1

2011 Global Microcredit Summit

Commissioned Workshop Paper

November 14-17, 2011 – Valladolid, Spain

MFI Transformations: The

LAC Experience

Written for the workshop session: “Transforming from NGO to Regulated MFI while

Maintaining Your Commitment to Empowering the Poor: A Step by Step Process.”

Written by:

Felipe Portocarrero M., Microfinance Consultant, International Finance

Corporation (IFC), Peru

2

TABLE OF CONTENTS

Introduction ............................................................................................................................. 3

1. Advantages and disadvantages of MFI transformations ........................................................... 6

2. Key factors for successful transformations ...........................................................................10

3. Planning the transformation. ...............................................................................................13

4. Final remarks and lessons learnt in LAC. .............................................................................17

References: ..........................................................................................................................20

Acronyms

ASOFIN Bolivian Microfinance Association

AS Advisory Services

CMAC Municipal Savings and Loans banks

CRAC Rural savings and loans banks

IDB Interamerican Development Bank

IFC International Finance Corporation

IS Investment Services

FFP Private Financial Funds

LAC Latin America and the Caribbean

MFI Microfinance Institution

MIF Multilateral Investment Fund

MIS Management Information System

NGO Nongovernmental Organization

TA Technical Assistance

TOR Terms of Reference

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Introduction

The pioneers Microfinance Institutions (MFI) were established in Latin America in the late

1980s and early 1990s. For the most part, those entities constituted credit granting Non

Governmental Organizations (NGOs) with a strong social mission1. Other MFIs were created as

greenfields (new formal intermediaries specialized in microcredit), under different institutional

models depending on the existing regulation2. In general, they could mobilize deposits from the

public but were not allowed to offer more complex financial services (as current accounts and

trade finance). Finally, some commercial banks initiated their downscaling experiences,

employing different strategies with mixed results.

But in retrospect, it is clear that the credit granting NGOs provided the most important base for

the development of microfinance in the region3. Within this group, the leading institutions were

the drivers of the growth of the microcredit portfolio and later transformed into formal financial

institutions, attaining deep outreach. Hence the interest to analyze this process and to discuss the

role played by transformation in the development of the microfinance sector.

Within this context, transformation is the process whereby NGOs, or other formal or informal

microfinance providers, convert to a regulated deposit-taking financial institution.

In the 1990s the microfinance industry was dominated by NGOs who depended on donor and

public sector funding to onlend. But as the sector experienced significant expansion those

sources of funding were unable to meet the demand. The resulting constraint led the more mature

and sustainable MFIs to enter the commercial sector by (i) appealing to international investors

1 See Conger L., P. Inga and R. Webb, 2009, “The Mustard Tree. A History of Microfinance in Peru”, Lima: Universidad de San Martin de Porres, 176 p. For a brief summary of the development of Bolivian Microfinance, cf. Elizabeth Rhyne, “Comercialization and Crisis in Bolivian Microfinance”, Nov. 2001, Microenterprise Best Practices, USAID, pp. 4-8. 2 Such is the case of the Municipal Savings and Loans (CMAC) and the Rural Savings and Loans (CRAC)

in Peru and the Fondos Financieros Privados (FFP) in Bolivia. These entities had lower minimum capital requirements than the banks. 3 For an overall view of the institutional development of microfinance in the region see DAI, “A Study of

Microfinance in Latin America and the Caribbean: Recommendations for Technical Assistance and Investment”, Final Report, Sep. 22,206, study submitted to IFC, pp. 7-9. For a global analysis of NGOs transformations see Gaamaa Hishigsuren, “Transformation of Microfinance Operations from NGO to Regulated MFI”, IDEAS, USA, paper presented to the 2006 Microcredit Summit.

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who desired a return on their investment but also wanted to contribute to a social cause; (ii)

contracting lines of credit from the banks and (iii) requesting the authorization to mobilize

deposits from the public and be subject to government regulations similar to those applied to

banking institutions. The development of the banking sector clearly showed that savings were

long-term the main and more stable funding source to be taped.

This recent trend of transformations from non-regulated microfinance NGOs into regulated

microfinance institutions has allowed the world to see that microfinance can operate in an open

market and be sustainable.

