MicroFinance Upgrading

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“A creation of an entity which can, in the course of time, be converted into a target-group oriented bank.”

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MicroFinance Upgrading

  1. 1. UPGRADING www.ies.org.pt
  2. 2. Group Presentation <ul><li>Name of Students </li></ul><ul><li>Marta Louro </li></ul><ul><li>Paulo Canas </li></ul>
  3. 3. Table of Contents <ul><li>The need behind ‘NGOs as Alchemist for the poor’ </li></ul><ul><li>Advantages and Disadvantages of Credit Granting NGOs </li></ul><ul><li>Understanding the Upgrading process </li></ul><ul><li>From MFIs to RFIs. A critical outlook </li></ul><ul><li>BANCO SOL. A successful case study </li></ul><ul><li>Other successful examples </li></ul>
  4. 4. <ul><li>“ Poor entrepreneurs possess the same survival skills as affluent business operators. </li></ul><ul><li>They save money, carefully apply their entrepreneurial energy, and repay debts as scheduled to maintain access to future loans.” </li></ul><ul><li>Source: Glosser, A. (1994): The Creation of BancoSol in Bolivia, in: Otero, M., E. Rhyne (eds.):The New World of Microenterprise Finance. Building Healthy Financial Institutions for the Poor, Chapter 12, Kumarian Press. </li></ul>A. The need behind ‘NGOs as Alchemist for the poor’ The main constraint is their insuficient access to credit
  5. 5. <ul><li>Washington,1987 </li></ul><ul><li>Highlights at the 1 st World Micro Enterprise Conference </li></ul><ul><li>small and micro enterprises are a important part of the economy in developing countries </li></ul><ul><li>they can contribute in terms of employment and poverty alleviation </li></ul><ul><li>private banks and other government entities are incapable of providing adequate financial services for the poor </li></ul>A. The need behind ‘NGOs as Alchemist for the poor’
  6. 6. <ul><li>Innovative lending technologies </li></ul><ul><li>New financial products for the poor (previously excluded clients) </li></ul><ul><li>Promoting poverty reduction </li></ul><ul><li>Supporting micro and small businesses </li></ul>MICROFINANCE INSTITUTIONS A. The need behind ‘NGOs as Alchemist for the poor’ <ul><li>Different microfinance institutional models as an answer to a multiplicity of markets: </li></ul><ul><ul><li>full service commercial bank </li></ul></ul><ul><ul><li>restricted service bank </li></ul></ul><ul><ul><li>regulated non-bank financial institution </li></ul></ul><ul><ul><li>membership society/union/cooperative </li></ul></ul><ul><ul><li>non-governmental organization </li></ul></ul>Regulation Capital Requi. Impact Sustainability
  7. 7. Source: From NGOs to FFIs in Microfinance Services: Conversation Road Map and its challenges – Comparative study of nine Eastern European MFIs A. The need behind ‘NGOs as Alchemist for the poor’
  8. 8. “ Promoters are those who help the poor set up their own poor-owned and poor managed systems, while providers are those who sell financial services to the poor” Rutherford, 2000 Financial system vs. Poverty lending approach Serves 32 Million out of a potential of 500 Million to 1.7 Billion <ul><li>~30% growth/year </li></ul><ul><li>High Demand </li></ul><ul><li>Space to grow </li></ul>Becoming more commercial: NGO’s and banks MFI A. The need behind ‘NGOs as Alchemist for the poor’
