Transforming Microfinance Institutions: Providing Full Financial Services to the Poor

Citation

Rhyne, E. (2008), "Transforming Microfinance Institutions: Providing Full Financial Services to the Poor", International Journal of Social Economics, Vol. 35 No. 11, pp. 879-882. https://doi.org/10.1108/03068290810905487

Commercial microfinance was born in 1992 when PRODEM, a Bolivian non‐governmental organization, founded by ACCION International and a group of Bolivian business leaders, launched Banco Solidario, S.A. (BancoSol). Following BancoSol's example, other Bolivian NGOs soon transformed into regulated banks or finance companies, and the concept spread. Transformed microfinance institutions (MFIs) appeared throughout Latin America and eventually in Africa, Eastern Europe, and Asia. Governments in countries as different as Peru, Pakistan, and Uganda created regulations that supported or even mandated transformations.

For MFIs or regulators contemplating transformation, it is very good news that Transforming Microfinance Institutions: Providing Full Financial Services to the Poor is now available. NGOs seeking to transform no longer need to start from scratch to work out all the challenges for themselves. They can now get a head start from the experiences of other institutions – and the wisdom of eight experts – packaged and presented clearly for them in this book. Policy makers can benefit from the book's depth of discussion of regulatory experience.

Today, no one knows exactly how many microfinance NGOs have become licensed financial institutions, but an educated guess would put the number above 100, including many of the leading MFIs in the world. Compartamos Bank in Mexico, Mibanco in Peru, K‐Rep Bank in Kenya, SKS Microfinance in India, CARD Bank in the Philippines, and many others all began life as NGOs and now operate as financial institutions. Such institutions serve a large share of all clients now reached by microfinance and hence the microfinance transformation process is a very relevant topic today.

Transformation is hard, especially for NGOs founded without transformation in mind. Leaders who have been through it describe transformation as a frustrating process that often takes far longer and costs more than anticipated. However, few transformed institutions look back. As licensed financial institutions, they achieve greater credibility, access a wider range of funding sources and offer more products and services. More broadly, MFI transformation has been a driving force in making microfinance more transparent, stable, and professional. It has been an important route to maturity for the microfinance industry at large.

In conceiving Transforming Microfinance Institutions, author/editors Joanna Ledgerwood and Victoria White modeled it on Ledgerwood's earlier volume, The Microfinance Handbook – one of the few solid references outlining the ABCs of operating a microfinance institution. They take the same straightforward and comprehensive approach, covering each major challenge involved in the transformation process and subsequent operation as a regulated institution.

The book looks at transformation primarily through the lens of the Ugandan experience. This is both one of its greatest strengths and something of a weakness. Uganda created a new regulatory category, the microfinance deposit‐taking institution (MDI) Act, in 2003, modeled in part on earlier Bolivian legislation. The MDI Act encouraged microfinance NGOs to become regulated institutions in order to gain the privilege of capturing savings from the public. Ledgerwood led a US Agency for International Development project that assisted NGOs to prepare for transformation, and White was the transformation coordinator for Uganda Microfinance Ltd, one of the first of the newly transformed MDIs. Their deep connection to the Ugandan experience allows the authors to speak with field‐tested authority, in both the general chapters and in the two chapters devoted specifically to Uganda (the case study of Uganda Microfinance Ltd by White and the chapter on the creation of the MDI Act by Alfred Hannig and Gabriella Braun who were advisors to the Bank of Uganda during the process).

The authors have drawn upon experiences from around the world, not just Uganda, and the main chapters on topics such as funding structure, mobilizing savings, and financial management are just as applicable in one country as another. However, the Ugandan vision of transformation is implicitly held up as the defining vision. For example, the book tends to equate transformation with institutional capability to accept and utilize savings. Gaining the right to offer savings was the leading motivation for transformation in Uganda, but in Latin America the main motivation was access to commercial capital. In some countries, savings is not even a prospect for transformed MFIs. For example, the Indian NGOs that become non‐bank financial companies are not allowed to take deposits. The book's advice on savings is first rate, as it is written by one of the foremost authorities on savings in microfinance, Marguerite Robinson. However, readers should remember that there may be other reasons to transform, and lessons of transformation are not limited to institutions contemplating deposit‐taking.

Once an institution decides to transform, it faces major challenges. First, it must make essential strategic decisions that will shape the new institution: ownership, funding structure, legal form, and market positioning. Part II of the book is devoted to these decisions, and it rightly focuses on getting these decisions right early on.

Among the most difficult decisions, and the most important to get right, is the change from the NGO ownership model in which no one “owns” the organization, to a corporate form in which ownership is held through shareholders' equity. Ownership structure is the make or break issue of transformation, and though it is discussed in the book, its treatment is relatively brief. It would be easy for readers to use this book without fully comprehending the seriousness and difficulty surrounding ownership transformation.

For most NGOs, and the people who lead them, this transformation is wrenching. Managers, especially founder/managers who have enjoyed a great degree of autonomy, may be unwilling to cede control of their prize organization to new investors. Investors coming into MFIs want to ensure that there is a like‐minded group of owners who can work together well. Regulators want to ensure that the new owners are qualified and have the financial resources to support the organization as it grows or survive when confronted by emergencies. All stakeholders feel the vulnerability of the social mission of the MFI as it moves into a for‐profit operating framework. Staff and clients are also stakeholders whose voice is not always heard in the process. Indeed, the trauma of ownership change has been central to the story of transformation in Uganda, as it was in Bolivia and other countries. Without perfect solutions, the issues surrounding ownership change do not go away. They have surfaced again most recently in the discussion surrounding the initial public offering of Compartamos Bank in Mexico.

The final section of the book is devoted to operational issues, with chapters on human resources, financial management, information technology, audit, and customer service. The focus in each chapter is raising the standard of operation to a professional level suitable for a regulated financial institution, and adequately safe to be entrusted with deposit taking. Not all readers will want to read these chapters from start to finish, but for those actually engaged in transformation, they should become a trusted resource. A transformation coordinator might well subject his or her copy of this section to highlighting, dog‐eared pages, and post‐it note place markers. Of particular value are the annexes that offer tools such as a checklists for the overhaul of the information technology system, terms of reference for hiring legal counsel, and a draft transformation plan and budget.

Nearly everything needed to take an NGO or a national microfinance sector up to the level of formal financial institutions is here. The microfinance industry and its future clients owe the authors their gratitude.