Most people with a lively interest in microfinance know that the majority of microloans dispensed throughout the world today come from for-profit microfinance institutions, rather than donation-dependent non-governmental organizations (NGOs).
What may be less recognized is how these for-profit MFIs were born. Many of the world's largest and most successful microfinance organizations -- including India's SKS Microfinance, which just raised some $358 million in a closely-watched IPO -- started life as nonprofit NGOs. Riding on early success in attracting clients, they decided to undergo dramatic transformations: they found investors, obtained regulatory approval, and spun off licensed, for-profit financial institutions, leaving the original NGO behind. This process has now happened dozens of times around the world.
The pioneer transformer, BancoSol of Bolivia in 1992, demonstrated that the path from non-profit to for-profit is fraught with difficulties. It often takes years to complete, especially when it involves getting regulators to grant a financial institution license. A leader like Vikram Akula, SKS's founder, needs a compelling reason to take his organization through that ordeal. For Akula, as for many others, that compelling reason was capital for growth. As Akula told Forbes India in September 2009, the transformation was all about SKS's mission to reach millions of families who lack access to financial services:
Grameen Bank reaches 7 million clients and that's amazing. On the other hand, it took Professor Yunus [Grameen Bank's founder] 35 years to do that... Can you imagine how many generations it will take to reach 150 million poor households in India if we took that approach? We have to scale more rapidly, and only commercial capital will meet our huge funding requirements.
And indeed, funded by three rounds of venture capital prior to its IPO, SKS grew from a modest nonprofit with 2000 borrowers in 2001 to a "Starbucks of microfinance" with 4.7 million borrowers in 2009. With the IPO, it is poised to continue growing.
The mission-critical reasons for transformation have to be very compelling because when money is at stake, personal interests tend to complicate the process. The hard challenge is to align the personal interests of the founders, investors and other stakeholders with the long run mission to assist low income clients. The SKS IPO, for example, has generated controversy in part because trustees of two charitable microfinance organizations that financed SKS at the outset disagree over how to spend the tens of millions of dollars those groups earned in the IPO. Another nonprofit supporter, Seattle-based Unitus, last month abruptly laid off its staff and announced it would refocus its efforts in fields other than microfinance -- a move that has raised a lot of eyebrows. And Mr. Akula, with a significant personal stake in SKS, is also a target, as observers examine whether his decisions place the mission in front of his own interests.
For-profit with a purpose: ingredients of successful transformations
The challenge is to transform while keeping the organization committed to its social mission. In practice, this entails balancing the interests, egos, abilities, goals, and responsibilities of the various stakeholders to create an organization that delivers high quality services and remains focused on its target clientele. At the Center for Financial Inclusion at ACCION, our "Aligning Interests" study examines several successful and not-so-successful MFI transformations in detail and sketches out practices that improve the chances for continuity of mission.
One good practice is to keep the original team of sponsoring organizations in place. Often, the founding NGO retains a large ownership stake and seats on the board. So do multilateral organizations or development banks that have invested capital and expertise in the past. It is also critical to create a strong and mission-focused management team, blending original NGO management with new managers who supplement the existing skill set.
It helps to talk openly about stakeholders' diverse personal interests, including those of NGO managers, board directors, and staff. Managers may be motivated by many factors, from financial security, to prestige, to commitment to poverty alleviation. As perhaps different from purely private mergers and acquisitions, the participants in a microfinance transformation generally recognize that financial rewards are not the only relevant factor. In fact, the non-profit origins of these organizations make financial rewards for managers a particularly ticklish subject. In a number of cases, employees' personal interests are addressed through opportunities for equity participation based on future performance (with care taken not to draw upon the original non-profit corpus).
The case for an NGO "Prenup"
Today, almost 20 years since BancoSol made the industry's first successful transformation, any start-up NGO should consider whether transformation might be a part of its future. If so, its founding agreements should anticipate the possibility as much as possible -- the NGO equivalent of a prenuptial agreement.
Provisions such as the granting of sweat equity, which may be ethically questionable if granted in retrospect, become more acceptable precisely because all parties to the institution explicitly agreed to them from the start. These issues may be easier to agree on at the beginning, when the NGO's business has not yet developed a large commercial value.
Re-imagining the for-profit company
Many people committed to social justice may have a built-in assumption that nonprofits are inherently more virtuous than for-profit companies. Most people also recognize, however, that for-profit businesses have been the primary engines of wealth creation in the modern world. It is for that reason that many social entrepreneurs are now seeking to create double bottom-line entities that maintain a dual focus on profits and a social mission. The microfinance industry has been at the forefront of such experimentation. While some missteps are inevitable, we are learning as we go. Each new case, SKS Microfinance included, provides valuable lessons and helps complete an increasingly useful transformation toolkit.