1. Community Based Ownership Structure in Microfinance
Challenges for MFI Management
By :
Nandan S. Bisht
February 23, 2012
Chennai, India
I
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2. Key Facts for Community Based Institutions
Following Types of different entities to be clearly
identified for the role they play for building and
sustaining community based institutions
One that takes initiatives to put
Promoting Entity
community institution into being!
Community Vehicle, where
Types of Entities
Promoted Entity community member joins to create
Involved
common capital
Entity engaged in providing financial
Microfinance Player
services to community at large
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3. Key Facts for Community Based Institutions
Aging of the Institutions also play a crucial role in determining
the right and appropriate doable community governance and
control systems to be in place
Aging Categorization of Community based Institutions
Category Promoting Entity Promoted Entity Microfinance Player
More Than 10 year of More than 5 Years of More Than 5 year of
Matured Existance Existance Existence
Developing 5-10 years 3-5 years 3-5 years
Starters 0-5 Years 0-3 Years 0-3 Years
Governance and control systems are reasonably expected to be at different
level in these institutions depending upon the age categorizations ! Though
Best Practice would suggest that things are done right upfront ! May not be
possible even for best of minds and institutions due to constraints on
resources and trained manpower !
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4. Institutions Should Develop a Road Map !
Institutions should based on resources constraints they predict,
develop a road map for instituting a sound governance an controls
systems based on principles enunciated in following few slides !
Aging Categoriezation of Community based Institutions
Category Promoting Entity Promoted Entity Microfinance Player
Should Address All Should Address All Should Address All
concerns highlighted concerns highlighted concerns highlighted
Matured in following slides in following slides in following slides
Should setup a road map agreed with all stakeholders and after
Developing assessing the resources they can spare, for addressing all
Starters concerns involved with community based institutions
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5. What is perceived wrong and unacceptable in
community owned structure
1. Structure should not be designed to serve as
one way money mobilization route
2. Inter-twined services should be
duly acknowledged and 3. Structure should be
documented with clear independent of operating
understanding or agreement company
between parties.
4. Community participation to be in real 5. MBT structure should not exist solely
term not only on paper. Systems and for money mobilization or
mechanism to be robust to ensure aggregation, there should be other
actual community participation meaningful services to be provided
by these structure to community
6. Awareness level among
members
community member should be
adequate to be reinforced by
the structure on periodic basis.
7. Record Keeping - of finance / accounts and
meetings to be kept with best practice possible.
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6. Concerns of Regulators
RBI i.e. central bank always doubts the genuineness of
independent decision making by larger community
members especially when they come from poor rural
masses and therefore regards such structures as
medium to circumvent the strict deposit
mobilization rules
RBI is concerned about the protection of public money and
the interest of public at large involved considering the past
instances in many ways wherein general public was cheated
( i.e chit fund companies, deposit companies, including few
MFI’s)
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7. Concerns of Regulators
The fact that the legal structure of Mutual Benefit Trust is
not regulated by any authorities, it become more
vulnerable and more suspected by regulatory bodies like RBI
when large numbers and big amount is involved
Under corporate laws such indirect ownership stake by large
number of people may be considered as share offering to public
without following the legal route of listing and related laws,
and when the overall structure is not well documented and exist
only on paper, this believe is well founded.
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8. Investors Concerns of Such Community Owned
Structures
As customer do not see the difference between
Due to miss-happening with the operating entity and MBT structure to channelize
community money in past, see the savings, problem in MBT functioning could
as reputation risk result in problem in credit portfolio and thereby
sounds risk to investors.
If the structure is not As Investor do not have any
independent of operating control over MBT's nor desired by
company, seems like them, risk emanating from MBT
company is using own functioning become beyond their
infrastructure to mobilize control and hence results in
money from its customer in concerns.
the pretext of giving them
loan.
Various inter-twined activities at field / staff and senior management level blurs
the independent and separate entity concepts and put Investors in unchartered
and unclear water.
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9. Concerns of Promoting Institution
Retaining ownership and control are the key issues for promoting institutions and
these become crucial due to following perceptions:
• What if these community vehicles are
overtaken by miscreants or mission non-
aligned entities or individuals?
• How to financially sustain these community
owned institutions, especially when all money
mobilized is locked in investment in
microfinance entity which may not be yielding
any return in foreseeable future?
• How to ensure the proper and correct
orientation and awareness building of
community members so that whole community
structure can have active and genuine
participation from community members?
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10. Then Where are the Solutions !
Understanding and practicing separate entity concept among
Solutions are in ! promoting, promoted and microfinance player !
Setting up transparent and strong governance system in community
structures
Investing robustly in creating awareness among the staff as well as
community members about the community structures and ownership
Proper design of legal vehicle in Indian context to avoid hostile
takeover and mission drift much difficult
Ensure community owned structure, carry out other activities to
financially sustain themselves. Such other activities should
normally not include generating revenue from community members
rather should be generating revenue for community members.
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11. Concept of Separate Legal Entities and separation of
Shareholder from company
Understanding of separate
entity concept need to be
built among following three
separate entities;
1. Promoting Institution
2. Promoted Institution
3. Microfinance Operator
Also need to bring the
understanding that:
Shareholders and the
company itself are two
separate entities both in
terms of legal and business
sense
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12. Outcomes of Separate Legal Entity Concepts
1. Each structure i.e. promoting, promoted
and microfinance operator should have
separate existence, visibility and
infrastructure ( i.e. either owned or
shared infrastructure) to sustain its
activities.
1. Inter-related activities and sharing of
infrastructure should be clearly defined,
documented and terms set in ( i.e.
including financial terms ).
1. At best level, transactions are done at
arms length principle and ambiguity is
avoided.
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13. Transparent and Strong Governance Systems
Following are few examples of good governance systems for community owned structures;
1. Ensuring adequate community participation which is real and
effective
2. Ensuring decision
making process and 3. Ensuring free and fair
functioning of these process of election and
community owned selection of office bearer of
institutions is such community owned
independent of institutions.
microfinance player.
4. Well designed and documented process of financial participation by
community members and the process/ rules for return of money back to
community members, i.e. exit option for community members or intermediary
institution who want to withdraw the money contributed to community investment
vehicle
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14. Awareness systems
1. Establishing a robust community awareness system for
community owned structure is essential for these community
owned vehicle to function properly
2. Awareness system should be established by promoting or
promoted institutions, and should be continuous and sustained
process.
3. Ensuring community members understand the role of each separate entity
involved i.e. promoting, promoted and microfinance player should be ensured
during such awareness programs.
4. Simple pictorial based training tools in vernacular language should be designed
to community the awareness message to individual and community institutions.
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15. Properly Designed Legal Vehicle
1. Community institutions should be designed on such legal
platform which are transparent as well as well
regulated by external agencies
2. Legal vehicle which are unregulated and not
accountable should be avoided as they have proved to
be susceptible manipulation in recent past.
3. Such legal vehicle should be able to clearly define /
document as well as monitor the ownership structure
i.e. changes in them by clear regulated process.
4. Such legal vehicle should be designed with rules and
regulation that make hostile takeover of such vehicle
impossible or difficult
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16. Activities of Community Owned Vehicles
1. Community owned vehicle should not exist solely
for fulfilling capital need to microfinance player
2. Such Community vehicle should have
larger and greater engagement with
community as well as others entities. This
should result in activates of such vehicle not
restricted to only mobilizing and aggregating
the capital of community members.
3. Such community institutions should try to identify and deploy various source
of revenue generation to sustain their independent status i.e. from
promoting or microfinance player
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17. Thank You
Nandan S. Bisht
nandan@nimbusconsulting.net
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