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26 May 2019

Transforming MFI from non-profit to pro-profit

M S Siddiqui

Bangladesh is globally well-known as the birthplace of microfinance. The structure of micro finance
is either is a trust or a shareholding organization. The borrowers are owners of the company
registered under trust or non-profit enterprises. But there is another transformation of microfinance a
few decades back.

The shareholder-owned, regulated and specialized pro-profit microfinance institution (MFI) has been
emerged and playing an increasingly important vehicle for serving the poor with financial products.
These are profit oriented and the number of such specialized MFIs is growing every year.

These MFI is a private financial institution with share capital that are primarily dedicated to the
provision of loans, deposits and other financial services to self-employed micro entrepreneurs and
other low-income workers in the developing world.

The first such private regulated entity solely devoted to microfinance came into being with the
creation of BancoSolidario (BancoSol) in Bolivia in 1992. Since that time, scores of institutions
throughout the developing world have been transformed into for-profit entities out of nonprofit
origins, or established as brand new, specialized MFIs.

The mission of MFIs requires that these institutions pursue a double bottom line objective of
achieving both social and financial returns. The goal of attaining profitability, daunting enough in the
unstable macro-economic and political environments of developing countries, becomes harder still
when placed alongside important social goals that may preclude the adoption of certain business
strategies.

In many countries, a significant number of nonprofit MFIs have become regulated and became
formal pro-profit MFIs. They have ceded their vaguely defined ownership structure to investors who
acquire a shareholding position and govern the institution through the board of directors (BOD).

Those are now managed privately and investors are multilateral, bilateral, or nonprofit organizations
as well as private investors seeking to use their resources in a commercially driven manner.
Investment capital seeking both social and financial returns comprises the bulk of capital in
microfinance. These investor organizations are growing in number and constitute the majority of the
members of BOD.

These institutions have created markets providing financial services to the self-employed poor and
other low-income individuals where none previously existed in their countries. While still small in
absolute terms, regulated MFIs form an increasingly significant and growing part of the financial
landscape in developing countries and have joined banks and other traditional institutions as full-
fledged members of the formal financial sector.
These for-profit MFIs have followed three major models-as institutions transformed from or out of
nonprofit predecessors, as de novo financial institutions, and as special-purpose subsidiaries of
commercial banks-and the three possess different, unique ownership traits. The building and
maintenance of a strong equity base for these institutions is a key component of their financial health
and their prospects for future success.

Many of these institutions have experienced rapid growth and can see the day when the demand for
financing from their customers will outstrip their current capital base. The ability of regulated MFIs to
attract additional capital, above all from the private sector, will in large part determine the long-term
success of their efforts.

There are many social investors in the international market, are investors seeking a combination of
social and financial returns. They are financing alongside local NGOs and international public
investors, such as multilateral investment banks. The local investors (1) original NGOs (for
transformed to profit MFIs); (2) commercial banks (for creation of subsidiary MFI); (3) employee
stock ownership programs (ESOPs); and (4) groups of large numbers of small individual and
business investors.

There are many private individuals who are interested in profit as well as advancement of society.
The private investors originally comes from public sources, and public money still plays a larger and
plays a relatively minor role in overall equity funding for these MFIs.

The investors are also well organized. The Council of Microfinance Equity Funds (CMEF) is a unique
forum, in that is the only venue in which direct investors in microfinance. CMEF membership is
comprised of active investors in financial inclusion that make equity investments in MFIs in the
developing world.

It's purpose is three-fold: (1) to articulate and disseminate the knowledge and expertise of the
Council's members among themselves and to other MFI stakeholders; (2) to present guidelines and
principles for effective investment in MFIs; and (3) to conceive a future strategy for the role of
investment capital in microfinance.

CMEF was conceived in 2002 and officially launched in 2003. The Council's members currently
include ACCION International, AfriCap, Andromeda Fund, CalvertFoundation, Citigroup, Desjardins,
Deutsche Bank, Oikocredit, Open Society Institute, Opportunity International, Pro Fund International,
SARONA/MEDA, Shore Bank, SIDI and Triodos Bank.

The commercial approach to profit MFI has been playing an increasingly important role in the overall
development of microfinance in all developing regions of the world. The existence of commercially
oriented, for-profit MFIs is a quite recent development. Such institutions did not even exist at the
beginning of the last decade. Since formation of such MFI in 1992, a rapid growth and expansion,
now is an appropriate time for existing MFI equity investors to transform themselves for attracting
equity investment from home and abroad.

The overseas investors are concern of management of for profit MFIs. The role of corporate
governance in MFIs, then, is doubly important because the governance practices of these
institutions must prove effective in the attainment of both financial and social objectives.

Ultimately, most supporters of the commercialization model would like to see MFIs develop
ownership and governance structures that enable them to grow, withstand crises and take their
places among the well-run businesses in their countries' financial systems, even as they continue to
serve their low-income clientele.
MFIs need to build institutional cultures that will allow for the development of local professionals not
only to staff and manage their institutions, but also to govern and ultimately own them. The
developing countries must have the objective is a long-term task because of a lack of qualified local
professionals, a financial inability to compete effectively for top local talent, or local patterns of
ownership that do not value good corporate governance.

By establishing good governance policies and procedures, MFIs can not only enhance their ability to
carry out their social mission, but also improve their financial prospects by making themselves more
attractive to potential investors.

The BOD composition and governance responsibilities also differ significantly between regulated
MFIs and nonprofits. In both cases, the primary duty of directors is to the institution on whose board
they serve. In the case of regulated MFIs, however, directors must also be answerable to the
shareholders who own the institution and elect them.

BOD are directly accountable not only to shareholders, but also to regulators, who must ensure the
safety and soundness of institutions that now form a part of the formal banking system, and perhaps
most importantly of all, to depositors who entrust their savings to these institutions.

One of the most important dimensions of ownership involves the relative roles of local and
international players. The development community entered microfinance with a presumption in favor
of local ownership, for a combination of philosophical and practical reasons. Nevertheless, there are
strong arguments that international investors can bring important assets other than financial to these
institutions.

After few decades of emerging for-profit MFIs in some countries, microfinance has become one of
the most profitable lines of business in the financial sector. Indeed, on numerous occasions, leading
MFIs have emerged as the most profitable regulated financial institutions in their countries, as
measured by both return on assets and return on equity.

Interestingly, the commercial banks, which often ignored the microenterprise market, are now
dedicating ever-greater resources to it and providing new, somewhat unexpected competition to
regulated MFIs. The achievement of attractive financial returns is all the more remarkable because
regulated MFIs have a doubly difficult task before them: to operate profitable, healthy financial
institutions while at the same time adhering to their social mission of providing financial services to
the poor.

Overseas investors are look for profit as well as social transformation but concerned of poor
corporation management in developing countries. On the other hand, Bangladesh needs huge
investment for development of micro enterprises in order to upgrade the huge population of poorest
of the poor. The funds available with existing MFIs are insufficient to meet the demands.

The non-profit MFIs 'innovated and developed' in Bangladesh and government also develops
regulations for MFIs with intimate consultation between regulators and NGOs. Bangladesh non-profit
MFIs may improve their corporate management and initiate process of transforming to pro- profit
MFI and attracting overseas investments.

The writer is a legal economist.

Email: mssiddiqui2035@gmail.com