Notable examples of NGOs that have upscaled in LAC are4:

• BancoSol, FIE, Caja Los Andes and Prodem in Bolivia

• Confianza, Mibanco, Edyficar and Crear Arequipa in Peru

• Bancamia, Banco WWB Cali in Colombia

• Compartamos and CAME in Mexico

4 All these MFIs are former or current IFC investees with the exception of CAME Mexico.

5

This paper will focus on the MFI transformation in LAC. The first section discusses the

advantages and disadvantages of transformation, showing that on balance its benefits far

outweigh the costs. The second reviews the key factors required for successful transformation.

The third addresses the planning of the transformation process. The last concludes and discusses

some lessons learnt.

Table 1: Selected financial indicators of transformed MFIs in LAC

(as of Dec. 2010 in millions USD)

MFI Net Loans Assets Deposits

Liabilities Equity

No. of

Borrowers

(Equity/As

sets) (%)

Deposits/Lia

bilities (%)

Bolivia

Bancosol 627 869 608 807 63 145,608 7.2 75.3Banco Los Andes -

Procredit 554 789 563 703 86 67,203 10.9 80.1

FIE 589 751 514 684 65 146,819 8.7 75.1

PRODEM 526 700 504 632 68 108,881 9.7 79.7

Colombia

Bancamia 315.9 376.5 16.5 279.5 97 341,100 25.8 5.9

WWB Cali **

Mexico

Compartamos 765.6 907.9 202.8 458 449.4 1,961,995 49.5 44.3

Peru

Crear Arequipa 123.8 151 * 130 21.4 87,302 14.2 n.i.

Confianza 124.5 174 9.5 149.9 24.2 75,802 13.9 6.3

Edyficar 335 465.6 153 410 55.5 285,781 11.9 37.3

Mibanco 1,224 1,587 997.5 1,448 138.8 401,788 8.7 68.9

* Crear was not a l lowed to ra ise depos its at the time as i t transformed recently into a finance co.

** Banco WWB was authorized at the end of Dec. 2010

Source: ASOFIN for Bol ivia , SBS for Peru, www.compartamos.com,www.bancamia.com.co

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1. Advantages and disadvantages of MFI transformations

The MFI transformation process has clear advantages:

1. Access to a greater and more diversified funding base, including deposits and bonds, which

will support long-term portfolio growth5 . As can be seen in table 1, savings represent 69% to 80

% of all liabilities in the oldest transformers6, the Bolivian MFIs and Mibanco. In particular,

savings mobilization offers the possibility to reduce liability concentration and diminish the

financial costs of the MFI. At the same time, depositors are important stakeholders in the entity

and ensure a deeper relationship with the local or regional community. In effect, in many mature

institutions savers outnumber borrowers.

2. Clients are offered a greater array of financial services (savings, micro insurance, remittances)

that help them smooth consumption in the face of vulnerabilities or shocks that challenge low

income informal sector households that are excluded from the social safety net protection.

3. Regulation provides a better framework for risk management, corporate governance and the

reinforcement of internal controls, factors that are essential to ensure a healthy portfolio growth

and a stable institutional development.

4. It is also important to note that formalization allows the MFIs to attain a greater leverage and

thus to intermediate more resources to grow the portfolio. Institutions that have transformed

some years ago show a greater leverage (like the Bolivian MFIs and Mibanco) than recently

formalized MFIs (Compartamos, Bancamia, WWB Cali, Crear, Confianza and Edyficar), as can

be seen in table 1.

5. With rapid portfolio growth, MFIs will be able to reap economies of scale, consolidate their

sustainability and attain a massive outreach at the BOP, as shown in table 2. Reflecting this

process Mibanco grew from 32,000 active clients at transformation (May 1998) to 401,788 in

December 2010. Similarly, Compartamos increased its outreach from 616,528 current borrowers

5 Cf. Portocarrero Maisch Felipe, Tarazona Soria Alvaro y Westly Glenn, “How Should Microfinance

Institutions Best Fund Themselves?”. IDB, Washington, Nov. 2006, for an analysis of the MFI funding structure and its evolution in LAC. 6 Note that Bancamia, WWB Cali, Crear, Confianza and Edyficar have transformed recently. As savings

mobilization is a long-term endeavor, the diversification of liabilities should proceed progressively over the medium-term, as shown by the experience of the first transformers. Compartamos has adopted a different strategy, as it is mainly funded by issuing short term notes and bonds in the Mexican Stock Exchange, the second largest in LAC. This access to the local capital market is only possible for a regulated institution. But long-term the MFI plans to raise deposits from the public.

