Micro Success Story? Transformation of Nongovernment Organizations into Regulated Financial Institutions Nimal A. Fernando ASIAN DEVELOPMENT BANK Regional and Sustainable Development Department June 2004 i Copyright: Asian Development Bank 2004 All rights reserved. Nimal A. Fernando is Lead Rural Finance Specialist in the Regional and Sustainable Development Department of the Asian Development Bank. The views expressed in this paper are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors or the governments they represent. The Asian Development Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequences of their use. Use of the term "country" does not imply any judgment by the author or the Asian Development Bank as to the legal or other status of any territorial entity. This publication is available on the Asian Development Bank's microfinance web site: http://www.adb.org/microfinance ISBN 971-561-541-4 Publication Stock No. 050404 Published by the Asian Development Bank, 2004. ii CONTENTS Page Abbreviations iv Foreword v Abstract vi I. Introduction 1 II. The Expectations 3 III. Have the Transformed Institutions Met the Expectations? 7 IV. Conclusions 29 Appendix: NGOs Transformed into Regulated Financial Institutions 31 References and Web Sites 41 iii ABBREVIATIONS ACLEDA - Association of Cambodian Local Economic Development Agencies ACP Acción Comunitaria del Perú ADB - Asian Development Bank ADC - Andean Development Corporation ADEMI - Asociación para el Desarrollo de Microempresas ASA - Association for Social Advancement BRAC - Bangladesh Rural Advancement Committee CARD - Center for Agriculture and Rural Development CDC - Commonwealth Development Corporation CGAP - Consultative Group to Assist the Poor CLA - Caja Los Andes COFIDE - Corporación Financiera de Desarollo CONFIA - Corporación Nicaragüense Financiera EDPYMEs - Entidades de Desarrollo para la Pequeña y Micro Empresa EMT - Ennathian Moulethan Tchonnebat FFP - Fondo Financiero Privado FIE - Fomento de Iniciativas Económicas FINAMERICA - Financiera America FMO - Netherlands Development Bank IIC - Inter-American Investment Corporation MFI - microfinance institution NBFC - nonbank finance company NGO - nongovernment organization OMB - Opportunity Microfinance Bank PRODEM - Fundación para la Promoción y el Desarrollo de la Microempresa RFI - regulated financial institution SHARE - Society for Helping Awakening Rural Poor through Education SML - SHARE Microfin Limited SOFOL - Sociedad Financiera de Objeto Limitado USAID - United States Agency for International Development NOTE: In this report, "$" refers to US dollars. iv FOREWORD he microfinance industry is undergoing This study examines the ownership structure, Tsignificant global change. Shareholder-owned, expectations, and achievements of transformed regulated microfinance institutions that provide institutions in Africa, Asia, and Latin America. a range of financial services to poor and low-income The study is based on data and information households and their microenterprises were not a painstakingly collected from many sources about general characteristic of this industry until the late their equity capital, ownership structure and the 1980s. Microfinance, or microcredit to be more evolution, scope of operations, and breadth and accurate, was largely an operation of nongovernment depth of outreach. organizations (NGOs) and state-sponsored programs. This has changed during the last two decades, The Asian Development Bank hopes that this mainly through transformation of NGOs into study will inform and improve understanding by regulated microfinance institutions in various microfinance stakeholders of the nature of the countries, particularly in Asia and Latin America. transformation of NGOs into regulated financial The number of such institutions remains low but institutions, and enrich and encourage their catalytic effect and overall influence on the discussions on the issues among stakeholders industry are disproportionately high relative to their and potential investors. It is hoped that the study position in the industry. In some countries, will help transformed institutions to improve transformed institutions have performed much their operations to serve larger segments of the better than conventional financial institutions both poor more effectively. Finally, the study should in terms of profitability and outreach. Many of these enable NGOs considering transformation into institutions have established themselves as robust, regulated financial institutions to make more permanent financial institutions with a social informed decisions to ensure their sustainability mission to serve the poor. and social mission. Geert