  9. 9. <ul><li>“ NGOs ideally have a social mission to help the poor and are not driven by the profit motive or vested interests that favor well-to-to.” </li></ul><ul><li>Source: F ernando, N.A. (2004): Micro Succes Story? Transformation of Non-Government Organizations into Regulated Financial Institutions, ADB. </li></ul>B. Advantages and Disadvantages of Credit Granting NGOs Are NGOs a promising option for solving the financial problem faced by small and micro enterprises? QUESTION
  10. 10. MF services were mainly provided by non-profit organizations aiming at transforming the lives of poor people and enabling them to develop and sustain income-generating and job-creating enterprises Main goals: outreach, financial viability and impact on their beneficiaries Constraints: legal barriers and governance limitations Solution: set up as regulated/formal MFI Outcomes: access to capital, capturing savings, reducing donor dependence and expand client outreach Serving clients not beneficiaries Funding problems through investor not donors B. Advantages and Disadvantages of Credit Granting NGOs
  11. 11. Basic precondition ensure that t he organization is sustainable <ul><li>Considerations preceding the conversion </li></ul><ul><li>minimal capital requirement </li></ul><ul><li>capital adequacy </li></ul><ul><li>liquidity requirements </li></ul><ul><li>asset quality </li></ul><ul><li>portfolio diversification </li></ul><ul><li>Conversion Process: </li></ul><ul><li>Vision, Objectives and Strategy </li></ul><ul><li>Investment Proposition (meeting stakeholders needs) </li></ul><ul><li>Internal Framework and Standards (culture, values, governance, policies, products, business plan) </li></ul><ul><li>Regulatory Process </li></ul><ul><li>Operations and Compliance </li></ul>B. Advantages and Disadvantages of Credit Granting NGOs
  12. 12. <ul><li>Role of the NGO (prior and post) </li></ul><ul><li>Mission and Value </li></ul><ul><li>Timing </li></ul><ul><li>Governance </li></ul><ul><li>Staff and Client Transition </li></ul><ul><li>Main challenges </li></ul><ul><li>Strategic </li></ul><ul><li>Operational </li></ul><ul><li>Regulation and Supervision </li></ul><ul><li>Regulatory Framework </li></ul><ul><li>Sustainability </li></ul><ul><li>Ownership </li></ul><ul><li>Roles and Functions </li></ul><ul><li>Culture Change </li></ul>B. Advantages and Disadvantages of Credit Granting NGOs
  13. 13. B. Advantages and Disadvantages of Credit Granting NGOs Advantages Disadvantages <ul><li>providers of socially oriented financial services </li></ul><ul><li>are flexible and offers more opportunities for reasonable interventions by donors institutions than other institutional forms </li></ul><ul><li>knowledge of the target groups </li></ul><ul><li>credits obtained from the informal sector are much higher </li></ul><ul><li>broaden employment oportunities </li></ul><ul><li>encourage investment in microbusinesses </li></ul><ul><li>increase the level of income generated by the sector </li></ul><ul><li>high cost-coverage interest rate in the beginning </li></ul><ul><li>no access to deposit facilities /voluntary savings </li></ul><ul><li>strive for achieving efficiency and lowering the costs as much as possible </li></ul><ul><li>strive for getting a large loan portfollio </li></ul><ul><li>long term sustainability </li></ul><ul><li>limitations regarding ‘ownership’ and ‘governance’ </li></ul><ul><li>unsufficient pressure to do their job as efficiently as they could </li></ul><ul><li>lack of support from donors to their NGO partners </li></ul>
  14. 14. <ul><li>The suitability of the NGOs modality to provide microfinance services, on a large scale, began to be questioned over time. </li></ul>B. Advantages and Disadvantages of Credit Granting NGOs Offer their services to small and micro enterprises Be stable,long-lasting and financially viable. Develop long-term relationships with small and micro enterprises. INSTITUTION BUILDING STRATEGY AS AN NGO