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at the end of 2006 – before obtaining the banking license in April 2007 – to 1,961,995 at the end

of 2010. The transformed MFIs have also attained massive outreach in the provision of savings

services, as shown by the considerable number of depositors attracted by Bancosol (414.154),

Banco Los Andes ( 381,416) and Mibanco (390,941) as of December 2010.

Table 2: Outreach Indicators of transformed MFIs in LAC

Source: adapted and updated from J. Ledgerwood, op. cit. pp xxxvi

6. Transformation tends to reduce the financial costs of the MFI, which gains access to lower

cost funds. This evolution and the more intense competition will drive down active interest rates

and spur operational efficiency in a sustainable manner to the benefit of the clients. Illustrating

this evolution, portfolio yield at Mibanco decreased from 31 % in 2007 to 27.6 % in 2010 on the

basis of increased operational efficiency (the ratio of operating expenses to loan portfolio went

MFI

Banco Sol

(BOL)

Finameric

a (COL)

Banco Los

Andes

ProCredit

(BOL)

Banco

ADEMI (DR)

Mibanco

(PE)

K-Rep

Bank

(Kenya)

Transformation

date Feb-92 Oct-93 Jul-95 Jan-98 May-98 Sep-99

22,743 32,022 12,662 18,000 32,000 13,201 130,628

Dec-91 Dec-93 Jul-95 Jan-98 May-98 Dec-98

145,608 61,880 67,203 82,049 401,788 65,073 823,601

(Dec 10) (Dec 10) (Dec 10) (Dec 09) (Dec.10) (Dec.10)

4.5 11.0 4.2 30.3 14.0 3.3 67.3

(Dec 91) (Dec 93) (Jul 95) (Jan 98) (May 98) (Dec 98)

439.8 181.7 392.3 192.0 1,224.0 74.2 2,503.9

(Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10)

414,154 109,389 381,416 109,364 390,941 170,189 1,575,453

(Dec 10) (Dec 10) (Dec 09) (Dec 10) (Dec 10) (Dec 10)

420 124.5 391.4 117.1 997.5 67.6 2,118.1

(Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10)

Amount of savings

mobilized in US M in

2010

TOTAL

No. of borrow ers

at transformation

date

No. borrow ers in

2010

Portfolio value at

transformation

(US$ M)

Portfolio value in

2010 (US$ M))

No. depositors in

2010

8

from 14.7 % to 12.7 % in the period), maintaining at the same time adequate profitability (ROE=

28 % in 2010)7.

7. A transformed MFI will have more success attracting external investors, facilitating thus

growth and M&A. Without doubt the April 2007 Compartamos IPO marked a watershed in the

development of microfinance 8 and created visibility for this asset class in the investment

community. Likewise, the transformation of Edyficar from an Edpyme (a non deposit taking

regulated financial institution) into a finance company in 2007 was important factor that

increased the interest of BCP (the largest commercial bank in Peru), which in 2009 acquired the

MFI from CARE, its original NGO owner.

But transformations also show some disadvantages:

1. Costs of regulatory compliance, which include (i) the cost of the studies and the

consultancies required to be licensed; (ii) the expenses involved in remodeling the

branches to the meet the higher standards of security and infrastructure required; (iii) the

outlays demanded by the acquisition of new software and hardware to perform the new

and more varied operations, like savings; (iv) the recruiting and training costs necessary

to incorporate new personnel, offer new financial services and to promote old employees;

(v) the costs generated by the submission of a series of new reports and by the challenges

of a more complex financial management , which requires the reinforcement of the

finance and treasury department to manage a more diversified funding structure and to

comply with the with the financial guidelines established by the regulator.