van der Linden Vice-President Knowledge Management and Sustainable Development Asian Development Bank v ABSTRACT ongovernment organizations (NGOs) began deposits to finance their growth. A review and Nmicrocredit operations because conventional analysis of operations of transformed institutions financial institutions were not providing financial show that many of these institutions have been services for the poor and low-income households able to achieve positive results, as expected, in and their microenterprises. Over time, NGOs four fundamental areas: an ownership structure began to play a significant role in providing with shareholders to maintain a balance between microcredit services in many countries. social mission and profitability/sustainability, Ironically, increasing numbers of NGOs have increased access to loanable funds from transformed themselves into regulated financial commercial sources, broader range of services institutions since the first such transformation, including voluntary deposit services, and that of the NGO Fundación para la Promoción y increased breadth and depth of outreach. el Desarrollo de la Microempresa into BancoSol However, more intensive research on transformed in Bolivia in 1992. With transformation, these institutions, particularly on their governance, institutions expected to increase the breadth and operational efficiency, and poverty outreach is depth of their outreach, primarily through better necessary to improve our understanding of the access to commercial sources of funds and public impact and emerging issues of transformation. vi I. INTRODUCTION1 major characteristic of the microfinance NGOs into regulated financial institutions (RFIs) Aindustry in many developing countries is the in some countries. This process, which started extensive involvement of nongovernment with the transformation of Fundación para la organizations (NGOs) in providing microcredit Promoción y el Desarrollo de la Microempresa services. This is the experience in Asia and the (PRODEM) into BancoSol in Bolivia in February Pacific, Latin America, and other regions. In some 1992, has continued in recent years, both in developing countries, NGOs have become, and Bolivia and in other countries around the world. continue to be, the dominant source of In 1993, NGO-Corposol in Colombia transformed institutional microcredit. For example, in itself into an RFI called Finansol. The number of Bangladesh 656 NGOs had cases of transformation 9.46 million active loan gradually increased over accounts with an outstanding NGOs, funding agencies, and time, as shown in Figure 1. total loan amount equivalent many other stakeholders are now Based on available infor- to $513 million at the end of paying increasing attention to mation from the literature, 2002 (Credit and Development limitations of the NGO modality. Internet sites, and financial Forum 2003). The Bangladesh networks, at least 39 NGO Rural Advancement Committee (BRAC) disbursed $294 million in loans to some 2.9 million clients Figure 1 Cases of Transformation of NGOs into during 2002, while the Association for Regulated Financial Institutions, by Year of Transformation Social Advancement (ASA), also in Bangladesh, disbursed about $345 million during 2003 and had about No. of Cases 2.13 million active borrowers at the 9 8 end of 2003. 7 NGOs, funding agencies, and 6 many other stakeholders are now 5 paying increasing attention to 4 limitations of the NGO modality, 3 particularly those arising from the 2 lack of owners. Recognition of the 1 limitations or perception of 0 Feb limitations has resulted in the 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 transformation of microfinance 1 The author gratefully acknowledges the information provided by In Channy (ACLEDA Bank), Udaia Kumar (SHARE Microfin Ltd.), Sunil Khanal (Nirdhan Utthan Bank), Shankar Man Shrestha (Rural Microfinance Development Center, Nepal), Bijaya Nath Bhattarai (Nepal Rastra Bank), Joji Tokeshi (Asian Development Bank, Vijay Mahajan (Basix), Syed Hashemi, Alexia Lartortue, Brigit Helms, and Veena Jayadeva (CGAP), Didier Thys (Microfinance Information eXchange), David Gibbons (Cashpor Inc), M. Kalyanasundaram (INAFI-India), Elissa McCarter, and Elizabeth Abrera (Catholic Relief Services), John Owens (USAID), William Steel (World Bank), and Perry Cartera (Opportunity Microfinance Bank). Also, the author acknowledges the information drawn extensively from Drake and Rhyne (2002) and Rhyne (2001) to discuss the issues relating to BancoSol in Bolivia and Mibanco in Peru. Comments of Tor Jansson, Nimal Sanderatne, and John Whittle are gratefully acknowledged. Research assistance was provided by Patricia Calcetas