Transforming NGO MFIs: Critical Ownership Issues to Consider

June, 2008     Kate Lauer

A significant proportion of microfinance institutions (MFIs) in developing countries operate either as nongovernmental organizations (NGOs) or as projects run by international NGOs. Many of these NGO MFIs plan to “transform” into a for-profit company—often, a regulated financial institution. The microfinance sector is, in many ways, at the threshold of knowledge and experience regarding this type of transformation. A key component of the transformation of an NGO MFI into a company—the establishment of ownership—presents issues for the NGO as well as the founders and funders of both the NGO and the newly established institution. These issues include the following:

• Legal limits on an NGO’s ownership of the transformed institution, which may have consequences for mission and governance
• Legal restrictions affecting the ability of the NGO MFI to contribute its assets to the transformed institution
• Effective transfer of liabilities
• Limitations related to the NGO’s grant funding
• Issuance of shares to management, employees, and other stakeholders
• Future divestiture by initial shareholders

This paper provides insights and guidance for those who plan to carry out a transformation. 

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