Micro Success Story? Transformation of Nongovernment Organizations Into Regulated Financial Institutions

Abstract

Nongovernment organizations (NGOs) began microcredit operations because conventional financial institutions were not providing financial services for the poor and low-income households and their microenterprises. Over time, NGOs began to play a significant role in providing microcredit services in many countries. Ironically, increasing numbers of NGOs have transformed themselves into regulated financial institutions since the first such transformation, that of the NGO Fundacion para la Promocion y el Desarrollo de la Microempresa into BancoSol in Bolivia in 1992. With transformation, these institutions expected to increase the breadth and depth of their outreach, primarily through better access to commercial sources of funds and public deposits to finance their growth. A review and analysis of operations of transformed institutions show that many of these institutions have been able to achieve positive results, as expected, in four fundamental areas: an ownership structure with shareholders to maintain a balance between social mission and profitability/sustainability, increased access to loanable funds from commercial sources, broader range of services including voluntary deposit services, and increased breadth and depth of outreach. However, more intensive research on transformed institutions, particularly on their governance, operational efficiency, and poverty outreach is necessary to improve our understanding of the impact and emerging issues of transformation.