Transformation of Microfinance Operations from NGO to Regulated MFI

This paper was commissioned by the  Microcredit Summit Campaign in 2006. The paper overviews the transformation of microfinance non-government organizations (MNGOs) into regulated financial institutions, and presents key issues and challenges before, during and after transformation. The paper identifies the following advantages to transformation:

• Ability to mobilize deposits;
• Permission to provide a wider range of financial services;
• Improvement in customer service;
• Access to private sources of capital;
• Better governance and transparency;
• The possibility of reaching significant scale and financial sustainability.

The paper discusses the common challenges experienced during transformation that discourage the uptake of this restructuring strategy:

• Need for timely and appropriate communication to staff and clients;
• Adjustment to a more competitive environment;
• Facing high initial costs;
• Problems in adjusting to the payment system;
• Difficulty in meeting reporting requirements;
• Entering into unfamiliar areas in terms of product development, management, etc;
• Difficulties in developing necessary management information systems (MIS).

The paper goes on to discuss and illustrate:

• Cross-cutting issues such as licensing and ownership models, raising equity capital, institutional models, operational transformation, organizational culture, human resources, client transitioning and competition;
• The implications of transformation on governance, ownership, organizational development, loan methodology, poverty outreach and social intermediation.

The paper concludes by listing key lessons learned from earlier experiences that apply to the three phases of transformation: before, during and after transformation.