Regulation and transformation: from microfinance NGO to bank
Most early microfinance programmes were NGOs funded by donors. They could lend, but they could not legally take deposits, and their growth was limited by grant money. Transformation, the conversion of an NGO into a licensed financial institution, became one of the defining strategies of the 1990s and 2000s.
Why transform?
- Access to deposits, both as a stable funding source and as a service clients want.
- Access to commercial capital: equity investors and bank loans.
- Scale: reaching far more clients than donor funding allows.
- Legitimacy and permanence under supervision.
The BancoSol case
In Bolivia, the NGO PRODEM began lending to urban microentrepreneurs in 1986 using solidarity groups. In 1992 its portfolio was transferred to BancoSol, a new private commercial bank. It was the first commercial bank in Bolivia, and one of the first anywhere, dedicated to microfinance. Bolivia later created a dedicated licence for non-bank microfinance entities, the Fondos Financieros Privados (1995), and other NGOs used it to transform.
BancoSol showed that microlending could be profitable and supervised. It became a reference point for practitioners, including the leading institutions that founded the MicroFinance Network at a 1993 meeting BancoSol hosted.
Other examples
- Mibanco (Peru) was created in 1998 from the NGO Acción Comunitaria del Perú.
- K-Rep Bank (Kenya) was licensed in 1999 from the NGO K-Rep.
- Equity Bank (Kenya) converted from a building society to a commercial bank in 2004 and grew into one of East Africa’s largest banks.
Regulatory approaches
Regulators distinguish between:
- Non-prudential regulation, which applies to all lenders: consumer protection, interest-rate disclosure and anti-fraud rules.
- Prudential regulation, which applies to deposit-taking institutions: capital adequacy, liquidity and provisioning, because public savings are at risk.
Many countries adopted tiered frameworks, with lighter licences for small credit-only lenders and full supervision for deposit-takers. Microfinance also needs specific rules. For example, standard banking rules on collateral and documentation can make unsecured microloans look riskier than they are.
Risks of transformation
- Mission drift towards larger loans and better-off clients.
- Governance changes as investors join the board.
- Higher costs of compliance and reporting.
Social investors and performance standards try to keep transformed institutions focused on their original clients.