This course looks at the benefits, costs, challenges and issues of undertaking microfinance on a commercial basis, in particular those that arise in the transformation of MFIs originally formed as NGOs (or private voluntary organizations) into licensed and regulated commercial financial institutions.
The course focuses on the lessons from the experience of K-Rep Bank (Kenya), as well as others such as Mibanco, and develops a checklist of the crucial areas for NGOs intending to transform. Particular attention will be paid to the creative tension between financial goals and poverty focus, and the implications for human resource management. The importance of a suitable legal/regulatory framework will also be discussed, focusing on different approaches in African countries.
Other topics include ownership, capitalization, governance, market environment, corporate communications, costs, performance, market positioning and product development in the context of transformation. *Prerequisites* The course is designed to accommodate and draw on the experiences of participants from diverse backgrounds, including MFI practitioners, central bankers, donor agencies, and policymakers. As such, it has no formal pre-requisites, other fluency in English and participation in the first two weeks of the Boulder MFT program.
Methodology
The course is team taught in such a way as to encourage discussion around the issues, drawing on the case study material presented and the various experiences of the participants. The core of the course is presentation of the experience of K-Rep Bank, with question-and-answer sessions interspersed. Break-out group sessions on benefits and costs of transformation, the critical decisions facing K-Rep, and an appropriate legal/regulatory structure give participants further opportunity to thrash out basic concepts and arguments for and against different options.
Objectives
Module I: Background
Introduction to the meaning and rationale of transformation. Historical perspective on the emergence of transformation in the 1990s as an important strategy for NGO-MFIs to improve sustainability, outreach and independence. Trends: will new laws pave the way for an upsurge in transformations? Mibanco (Peru) case as a typical early example of the process.
Module II: Why Transform? What Are the Risks?
Why NGOs with a social purpose may need to commercialize in order to achieve their objectives on a larger scale – in general, and in the case of K-Rep. Break-out discussions of what benefits may be anticipated, and the risks involved. Concern about “mission drift.”
Module III: Changing the Legal Framework
An emerging trend is legislation to permit specialized microfinance institutions to become licensed to take savings, providing more options than becoming commercial banks (as did K-Rep and a number of early transformers). Uganda Microfinance Deposit-Taking Institutions Act as an example of how long this process can take.
Module IV: The K-Rep Case: The Process
Background to K-Rep’s decision to undertake two transformations (project to NGO; NGO to commercial bank). Key objectives. Issues of organizational structure and ownership. Key challenges (external and internal). Finding investors and structuring the deal. The changing scene of investors and ownership profiles.
Module V: The Challenges of Implementing Transformation
Overview of the critical challenges following the decision to transform, including meeting the standards for licensing and regulatory compliance; operational Issues; personnel and staffing; and dealing with the political and economic environment. Break-out discussions on the key decisions facing K-Rep and what might have been done differently.
Module VI: The K-Rep Case: Overcoming Difficulties; Impact
How K-Rep dealt with some of the key problems that threatened to derail the process, including data migration, staffing and office culture, governance, and Central Bank supervision. Comparison of clientele and portfolios before and after. Is the mission being achieved, or drifting?
Module VII: Reforming the Legal and Regulatory Framework
Regulatory issues faced by K-Rep. Break-out discussions of the benefits and risks of a special microfinance law, from different perspectives (e.g., large and small NGOs, central bankers, parliamentarians). Different approaches to licensing and regulation as illustrated by different countries in Africa.