  15. 15. B. Advantages/Disadvantages of Credit Granting NGOs INSTITUTION BUILDING STRATEGY AS AN NGO <ul><li>Target-group orientation </li></ul><ul><li>Cost-coverage </li></ul><ul><li>Cost-containment </li></ul>
  16. 16. <ul><li>“ A creation of an entity which can, in the course of time, be converted into a target-group oriented bank .” </li></ul><ul><li>Source: Schmidt, R.H., C.P. Zeitinger (1996): Prospects, Problems and Potential of Credit-Granting NGOs, in:Journal of International Development, Vol. 8, No. 2, 241-258. </li></ul>C. Understanding the UPGRADING process UPGRADING and what it means… Pre-conditions of the UPGRADING Process <ul><li>The institution must: </li></ul><ul><li>identify and select a project partner </li></ul><ul><li>have a legal form </li></ul><ul><li>have a ownership structure </li></ul><ul><li>have individuals who works to determine its own policy and long-term development </li></ul>
  17. 17. C. Understanding the UPGRADING process PROCESS OF CHANGE up to 10 years <ul><li>GROWTH </li></ul><ul><li>acquire expertise in lending </li></ul><ul><li>reduce costs to pass them in full to the borrowers (if acceptable) </li></ul><ul><li>QUALITATIVE TRANSFORMATION </li></ul><ul><li>legal structure </li></ul><ul><li>formal status </li></ul><ul><li>relationships with donor organizations </li></ul><ul><li>internal structure </li></ul><ul><li>portfolio of financial services </li></ul>
  18. 18. C. Understanding the UPGRADING process Phase 1 Childhood up to 4 years <ul><li>The institution operates as an NGO (a foundation is preferable) </li></ul><ul><li>Should become competent lender to the target group </li></ul><ul><li>Should have qualified loan officers </li></ul><ul><li>Get to know the non-conventional credit technology </li></ul><ul><li>Know very well the target group </li></ul>Phase 2 Adolescence up to 3 years <ul><li>Should became a bank with the legal form of a corporation </li></ul><ul><li>Owners should be from the old NGO foundation and donors </li></ul><ul><li>Growth in portfolio volume and produtivity </li></ul><ul><li>Lowering the lending costs up to 20% </li></ul><ul><li>Funding should come from donors loans and local financial markets </li></ul><ul><li>Starting to accept deposits </li></ul><ul><li>The average loan size should be in the range of US$ 1,000 </li></ul>Phase 3 Early Adulthood up to 3 years <ul><li>Cost reduction </li></ul><ul><li>Maximize the portfolio growth and the productivity growth in lending </li></ul><ul><li>Total lending costs should be under 20% (there is no convincing reason) </li></ul><ul><li>For larger loans the interest rate should be lower due to competition </li></ul><ul><li>Intensify its deposit mobilization activities </li></ul><ul><li>Enhance its financial stability </li></ul>
  19. 19. D. From MFIs to RFIs. A CRITICAL OUTLOOK Why transform to RFIs? <ul><li>to offer financial services beyond lending (savings and transfer services, etc.) </li></ul><ul><li>to access capital (commercial borrowings, deposits, raising equity) </li></ul><ul><li>to comply with new legislation requiring or permitting transformation </li></ul><ul><li>to gain legitimacy (for investors, commercial lenders, others) </li></ul><ul><li>to enable employees, clients and other stakeholders to become owners </li></ul>Transformation is a variety of transactions in which a Microfinance business is transferred from one institution to another.
