David Gibbons, Transforming from NGO to Regulated MFI
Transformation or Distortion? Comments on “MFI Transformation: the LAC Experience” By David S. Gibbons, CASHPOR India
Impressive Transformation, but ….• NGO MFIs with a strong social missions have become financially-sustainable formal financial institutions, with large portfolios and significant outreach, and converted to regulated deposit- taking financial institutions• IFC has played a major role in this transformation, both as consultants and investors• But at what cost to the original social missions of the NGO MFIs?
Mission Drift, an Ever-Present Danger• Transformation requires • Take the cases of Mibanco and capital Confinanza MF Bank quoted• NGO MFIs are normally short by the author of capital • After transformation,• With the help of consultants Mibanco’s ROE was 28%, for they turn to investors to which it needed a YOP of supply the capital 27.6%• Investors normally expect a • The average loan outstanding return on their investment of of Confinanza MF Bank, which at least 25% had the original mission of• This makes transformed MF lending to poor women in the expensive, and threatens the Peruvian Highlands, after original social mission transformation was US$2,081! Can poor women in the Highlands repay such loans? Or have they been displaced?
Can Mission Drift be Prevented?• The author says that it • No data, such as the must and can be proportion of the• Small loans will still be transformed MFIs’ new profitable for efficient, clients that are below transformed MFIs, he the international argues poverty-line of US$1.25• NGO MFIs can retain per person/per day, ownership control to that would show the prevent MD absence of MD, are presented
The Litmus Test• There is a direct trade-off between the rate of interest charged to the poor and the degree that they benefit from MFI loans• Poverty-focused MFIs should offer the lowest- possible interest rate to clients, that is consistent with institutional financial sustainability• Economies of scale should be shared periodically with clients, in the form of reductions in the interest rate• Both are difficult, if not impossible, for MFIs transformed in the LAC manner
Transformation without Mission Drift• To reach scale and to offer • ASA Bangladesh , probably the lowest possible interest one of the most efficient rate to the poor, NGO MFIs MFIs in the world, has need to become efficient reached scale with over 7 financial institutions, but million clients, without MD; depending upon prevailing is financially-sustainable financial regulation, it is not with substantial retained always necessary to be earnings and a YOP of 25%. transformed into for-profit, Savings finance only about a regulated financial third of its portfolio, and the institutions that depend rest is financed from mainly on private capital retained earnings and and mobilization of savings borrowing from the PKSF at for their loan funds reasonable but financially- sustainable rates
Why Risk Mission Drift?• Given the apparent MD in LAC and its ever- present risk, given the current crisis in Indian microfinance that has accompanied LAC-type transformation and given the existence of a viable alternative path, why take the risk of Mission Drift?• Thank you!