MFI transformations in Latin America and the Caribbean have led to significant growth and improvements. Some key advantages of transforming non-regulated NGO MFIs into regulated financial institutions include gaining access to more diversified funding like deposits, offering more services to clients, and achieving greater scale and efficiencies. Careful planning is important, focusing on regulatory compliance, cultural changes, and developing strategic areas like governance, risk management, products, and operations. Transformed MFIs in the region have shown substantial increases in outreach, portfolio size, and deposit mobilization.

1. MFIs Transformations: The LAC
Experience
Felipe Portocarrero M.
2011 Global Microcredit Summit
November 14-17, 2011 – Valladolid, Spain

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
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3. Introduction
• Transformation is the process whereby NGOs, or other formal or
informal microfinance providers, convert to a regulated deposit-
taking 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.
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4. •This recent trend of transformations from non-
regulated 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
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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.
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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.
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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
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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.
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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.
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10. 5. Annex
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11. Indicators of transformed MFIs in LAC
Table 1: Selected financial indicators of transformed MFIs in LAC
(as of Dec. 2010 in millions USD)
No. of (Equity/As Deposits/Lia
MFI Net Loans Assets Deposits Liabilities Equity Borrowers sets) (%) bilities (%)
Bolivia
Bancosol 627 869 608 807 63 145,608 7.2 75.3
Banco Los Andes -
Procredit 554 789 563 703 86 67,203 10.9 80.1
FIE 589 751 514 684 65 146,819 8.7 75.1
PRODEM 526 700 504 632 68 108,881 9.7 79.7
Colombia
Bancamia 315.9 376.5 16.5 279.5 97 341,100 25.8 5.9
WWB Cali **
Mexico
Compartamos 765.6 907.9 202.8 458 449.4 1,961,995 49.5 44.3
Peru
Crear Arequipa 123.8 151 * 130 21.4 87,302 14.2 n.i.
Confianza 124.5 174 9.5 149.9 24.2 75,802 13.9 6.3
Edyficar 335 465.6 153 410 55.5 285,781 11.9 37.3
Mibanco 1,224 1,587 997.5 1,448 138.8 401,788 8.7 68.9
* 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
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12. Outreach Indicators of transformed MFIs
Banco Los
Andes K-Rep
Banco Sol Finam eric ProCredit Banco Mibanco Bank
MFI (BOL) a (COL) (BOL) ADEMI (DR) (PE) (Kenya)
Transformation
date Feb-92 Oct-93 Jul-95 Jan-98 May-98 Sep-99 TOTAL
No. of borrow ers 22,743 32,022 12,662 18,000 32,000 13,201 130,628
at transformation
date Dec-91 Dec-93 Jul-95 Jan-98 May-98 Dec-98
145,608 61,880 67,203 82,049 401,788 65,073 823,601
No. borrow ers in
2010 (Dec 10) (Dec 10) (Dec 10) (Dec 09) (Dec.10) (Dec.10)
Portfolio value at 4.5 11.0 4.2 30.3 14.0 3.3 67.3
transformation
(US$ M) (Dec 91) (Dec 93) (Jul 95) (Jan 98) (May 98) (Dec 98)
Portfolio value in 439.8 181.7 392.3 192.0 1,224.0 74.2 2,503.9
2010 (US$ M)) (Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10)
No. depositors in 414,154 109,389 381,416 109,364 390,941 170,189 1,575,453
2010 (Dec 10) (Dec 10) (Dec 09) (Dec 10) (Dec 10) (Dec 10)
Amount of savings
420 124.5 391.4 117.1 997.5 67.6 2,118.1
mobilized in US M in
2010 (Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10) (Dec 10)
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