  20. 20. <ul><li>How? </li></ul><ul><li>An NGO transfer its loan portfolio and other assets, liabilities, and employees to new company in exchange for shares or payment </li></ul>D. From MFIs to RFIs. A CRITICAL OUTLOOK <ul><li>NGO acquires an existing company or RFI transfers its business </li></ul><ul><li>NGO merges with one or more NGOs and they transfer they collective portfolio to a new/existing company or RFI </li></ul><ul><li>NGO transfers its client list (but not loan) as soon as each loan is repaid </li></ul><ul><li>NGO transfers branches </li></ul><ul><li>NGO MFI continues to engage in MF activities alongside the new company </li></ul><ul><li>NGO is reorganized into a company with shareholders </li></ul>
  21. 21. <ul><li>Controlling the Transformed Institution </li></ul><ul><li>Maximum ownership limitations </li></ul><ul><li>Regulatory Approval of significant owners </li></ul><ul><li>Restrictions on foreign ownership </li></ul><ul><li>Initial minimum capital requirement </li></ul><ul><li>Minority shareholder rights </li></ul><ul><li>NGO Post-Transformation Activities </li></ul>D. From MFIs to RFIs. A CRITICAL OUTLOOK Factors that may interfere
  22. 22. <ul><li>Banco Solidário, S.A. or Banco Sol </li></ul><ul><li>Started operations in Bolivia in February of 1992 </li></ul><ul><li>6 offices working and located in a market district and modestly designed </li></ul><ul><li>Was the first private commercial bank in the world that served entrepreneurs </li></ul><ul><li>Services offered: solidarity group loans and compulsory savings (phase 1) </li></ul><ul><li>savings and credit in US Dollars (phase 2) </li></ul><ul><li>voluntary savings (phase 3) </li></ul><ul><li>.... </li></ul>E. BANCO SOL. A successful case study
  23. 23. <ul><li>From PRODEM </li></ul><ul><li>(Fundación para la Promocion y Desarrollo de la Microempresa), a non profit lending program </li></ul><ul><li>Created in 1986 </li></ul><ul><li>Joint venture between : </li></ul><ul><li>members of the Bolivian business community (provided seed capital/leadership) </li></ul><ul><li>and </li></ul><ul><li>ACCION International (US NGO that provided technology and methodology) </li></ul><ul><li>broaden employment opportunities and encourage investment in micro businesses by offering access to credit and training </li></ul>E. BANCO SOL. A successful case study Short-term loans Average size of $273 Provides working capital for small scale production, commercial activities and services. Brief Seminars Introduces the concept of credit, investment, and loans from the Central Bank of Bolivia.
  24. 24. <ul><li>From PRODEM </li></ul><ul><li>By 1988, it was mandatory for each client to save 5% of each loan </li></ul><ul><li>Mandatory savings came from the need for a increasing flow of resources and the desire to offer clients access to full financial services </li></ul><ul><li>By 1991, mandatory savings reached more than $ 1 million </li></ul>E. BANCO SOL. A successful case study PRODEM had to find another legal and financial way to deal with this Voluntary Savings became a viable source of funds for expansion as well as loans for investment capital, housing and education; term deposits; and dollar accounts.
  25. 25. <ul><li>PRODEM and a market-driven approach </li></ul><ul><li>Profit was coming from loans and donations </li></ul><ul><li>Expansion demands outside sources of funding </li></ul>E. BANCO SOL. A successful case study PRODEM decided to create a bank to become independent from donated funds HOW? <ul><li>By paying for its funds through interests on saving deposits, dividends, bonds, interbank loans, and other forms. </li></ul><ul><li>Prodem would serve clients and establish a mutual relationship </li></ul><ul><li>Prodem would transfer capital between its clients </li></ul>
  26. 26. <ul><li>COBANCO (Comite Promotor del Banco para la Microempresa) </li></ul><ul><li>The comite was created to carry out this transition with 5 goals: </li></ul><ul><li>Generate a financial study of the bank </li></ul><ul><li>Promote the project among financial institutions and investors </li></ul><ul><li>Inform local authorities, specially SIB (Superintendencia de Bancos) </li></ul><ul><li>Negotiate with USAID and donors to transfer funds to the bank </li></ul><ul><li>Coordinate the organization and design of the plans for the bank </li></ul>E. BANCO SOL. A successful case study 4 PHASES