2. It is also important to note that the MFIs need to allocate extensive time and critical

resources to the transformation process. In general, they tend to underestimate the level

of effort and the delays involved.

3. Many MFIs experiment issues of cultural change as they convert into a more commercial

driven entity. Many fear that the entity might lose its social mission (mission drift) and

the quest for profitability will be the overriding priority. In this context it is important to

reach an internal consensus on the ultimate goal of the transformation process and the

7 See www.themix.org

8 See Richard Rosemberg, “CGAP Reflections on the Compartamos Initial Public Offering: a Case Study

of Microfinance Interest Rates and Profits”, CGAP, June, 1, 2007, Washington

9

proposed governance structure which should adequately balance the imperatives of

sustainability and mass outreach.

On balance the benefits far outweigh the costs of transformation. As J. Ledgerwood states

“ In most cases investments in transformation costs have for the most part been

recovered as a result of a steady flow of lower-cost funding and the increased

efficiencies achieved from economies of scale9“.

In this context, the recent international financial crisis of 2007-9 has demonstrated the dangers

faced by the MFIs dependent on wholesale funding and has undoubtedly accelerated the trend

towards transformation. Hence, the continued success of the transformation process.

But it is also important to note that many of the changes introduced are indispensable to ensure a

healthy and sustainable growth of the MFI. For this reason the largest remaining credit granting

NGOs have adhered voluntarily to many of those regulatory requirements in order ensure a

healthy portfolio development and to increase transparency and access to external funding10

.

They thus incur in the majority of the costs associated with transformation without fully reaping

its benefits.

It should also be underlined that transformation is a valid option only for those credit-granting

NGOs that have attained financial sustainability and developed a critical institutional base. As

most start-ups, the majority of the NGOs have not been able to reach such a level of

development. As a consequence, they remain dependent on a continuous flow of new grants to

survive, have to curtail or suspend their credit operations or have to adopt a clear turnaround

strategy to improve sustainability. In this last case, transformation should be preceded by a phase

of institutional strengthening to attain financial sustainability.

9 J. Ledgerwood et al, Transforming Microfinance Institutions, World Bank, 2006, pp. XXVIII

10 Such is the case of some of the WWB affiliates in Colombia, like WWB Cali and Bancamia, before they

transformed, and FMM Popayan, which plans to transform in the near future. In effect, many investment funds favor those NGOs that comply voluntarily with the regulatory requirements in terms of accounting, provisioning, external audit, etc.

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2. Key factors for successful transformations

Four key main factors determine the success of the transformation:

The existence of specific regulations tailored for the microfinance sector has greatly

facilitated the process. This relationship is illustrated by the evolution of Peruvian and

Bolivian microfinance markets, with the best ranking on regulations within LAC

countries, and which have coincidentally registered the higher number of

transformations11

.

The stage of development of the MFI: only mature and fully sustainable institutions

should contemplate transformation in the short-term. During a considerable period the

new formal intermediary will develop on the foundations created by the NGO. Only

robust institutions will be able to simultaneously manage rapid high-quality growth with

the challenges of transformation.

The commitment of the MFI main stakeholders is key for the transformation to succeed.

The support of Board Members, Managers and Staff will be critical to face the

institutional and technical challenges generated by transformation. As a consequence, it is

very important to create a broad consensus in the organization on the advantages of

transformation and on the strategy adopted to attain that goal.

The quality of the technical assistance contracted. Most MFIs are unable to design in-

house an adequate transformation plan and to implement it. Therefore, external

11 EIU, Global Microfinance Microscope, 2010

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consultants are contracted to conduct an appraisal and propose a transformation plan and

strategy. The quality of their work and their capacity to create a consensus on a sound

strategic plan will have a considerable impact in transformation’s success. Likewise, the

support of the consultants allows the MFIs to tackle the different challenges during

implementation, such as the design and pilot-test of the new financial products and their

roll-out at the national level.

