FROM NGOs TO FFIs IN MICROFINANCE SERVICES:
CONVERSION ROAD MAP AND ITS CHALLENGES
Comparative study of nine Eastern European MFIs
For more than three decades global microfinance services have been dominantly carried out by coalitions of organizations dedicated to providing opportunities for people in poverty to transform their lives through small and micro business loans, training, and financial services that enable them to develop and sustain income-generating and job-creating enterprises. Most of them have been motivated by their vision and mission that include financial viability (measured by the sustainability of their programs), outreach to poor clients (number of clients reached), and transformational impact (measurable impact on the lives of their clients). Their core values vary, being focused mostly on such as commitment to the poor, respect, integrity, stewardship etc.
Opportunity International (OI) is one of those global coalitions of microfinance institutions and funding partners dedicated to achieve a triple bottom line of financial viability, outreach, and impact on their clients. The Opportunity International Network consists of 40 implementing partners in Africa, Asia, Latin America and Eastern Europe, as national scale transformational financial institutions, and 5 funding or support partners. As of March 2003 OI was serving over 403,000 clients worldwide with a loan portfolio of USD 61.3 million.
As many other global coalitions, recently OI made a strategic decision to focus on creating regulated (formal), rather than unregulated (informal) microfinance institutions to better achieve its goals, including conversion of those in existence, established through the years as NGOs. The primary reason for this strategy has been to overcome legal barriers and governance limitations inherent in unregulated organizations which restrict outreach and access to capital. According to what the new concept declared, the significant outcomes of this approach should be increased access to capital by formal microfinance institutions in the form of wholesale debt, deposits and investor equity; the ability to offer additional services such as savings and insurance products; and the ability to attract investors that may not have otherwise participated. Given these advantages, it is projected that regulated microfinance institutions are able to reach far greater numbers of poor microentrepreneurs while reducing dependency on donated funds.
Objective and plan
The Project FROM NGOs TO FFIs IN MICROFINANCE SERVICES: CONVERSION ROAD MAP AND ITS CHALLENGES intends to look into the logical framework of the microfinance institutions’ (MFI’s) scaling up process, analyzing both its strengths and challenges. As the tendency of creating regulated financial institutions rather than historically preferred NGOs globally faces pro and contra argumentation, the project proposes rationale for conversion to be based on the particular experiences, as well as on qualitatively and quantitatively analyzed performances of nine East European MFIs: PShM (Albania), Nachala (Bulgaria), NOA (Croatia), Moznosti (Macedonia), Opportunity Bank Montenegro (OBM), Inicjatywa Mikro (Poland), Opportunity Microcredit Romania (OMRO), Fund Opportunity Russia (FORA) and Opportunity International Serbia (OIS). Although members of OI Network, each of these microfinance entities belong to slightly different social and legal environment, therefore being in different phases and paths of conversion.
In terms of methodology, the research should include content analysis of the latest social and financial performance figures released (for the converted MFIs both prior and after the conversion). In addition, the survey should refer to the responses from standardized interviews with board and staff (governance and management) representatives, conducted online or personally, during some of their annual regional gatherings. Sample questionnaire for the interview should include issues (legal, economic, social, psychological) that are to be or have already been addressed in regard to the process of conversion.
Finally, in its interpretational phase, the figures and responses analyzed would have to provide sufficient amount of information for the road map to be drafted, and the challenges to be listed. It is intended the final report to be a kind of reference handbook for those planning to carry out such a conversion.
In that sense, particular focus should be given to the following dilemmas:
1. Traditional vision, mission and values versus forthcoming commercial pressure
- To which extent the commitment to the original vision, mission and strategy remains strong? Is it possible the mission to erode by commercial pressures?
- What happens with the economic, spiritual, social and personal transformation in clients’ lives since the normal reporting system of the FFI will focus on financial measures only?
- How to encourage FFIs to innovate and develop new financial products that serve their clients’ needs, while maintaining quality control and making sure that they are to remain focused on serving the very poor and achieving a transformational impact?
2. Flexible concept of ownership and control in NGOs versus the clear reporting in FFIs
- As the most of the existing MFI have been established with the generous grants by various charitable organizations or by the technical donations of various public entities from the developed countries, resolving the issue of FFIs’ ownership becomes crucial point of conversion!
- What about the role of NGOs when a FFI is formed? In most of these cases, the original NGOs remain as owners of the equity, or will become major investors in the formal financial institutions. In some cases these NGOs are required by law to continue as operating entities. Furthermore, in most others the NGO’s boards and management desire to remain as operating entities after the FFI is formed.
- Are the new entities ready to expect raising standards through revised accreditation process and audit function in line with both, original vision and mission and external rating agency standards?
3. Breadth and Depth of Financial Products
- What about the loans for small and medium-scale enterprises (SMEs)? Many of the newly formed FFIs have access to funds for SME loans, and in many Eastern European countries the donors are no longer providing funds for micro enterprises. While these funds help grow the overall portfolio of the FFI, they also have the potential to move the FFI away from their initial target market!
- Purposes in providing savings services? If the savings are seen primarily as a means of attracting capital to be lent to the poor, then the most cost effective vehicle in many countries may be saving products which attract wealthy people to invest in certificates of deposit. On the other hand, if the savings are seen as an essential financial service needed by the poor, then the new design is needed, of very different financial products that can attract savings from the clients and their communities on a cost effective basis.
Once these dilemmas solved, the result of the conversion should meet the desired description of transformational financial institution, aimed to plant the seeds for potential growth in low income countries. Then, the term transformational will achieve its full meaning of social, political and economic transformation of the clients and their communities.
As mentioned above, the initiatives for MFIs’ conversion have been motivated by the goal for expanding outreach through access to savings and commercial loans for on-lending, followed by meeting clients’ changing needs, as well as the requirements of changing funding environment: investor standards, changing donor strategies and priorities. Increase of market credibility, increase of efficiency and retaining competitiveness have been also among the motives. So, the research that will provide a kind of review of the argumentation in favor or against these recognized tendencies, followed by draft road map for conversion, might be by all means understood as applicable.
However, it is noteworthy that MFIs organized as formal financial institutions are subject to regulations and policies established by the Central Banks in their respective countries. It is expected that MFIs intended to converse into formal financial institutions, besides using these research findings, will have to comply with all Central Bank regulations and reporting requirements in their country.