  27. 27. <ul><li>PHASE 1 Studies and Bank Structure </li></ul>E. BANCO SOL. A successful case study <ul><li>Highlights </li></ul><ul><li>Prodem would be a support entity for Banco Sol by developing rural credit programs, research and develop financial products and covering costs with training, consultancy, etc.. </li></ul><ul><li>Prodem would sell a part of its lending portfolio to the bank in exchange for shares </li></ul><ul><li>Inter-American Investment Corp. And International Finance Corp. Became interested as well as others multilateral lenders </li></ul><ul><li>The interest rate first adopted should be the same as Prodem’s: 4% a month </li></ul>
  28. 28. <ul><li>PHASE 2 Pursuing Investors and Selling Equity </li></ul>E. BANCO SOL. A successful case study <ul><li>Highlights </li></ul><ul><li>Cobanco had commitments of $5 million of equity financing by 1990 from Bolivian and non Bolivian investors (less that ¼ of the banks equity) </li></ul><ul><li>IIC provided a seal of approval which fostered a sense of credibility </li></ul>PHASE 3 Legal Process <ul><li>Highlights </li></ul><ul><li>Preparation of the documentation and SIB’s site visits to approve the bank feasibility </li></ul><ul><li>Well-selected bank founders based on their prestigious reputation </li></ul>
  29. 29. <ul><li>PHASE 4 Operational Transition </li></ul>E. BANCO SOL. A successful case study <ul><li>Highlights </li></ul><ul><li>SIB required current balances every day, week, etc.. </li></ul><ul><li>Different sources of funds are irrelevant for a bank </li></ul><ul><li>Mixed-staff was hired from Prodem and the traditional banking sector </li></ul><ul><li>Systems, security and the credit program had to be tailor made </li></ul><ul><li>Staff’s transition was aiming to bring people from the two different cultures together </li></ul><ul><li>Credit officers gave daily seminars to ease the client’s transition </li></ul>
  30. 30. Created in 1998 Originates from NGO Accion Comunitária del Peru (ACP) Motto: Doing one thing and doing it well <ul><li>Existing demand in low-income segments, not only in rural areas, but also in urban areas </li></ul><ul><li>Governments do not have to own MFI’s, but can encourage private ownership and indirectly help many poor clients </li></ul><ul><li>Governments and funding agencies need to create preconditions for successful transformation and critical assistance </li></ul><ul><li>MFI’s should establish partnerships to attain higher growth </li></ul><ul><li>Develop the right products/tailor made solutions </li></ul><ul><li>Upgrading doesn’t mean losing the mission of the NGO, it can even be more impactful </li></ul>NGO’s can be successfully transformed into financial entities (with supportive legal framework) and serve the poor better Lessons Learned F. Other successful examples
  31. 31. Source: From NGOs to FFIs in Microfinance Services: Conversation Road Map and its challenges – Comparative study of nine Eastern European MFIs F. Other successful examples
  32. 32. Literature Schmidt, R.H., C.P. Zeitinger (1996): Prospects, Problems and Potential of Credit-Granting NGOs, in: Journal of International Development, Vol. 8, No. 2, 241-258. Glosser, A. (1994): The Creation of BancoSol in Bolivia, in: Otero, M., E. Rhyne (eds.):The New World of Microenterprise Finance. Building Healthy Financial Institutions for the Poor, Chapter 12, Kumarian Press. Lauer, K. (2008): Transforming NGO MFIs: Critical Ownership Issues to Consider, CGAP, Occasional Paper, No.13, from http://www.cgap.org/gm/document-1.9.4213/OP13.pdf Fernando, N.A. (2004): Micro Success Story? Transformation of Non-Government Organizations into Regulated Financial Institutions, ADB Aghion, Beatriz A. and Morduch, Jonathan: The Economics of Microfinance, the MIT Press, 16-23. From NGOs to FFIs in Microfinance Services: Conversation Road Map and its challenges – Comparative study of nine Eastern European MFIs Web Banco Solidário http://www.bancosol.com.bo/ References
  33. 33. Thank you for your attention ! University Meets Microfinance Planet Finance www.planetfinancegroup.org [email_address] www.universitymeetsmicrofinance.eu www.ies.org.pt

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