But transforming MFIs should also support the development of different areas, whose outputs are

needed to ensure a healthy development of the new formal intermediary. In effect, the NGOs

were credit-led institutions with less complex funding and operation structures. The new formal

financial intermediaries would need to develop their internal capabilities in the fields of:

1. Strategic Planning to establish an adequate growth strategy for the IMF, the

financial products to be offered and the sequence of their introduction, as well as

to elaborate a set of financial projections to guide the budgeting process. In this

context, the IMF should conduct viability studies for the establishment of new

branches, the penetration of new market segments and the introduction of new

products and delivery channels.

2. Corporate Governance to ensure that Directors adequately address the interests of

the different stakeholders; the Board protects the rights of the minority

shareholders; the independent directors assist the MFI to ensure adequate

management oversight.

3. Risk Management Units (Credit, Operating, Market risks) the new and more

complex operations requires a more robust and integrated framework of risk

management, which should also comply with the regulatory guidelines from the

supervisor

4. Financial and Treasury Department which should be reinforced and restructured

to meet the more complex the liquidity management of an MFI mobilizing

deposits

5. Deposit Mobilization (adequacy of organizational structure, infrastructure,

training of staff, marketing, etc), the MFI would need to restructure its

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organization and branches to accommodate the needs of the depositors and design

new marketing strategies for those clients

6. Improving Operational Efficiency and Internal Controls, to reap the economies of

scale associated with portfolio growth, the MFI should streamline its operational

processes and establish more robust internal control mechanisms.

7. Systems / IT / MIS: the MFI must invest significant resources to improve its

hardware and software platforms to support the new financial products (like

savings) and accommodate rapid portfolio growth

8. Implementation of new lending products that meet the diversified needs of their

clients. Most NGOs concentrated on the provision of short-term working capital

loans. The transformed MFI can offer other types of loans to finance fixed-assets,

house improvement and agricultural activities.

Finally, it is also relevant to review the experience of failed transformations. In countries with

favorable regulatory environment, for the majority, the problems arise out of the intent to merge

smaller MFIs into one bigger formal entity. Issues like valuation, governance and managerial

control tend to create wide divergences among the participants in the proposed merger and

explain the failures observed. In countries with a less structured regulatory environment, the

authorities tend to block the road to transformation and prefer to wait for the appropriate

legislation to be passed. In the meantime, NGOs might opt for a linkage approach, establishing a

close relationship with different banks.

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3. Planning the transformation.

It is often convenient to hire external consultants to develop a transformation plan, performing a

gap analysis of the institution. As J. Ledgerwood notes:

“In general the transformation plan outlines the specific activities that need to take place

to develop the capacity of the MFI to be a licensed deposit-taker12

“.

In effect, consultants with ample financial sector experience are better equipped to conduct an

objective diagnosis of the MFI and to design the different activities needed to implement the

plan. In correspondence, it is of critical importance to develop adequate terms of reference

(TOR) and ensure a competitive consultant selection process. As shown by the LAC experience,

many MFIs are not experienced in contracting external consultants and they very much

appreciate IFC support in this area13

.

Although some MFIs have transformed directly from NGO to bank (such as Mibanco and

Bancamia), many transformations involve a two-step process. In the first one, the NGO

transforms into a non-banking financial intermediary, like a Fondo Financiero Privado (FPP) in

Bolivia or an Edpyme in Peru14

. Some years later, the MFI applies for a banking or finance

company license, in order to offer more diverse financial services15

. This path has been followed

by Banco Los Andes - Procredit and Banco FIE in Bolivia and by Edyficar, Confianza and Crear

Arequipa in Peru, which transformed first into Edpymes and later into finance co. The decision

to transform will clearly impact the strategic plan of the MFI, which should be up-dated to take

12

J. Ledgerwood, op. cit., pp. 78. 13

Many MFIs mistakenly assume that the regulator will require that big, prestigious international consulting firms should elaborate the transformation plan and corresponding consultancies. In reality, the authorities accept without much difficulty plans and reports produced by less well-known consultants, if they satisfy their standards. 14

These are formal financial institutions with more limited operations than banks and with lower minimum capital requirements. In Bolivia, FPP can mobilize deposits, whereas in Peru Edpymes are not allowed to do so. 15

In Peru the Finance Co. can issue bonds and raise deposits.

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into account the products to be introduced and the new framework for the management of the

institution.

