klein For 22 years, Klein worked as a technician for the largest telecommunications company in America, AT&T. Several years ago, Klein says he came to suspect that AT&T had installed secret computer gear designed to spy on internet traffic, at the request of the National Security Agency, or N-S-A. AT&T handles tens of millions of e-mails a day, not just for its own subscribers, but for other internet companies too.
Upset by what he saw, Klein decided to blow the whistle.
KLEIN: I have been struggling for some months now to bring it out in the light of day. And that is all I really want to do, is bring it out there. So people can examine and decide for themselves.
BRANCACCIO: A few months earlier, he showed up—unannounced—at the offices of the Electronic Frontier Foundation. Located in San Francisco, the foundation fights to protect people's privacy. Kevin Bankston is one of their lawyers.
BANKSTON: Based on Mr. Klein's statements. We have reason to believe that AT&T is assisting the NSA in collecting the communications, and communications records, of all or practically all of its customers.
BRANCACCIO: Klein gave Bankston a treasure trove of documents to support that allegation. Bankston isn't allowed to talk about the documents in detail—the government has since had them sealed—but, he says, what's in there boggles the mind.
BANKSTON: We are talking about a substantial portion of all the communications traffic in the United States.
BRANCACCIO: As a result, Bankston and his group are suing AT&T for violating the privacy laws which govern the big telecommunications companies.
Now has obtained copies of what are believed to be Klein's documents. In them, Klein describes the construction of a room in the AT&T building in which he worked, located in downtown San Francisco. He even took a picture.
He says, the secret room at AT&T contains gear which enables the government to look at every individual message that comes through this important part of the internet, to determine which should be examined further.
The program now operates under the temporary law passed by congress this summer. That law is due to expire in February, and has recently been challenged in court.
BUSH: So I call on Congress to make the Protect America Act permanent.
BRANCACCIO: Just this week President Bush asked Congress to both extend the law and retroactively grant AT&T and other companies immunity from civil liability for cooperating with the government surveillance program.
The companies could face penalties of $1000 per customer, for a total that could reach into the billions due to the sheer volume of emails involved.
BANKSTON: What we're talking about is the wholesale diversion of millions upon millions of communications from AT&T's backbone network.
BRANCACCIO: The government does not publicly discuss details of its terrorist surveillance program, or what's going on at AT&T. So we contacted the company. They declined to be interviewed, saying only, "AT&T is fully committed to protecting our customers' privacy. We do not comment on matters of national security."
And that's it for NOW. From New York, I'm David Brancaccio. We'll see you next week.
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