Community owned institutions & microfinance

Community Based Ownership Structure in Microfinance

Challenges for MFI Management

© F r a n k f u r t – S c h o o l . d e

By :Nandan S. BishtFebruary 23, 2012Chennai, IndiaI

© F r a n k f u r t – S c h o o l . d e 2

Key Facts for Community Based Institutions

Types of Entities Involved

Promoting Entity One that takes initiatives to put community institution into being!

Promoted EntityCommunity Vehicle, where community member joins to create common capital

Microfinance Player Entity engaged in providing financial services to community at large

Following Types of different entities to be clearly identified for the role they play for building and sustaining community based institutions


Key Facts for Community Based Institutions

Aging of the Institutions also play a crucial role in determining the right and appropriate doable community governance and control systems to be in place

Aging Categorization of Community based Institutions

Category Promoting Entity Promoted Entity Microfinance Player

MaturedMore Than 10 year of

ExistanceMore than 5 Years of

ExistanceMore Than 5 year of

Existence

Developing 5-10 years 3-5 years 3-5 years

Starters 0-5 Years 0-3 Years 0-3 Years

Governance and control systems are reasonably expected to be at different level in these institutions depending upon the age categorizations ! Though Best Practice would suggest that things are done right upfront ! May not be possible even for best of minds and institutions due to constraints on resources and trained manpower !


Institutions Should Develop a Road Map !

Institutions should based on resources constraints they predict, develop a road map for instituting a sound governance an controls systems based on principles enunciated in following few slides !

Aging Categoriezation of Community based InstitutionsCategory Promoting Entity Promoted Entity Microfinance Player

Matured

Should Address All concerns highlighted

in following slides


in following slides


in following slides

DevelopingShould setup a road map agreed with all stakeholders and after assessing the resources they can spare, for addressing all concerns involved with community based institutionsStarters


What is perceived wrong and unacceptable in community owned structure

1. Structure should not be designed to serve as one way money mobilization route

3. Structure should be independent of operating company

2. Inter-twined services should be duly acknowledged and documented with clear understanding or agreement between parties.

4. Community participation to be in real term not only on paper. Systems and mechanism to be robust to ensure actual community participation

5. MBT structure should not exist solely for money mobilization or aggregation, there should be other meaningful services to be provided by these structure to community members

7. Record Keeping - of finance / accounts and meetings to be kept with best practice possible.

6. Awareness level among community member should be adequate to be reinforced by the structure on periodic basis.


Concerns of Regulators

RBI i.e. central bank always doubts the genuineness of independent decision making by larger community members especially when they come from poor rural masses and therefore regards such structures as medium to circumvent the strict deposit mobilization rules

RBI is concerned about the protection of public money and the interest of public at large involved considering the past instances in many ways wherein general public was cheated ( i.e chit fund companies, deposit companies, including few MFI’s)


Concerns of Regulators

The fact that the legal structure of Mutual Benefit Trust is not regulated by any authorities, it become more vulnerable and more suspected by regulatory bodies like RBI when large numbers and big amount is involved

Under corporate laws such indirect ownership stake by large number of people may be considered as share offering to public without following the legal route of listing and related laws, and when the overall structure is not well documented and exist only on paper, this believe is well founded.


Investors Concerns of Such Community Owned Structures

Due to miss-happening with the community money in past, see as reputation risk

If the structure is not independent of operating company, seems like company is using own infrastructure to mobilize money from its customer in the pretext of giving them loan.

As customer do not see the difference between operating entity and MBT structure to channelize the savings, problem in MBT functioning could result in problem in credit portfolio and thereby sounds risk to investors.

As Investor do not have any control over MBT's nor desired by them, risk emanating from MBT functioning become beyond their control and hence results in concerns.

Various inter-twined activities at field / staff and senior management level blurs the independent and separate entity concepts and put Investors in unchartered and unclear water.


Concerns of Promoting Institution

Retaining ownership and control are the key issues for promoting institutions and these become crucial due to following perceptions:

• What if these community vehicles are overtaken by miscreants or mission non-aligned entities or individuals?

• How to financially sustain these community owned institutions, especially when all money mobilized is locked in investment in microfinance entity which may not be yielding any return in foreseeable future?

• How to ensure the proper and correct orientation and awareness building of community members so that whole community structure can have active and genuine participation from community members?


Then Where are the Solutions !

Solutions are in !Understanding and practicing separate entity concept among promoting, promoted and microfinance player !

Setting up transparent and strong governance system in community structures

Investing robustly in creating awareness among the staff as well as community members about the community structures and ownership

Proper design of legal vehicle in Indian context to avoid hostile takeover and mission drift much difficult

Ensure community owned structure, carry out other activities to financially sustain themselves. Such other activities should normally not include generating revenue from community members rather should be generating revenue for community members.


Concept of Separate Legal Entities and separation of Shareholder from company

Understanding of separate entity concept need to be built among following three separate entities;1. Promoting Institution2. Promoted Institution3. Microfinance Operator

Also need to bring the understanding that:Shareholders and the company itself are two separate entities both in terms of legal and business sense


Outcomes of Separate Legal Entity Concepts

1. Each structure i.e. promoting, promoted and microfinance operator should have separate existence, visibility and infrastructure ( i.e. either owned or shared infrastructure) to sustain its activities.

2. Inter-related activities and sharing of infrastructure should be clearly defined, documented and terms set in ( i.e. including financial terms ).

3. At best level, transactions are done at arms length principle and ambiguity is avoided.


Transparent and Strong Governance Systems

Following are few examples of good governance systems for community owned structures;

3. Ensuring free and fair process of election and selection of office bearer of such community owned institutions.

1. Ensuring adequate community participation which is real and effective

2. Ensuring decision making process and functioning of these community owned institutions is independent of microfinance player.

4. Well designed and documented process of financial participation by community members and the process/ rules for return of money back to community members, i.e. exit option for community members or intermediary institution who want to withdraw the money contributed to community investment vehicle


Awareness systems

1. Establishing a robust community awareness system for community owned structure is essential for these community owned vehicle to function properly

2. Awareness system should be established by promoting or promoted institutions, and should be continuous and sustained process.

3. Ensuring community members understand the role of each separate entity involved i.e. promoting, promoted and microfinance player should be ensured during such awareness programs.

4. Simple pictorial based training tools in vernacular language should be designed to community the awareness message to individual and community institutions.


Properly Designed Legal Vehicle

1. Community institutions should be designed on such legal platform which are transparent as well as well regulated by external agencies

3. Such legal vehicle should be able to clearly define / document as well as monitor the ownership structure i.e. changes in them by clear regulated process.

4. Such legal vehicle should be designed with rules and regulation that make hostile takeover of such vehicle impossible or difficult

2. Legal vehicle which are unregulated and not accountable should be avoided as they have proved to be susceptible manipulation in recent past.


Activities of Community Owned Vehicles

1. Community owned vehicle should not exist solely for fulfilling capital need to microfinance player

2. Such Community vehicle should have larger and greater engagement with community as well as others entities. This should result in activates of such vehicle not restricted to only mobilizing and aggregating the capital of community members.

3. Such community institutions should try to identify and deploy various source of revenue generation to sustain their independent status i.e. from promoting or microfinance player


Thank YouNandan S. Bisht

[email protected]

Business

Community owned institutions & microfinance