Experience has shown that the MFI should designate a transformation champion, a Director or

senior manager firmly persuaded on the advantages of the process and able to lead the effort of

the MFI and manage the main challenges. Additionally, the institution should contract a

transformation manager, who will be in charge of the coordination and monitoring of the

consultant team and to ensure the continuous support of the rest of the organization.

The transformation plan should contain a detailed discussion of the studies and consultancies to

be contracted, including their terms of reference, timeline and estimated budget.

More specifically, the transformation plan addresses the period it will take to transform, usually

12-24 months and will include the following elements16

:

1. Review of operations, including credit and savings products.

2. Strategic Plan update, including competitive positioning of the MFI and mid-term

financial projections of the new financial entity.

3. Legal due diligence and legal aspects, explore the legal framework for transformation;

the eventual set-up of a for profit company; the transfer mechanism from the NGO to the

new intermediary; the licensing requirements, and the compliance with the relevant

regulation.

4. Funding and ownership: determine the funding structure of the new entity and the level of

equity required; estimate the appropriate leverage and the expected profitability;

determine the ownership structure and the profile of the desired investors.

5. Governance: analyze the current board of directors; propose changes for the new

regulated entity; suggest clear board policies and procedures.

6. Human resources: evaluate the current organizational structure and recommend changes;

develop a process to qualify existing staff for the new positions; review the salary and

incentive structure; identify the positions in senior management that should be filled by

outside candidates.

16

In certain measure, these tasks can be carried out concurrently, cf. J. Ledgerwood, op. cit. pp. 79.

15

7. MIS: review the hardware and software and determine the changes required to support

the new and more complex operations and reporting requirements.

8. Risk management and internal controls: review existing framework; ensure compliance

with the requirements of the regulator; reinforce internal controls.

9. Financial management: reinforce the financial management and treasury operation to

meet the higher standards prevalent in a regulated intermediary; establish well-

documented financial procedures.

10. Transformation costs: estimate the cost of transformation by activity; develop a timeline

and TORs for the different consulting assignments foreseen; propose a procurement

strategy to contract the consultants, and explore the sources of funding for

transformation.

In this context, the restructured financial projections and the up-dated business plan will show

the positive impact of transformation and should be used to facilitate consensus-building among

the MFI Directors, Managers and Staff.

IFC recent experience shows that it is useful to suggest a phased approach for the TA delivered

to support transformation. During a first phase, an outline of the transformation plan is drafted in

a 3-4 month period and discussed with the MFI in a workshop. This outline should suggest a

road map for the second phase, including timeline and estimated budget. Within this framework,

the MFI main stakeholders reach an informed decision on whether to transform and how to

structure this process. On the basis of a consensus reached with the MFI, during the second phase

the more detailed consultancies are developed. As this process frequently involves the

collaboration of multiple donors and consultants, the role of the transformation manager is

central to ensure adequate coordination and on-time delivery of the reports.

Box. No. 1: Confianza: a case study of transformation from NGO to microfinance bank.

The NGO SEPAR was established with support from an IDB grant in 1992 to provide rural

credit for poor women in the Peruvian highlands. The institution grew rapidly and in 1998 was

authorized to transform into Edpyme Confianza, a non-deposit taking formal financial

16

institution. With this change the MFI was able to access new sources of funding (including an

IFC loan in 2006) and increase its on-lending activities in urban and rural areas in central Peru.

At the end of 2008 its portfolio attained US$ 86 million and 59,042 outstanding borrowers. In the

same year the MFI signed a Cooperation Agreement with IFC to support its transformation into a

deposit taking finance company. The TA provided included during a first phase (i) The

development of a new 5 year strategic plan for the future finance company and (ii) The

improvement of the governance structure to meet the higher requirements of an intermediary that

would issue bonds in the local capital market. On this basis, the MFI prepared a transformation

plan and the regulator licensed the entity as finance company in September 2009. The new

institution benefited from a second phase of the TA centered on the implementation of a more

advanced risk management system and on the design and roll out of the new savings products.

