F portocarrero mfi-transformations_the_lac_experience


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F portocarrero mfi-transformations_the_lac_experience

  1. 1. MFIs Transformations: The LAC Experience Felipe Portocarrero M. 2011 Global Microcredit Summit November 14-17, 2011 – Valladolid, Spain
  2. 2. Contents • Introduction 1. Advantages and disadvantages of MFI transformations 2. Key factors for successful transformations 3. Planning the transformation 4. Final remarks Annex: Indicators of transformed MFIs in LAC 2
  3. 3. Introduction • Transformation is the process whereby NGOs, or other formal or informal microfinance providers, convert to a regulated deposittaking 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; (ii) contracting lines of credit from the banks and (iii) requesting the authorization to mobilize deposits and be subject to government regulations. • The development of the banking sector clearly showed that savings were long-term the main and more stable funding source to be taped. 3
  4. 4. •This recent trend of transformations from nonregulated 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 are: •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
  5. 5. 1. Advantages of MFI transformations • The main advantages are: 1. Access to a greater and more diversified funding base, including deposits and bonds, that will support long-term portfolio growth. 2. Clients are offered a greater array of financial services (savings, micro insurance, remittances). 3. Regulation provides a better framework for risk management and corporate governance 4. Formalization allows the MFIs to attain greater leverage and to grow the portfolio 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. 6. Transformation tends to reduce the financial costs of the MFI. At the same time, increasing competition will spur operational efficiency and drive down active interest rates in a sustainable manner to the benefit of the clients. 7. A transformed MFI will have more success attracting external investors, facilitating thus growth and M&A. 5
  6. 6. Disadvantages of MFI transformations Disadvantages : • (i) Costs of regulatory compliance; • (ii) Need to allocate extensive time and critical resources to the transformation process; • (iii) Issues of cultural change in the MFI as it converts into a more commercial driven entity. But the benefits far outweigh the costs of transformation. Hence, the continued success of the process. 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. 6
  7. 7. 2. Key factors for successful transformations • The existence of specific regulations tailored for the microfinance sector has greatly facilitated the process. • The stage of development of the MFI. • The commitment of the MFI main stakeholders is key for the transformation to succeed. • The quality of the technical assistance contracted • It is also important the development of different areas: 1. Strategic Planning / Feasibility studies 2. Corporate Governance 3. Risk Management Units (Credit, Operating, Market risks) 4. Financial and Treasury Department 5. Deposit Mobilization (adequation of organizational structure, infrastructure, training of staff, marketing, etc). 6. Improving Operational Efficiency and Internal Controls. 7. Systems / IT / MIS 8. Implementation of new lending products 7
  8. 8. 3. Planning the transformation • 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. 8
  9. 9. 4. Final remarks • The transformation experiences have been very positive: portfolio growth has accelerated; operational efficiency and profitability have increased; financial products offered multiplied and the funding structure was more stable and diversified. • 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. • Transformation has not generated mission drift • Highlight the long term advantages of transforming as opposed to short term costs. • Develop a detailed road map of the consultancies required for the process, including TORs and estimated budget and timeline. • Once the project is approved the real work begins: 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. 9
  10. 10. 5. Annex 10
  11. 11. Indicators of transformed MFIs in LAC Table 1: Selected financial indicators of transformed MFIs in LAC (as of Dec. 2010 in millions USD) MFI Bolivia Bancosol Banco Los Andes Procredit FIE PRODEM Net Loans Assets Deposits Liabilities Equity No. of (Equity/As Deposits/Lia Borrowers sets) (%) bilities (%) 627 869 608 807 63 145,608 7.2 75.3 554 589 526 789 751 700 563 514 504 703 684 632 86 65 68 67,203 146,819 108,881 10.9 8.7 9.7 80.1 75.1 79.7 315.9 376.5 16.5 279.5 97 341,100 25.8 5.9 765.6 907.9 202.8 458 449.4 1,961,995 49.5 44.3 Crear Arequipa 123.8 151 * 130 21.4 87,302 14.2 n.i. Confianza Edyficar Mibanco 124.5 335 1,224 174 465.6 1,587 9.5 153 997.5 149.9 410 1,448 24.2 55.5 138.8 75,802 285,781 401,788 13.9 11.9 8.7 6.3 37.3 68.9 Colombia Bancamia WWB Cali ** Mexico Compartamos Peru * Crea r wa s not a l l owed to ra i s e depos i ts a t the time a s i t tra ns formed recently i nto a fi na nce co. ** Ba nco WWB wa s a uthori zed a t the end of Dec. 2010 Source: ASOFIN for Bol i vi a , SBS for Peru, www.compa rtamos .com,www.ba nca mi a .com.co 11
  12. 12. Outreach Indicators of transformed MFIs MFI Transformation date 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 Amount of savings mobilized in US M in 2010 Banco Sol (BOL) Banco Los Andes Finam eric ProCredit Banco a (COL) (BOL) ADEMI (DR) Mibanco (PE) K-Rep Bank (Kenya) Feb-92 Oct-93 Jul-95 Jan-98 May-98 Sep-99 TOTAL 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 (Dec 10) (Dec 10) (Dec 10) (Dec 09) (Dec.10) (Dec.10) 4.5 11.0 4.2 30.3 14.0 3.3 (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 (Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10) 414,154 109,389 381,416 109,364 390,941 170,189 (Dec 10) (Dec 10) (Dec 09) (Dec 10) (Dec 10) 124.5 391.4 117.1 997.5 67.6 (Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10) 67.3 2,503.9 1,575,453 (Dec 10) 420 823,601 12 2,118.1