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
3
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.
4
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
6
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.
10
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
11
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.
14
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.
17
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
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Asian development Bank, July 2003
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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
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Approach to Poverty Oriented Banking”, Westview Press, 1994
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Institutions Best Fund Themselves?”. IDB, Washington, Nov. 2006.
http://www.iadb.org/sds/publication/publication_4220_e.htm
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Richard Rosemberg, “CGAP Reflections on the Compartamos Initial Public Offering: a Case
Study of Microfinance Interest Rates and Profits”, CGAP, June, 1, 2007, Washington