In March 2011 Confianza had an outstanding loan portfolio of US $ 141 million with 80,199

current borrowers. In April 2011 the MFI signed a merger and integration agreement with Caja

Nuestra Gente (a Peruvian MFI majority owned by the BBVA Foundation and also an IFC

investee, with an outstanding portfolio of US $ 269 million and 129,209 active borrowers in

March 2011) to establish Banconfianza, a niche bank, reinforcing thus the consolidation trend

recently observed in Peruvian microfinance.

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4. Final remarks and lessons learnt in LAC.

As discussed, only mature MFIs that have reached full sustainability, reap economies of scale

and possess a solid institutional base should attempt transformation in the short-term.

Other, less advanced institutions should first embark on a program of institutional strengthening

to improve its operations and institutional base. Once one these goals are met the MFI

contemplate transformation.

As shown in tables 1-2, the transformation experiences have been very positive in LAC:

portfolio growth has accelerated; operational efficiency and profitability have increased;

financial products offered multiplied and the funding structure has become more stable and

diversified. The relevance of this process in LAC is reflected in the fact that 5 out of the 10

largest MFIs in terms of microenterprise portfolio size (Compartamos, Mibanco, Bancamia,

WWB Cali and CAME) have grown as a consequence of transformation17

. The rest includes two

public programs (Crediamigo in Brazil and BancoEstado in Chile), two NGOs that are in the

process of transformation ( FMM Popayan and FMM Bucaramanga in Colombia) and one bank

downscaler (Banco Caja Social in Colombia). Transformation has played thus a central role in

the development a of mature and inclusive microfinance market in LAC.

Transformation has also allowed MFIs to diversify their funding via deposit mobilization,

reducing liability concentration and enhancing the degree of freedom of their managers vis- a-

vis the donors and the public sector. Relying on savers, the MFIs develop deeper roots in the

local and/or regional communities and are thus better protected against eventual populist

measures (like debt forgiveness programs or debtors collusion movements). In this context, it is

important for the MFI to establish a clear savings mobilization strategy. In many cases, it has

been easier for the MFIs to attract term deposits from middle income groups, as those clients are

lured by financial returns and do not require an extensive branch network and transactional

17

See IDB-MIF and MIX “Microfinance Americas: The Top 100”, Washington, 2010, pp.7.

18

facilities (ATMs, etc). Later, as the MFI scales up passbook savings will develop and provide an

important and low-cost source of funding18

It is also important to analyze the impact of transformation on the social mission of the

institution. On the one hand, portfolio growth, improved efficiency and greater access to funding

allow transformed MFIs to increase significantly their outreach, incorporating a massive number

of clients to the formal financial system and offering them a greater variety of financial products

at diminishing costs. On the other, an excessive emphasis on profitability might lead the MFIs to

prioritize loans to the larger, more established small and micro-entrepreneurs, neglecting their

original base of the pyramid orientation. But in the absence of interest rate caps and other

distortions in the financial system (targeted credit goals set by sectors, enterprise size or regions),

this trade-off will not be very significant: the MFIs that adopt the required technological and

organizational innovations would find small loans profitable and attractive.

To preserve their social mission, many MFIs have adopted an ownership structure where the

original NGO retains the majority of the shares in the transformed formal institution, as in the

case of Mibanco in Peru or FIE in Bolivia19

. In this way, the target group orientation is

maintained and the NGO shareholder ensures the representation of social mission. But this

ownership structure could have also some disadvantages: the NGO shareholder might not be in

the situation to provide additional fresh capital to sustain more rapid growth or to face a crisis; it

is also important to note that an NGO has a diffuse control structure, which could create

inappropriate incentives for Directors and Managers, as shows the recent experience of some

Spanish Saving Cajas.

Of paramount importance is to strategically plan the transformation process: the main focus

should be the long-term needs of the MFI and its business plan; to comply with the regulator’s

demands is a secondary, albeit important, consideration. Careful planning and sequencing of the

consultancies will lead to better results, avoiding the possibility to overburden the MFI with

multiple requests and facilitating knowledge transfer from the consultants. In this context, it is

18

The economies of scale and the use of alternative delivery channels (banking corrspondents, ATMs, m-banking) will help the MFIs dilute the high administrative cost of managing these small-scale savings. 19

In both countries the banking laws allow NGOs to be bank shareholders.

