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. Thus the paper’s discussion of issues is likely more detailed and technical than most general readers will care to wade through. At the same time, this is not a “how to” manual nor does it identify right and wrong answers. Such an approach would not be feasible, primarily because of the different scenarios transforming institutions will face depending on local law and regulation. Although this paper touches on matters that have raised difficult ethical and “double bottom line” issues in recent transformations and post-transformation sales of shares, it does not deal with these issues in depth because they have already been discussed in various publications.