19

very useful to develop a detailed road map of the consultancies required for the process,

including TORs and estimated budget and timeline.

The MFI should highlight the long-term advantages of transformation as opposed to short-term

costs and to the organizational upheavals generated. All staff levels should participate in the

discussion of the transformation plan and the up-dated business plan, supporting thus the

formation of a wide consensus critical for the success of the process.

But once the regulator grants the license to transform the real work begins: the MFI will need to

establish a new governance structure; maintain a good quality portfolio growth; design and

implement new financial products; reinforce financial management; improve operational

efficiency and explore options to increase outreach in a cost efficient manner.

IFC has played an important role in MFIs transformations in LAC.

In its role as investor, IFC provides equity or convertible loans to reinforce the capital

base of the new intermediaries, as in the case of Compartamos, Mibanco and Edyficar. It

also grants loans and partial credit guarantees to fund portfolio growth and facilitate

access to the local capital markets, as in Confianza and Edyficar, respectively.

As advisory services provider, IFC supports the MFIs in the different stages of the

transformation process, on the basis of a diagnostic of the MFI and the design of a tailor-

made proposal. Both parties will jointly design the TORs for the different assignments

foreseen (elaboration of the transformation plan, up-date of the business plan) and select

the consultants in a competitive procurement process to carry them out. As experience

has shown, IFC active involvement and quality control are appreciated by the MFIs.

Providing a significant cost-share fosters the ownership of the transformation in the MFI

and helps it focus its attention on assimilating the knowledge transfer from the

consultants.

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References:

Bruskie Bonnie, “Linking MFIs to Commercial Finance in Latin America: IDB Support of

Profund”, CGAP, Washington, Case Studies in Donor Good Practice, no. 12, May 2004.

Campion Anita et al, “The Transformation of ACP to Mibanco”, Microenterprise Best Practices,

Washington, October 2001

Christen Robert P. et al, “Commercialization and Mission Drift: The Transformation of

Microfinance in Latin America”, CGAP, Washington, Occasional Paper no. 5, January 2001.

Conger L., P. Inga and R. Webb, 2009, “The Mustard Tree. A History of Microfinance

in Peru”, Lima: Universidad de San Martin de Porres, 176 p.

DAI, “A Study of Microfinance in Latin America and the Caribbean: Recommendations for

Technical Assistance and Investment”, Final Report, Sep. 22, 2006, study submitted to IFC

EIU, “Global Microfinance Microscope”, 2010

Fernando A. Nimbal, “Mibanco, Peru: Profitable Microfinance Outreach with Lessons for Asia”

Asian development Bank, July 2003

CGAP, “NGO MFI Transformations: Ownership Issues”, CGAP Brief, Washington, September

2008

CGAP, “The Challenge of Growth for Microfinance Institutions: The BancoSol Experience”,

Washington, Focus Series no 6, March 1997

Hishigsuren Gaamaa, “Transformation of Microfinance Operations from NGO to Regulated

MFI”, IDEAS, USA, paper presented to the 2006 Microcredit Summit.

IDB-MIF and MIX “Microfinance Americas: The Top 100”, Washington, 2010

Lauer, Kate, “Transforming NOG MFIs: Critical Ownership Issues to Consider”, CGAP

Occasional Paper 13, June 2008, Washington

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Ledgerwood J. et al, “Transforming Microfinance Institutions”, World Bank, 2006

Krahnen J. P. and Schmidt R. H., “Development Finance as Institution Building: A New

Approach to Poverty Oriented Banking”, Westview Press, 1994

Portocarrero Maisch Felipe, Tarazona Soria Alvaro y Westly Glenn, “How Should Microfinance

Institutions Best Fund Themselves?”. IDB, Washington, Nov. 2006.

http://www.iadb.org/sds/publication/publication_4220_e.htm

Rhyne Elizabeth , “Comercialization and Crisis in Bolivian Microfinance”, Nov. 2001,

Microenterprise Best Practices, USAID.

Richard Rosemberg, “CGAP Reflections on the Compartamos Initial Public Offering: a Case

Study of Microfinance Interest Rates and Profits”, CGAP, June, 1, 2007, Washington