So what does transformation mean? The term is used…to mean many different types of…change. I'll give you some examples. It could be a foreign NGO branch office like Save the Children, for example, who formed a local NGO and transferred to this local NGO its microfinance portfolio. It could be a foreign NGO branch like FINCA, a participant in the formation of local commercial microlending company, and [they] transfer the [microfinance] portfolio to the for profit entity in exchange for shares. It could also be a local or a foreign NGO…participating in the formation of a commercial company that is licensed as a bank or non-bank financial institution. Again, [they] transfer in [their] microloan portfolio for shares. And obviously, you can have many variations of those different schemes depending of what the local law permits. So, in fact the NGO is not what is transforming. It is the nature of its assets. The NGO very often remains an NGO and we create a new entity, which is this new commercial entity, but the asset of the NGO is changing. The NGO has a loan/microloan portfolio and it will be replaced by shares in this commercial entity.

So, what are the common issues we find? Depending on the local law, fiscal law, the state might be interested in recapturing some of the [preferential] tax benefits accorded to the NGOs. So we need to be sure that in the process when we transfer this charitable microfinance portfolio the state doesn't say, you were a nonprofit, you were nontaxable and if you [transform into a Bank], then we'll have to retroactively tax you for this commercial transaction. There are sometimes restrictions on the NGO legal board to transfer charitable assets depending on local NGO law. And sometimes, [as] I found that when I was working in Indonesia, NGOs are not allowed to be shareholders of banks, for example. So the local law context is extremely important.

So, what are the challenges for transformation? I think my colleagues will expand on that much more. So first, I re-emphasize the importance of the legal framework…. Then we have the question of ownership. Who owns the new entity to be created? You can think of it as local shareholders, international shareholders, we can think about staff also having a share in the new entity and this is happening, this has happened many times. For example in [ADEME] in South America, staff own more than ten percent of the shares, like at K-REP in Kenya [where]the staff owns an equity stock option plan, and also I think around five percent of the shares. In some transformations, like at CARD in the Philippines, some shares were also given to the clients.

The second question we can look at is the governance. How to make this transition from funder controlled company to a share company. Now what of the change of leadership? To be the executive director of an NGO is not the same thing as being the CEO of a bank. Then there are donors, which raises the question of who owns the value being transferred to the new company. If the loan portfolio has been really funded by donors can the donors claim that they have a right to this loan portfolio? And then another issue is the management and staff expectation. What is the staff motivation? What are their expectations? Very often the staff sees the transformation as a way also to earn more, to get more out of this new structure. Is this through shares or is this through a profit distribution to the staff? So, the key step of transformation is mobilizing equity and this takes a lot of time. As you will see, there is a need to do an evaluation of the loan portfolio and this is quite a complex issue to deal with, identifying and negotiating with investors. The second step is registering and there is a two step registering process, registering as a legal entity and getting the appropriate license. For example, if I want to get a banking license I will need to apply to the Central Bank or to the Minister of Finance for a banking license which is a totally different process than registering as a local, legal for profit company. And then you have obviously management and governance issues... for profit companies require specific, accountability assistance. The last point is operating systems and procedures. I mean, there is obviously a need to revise policies, manuals, MIS, and have trainings about the new entity organization to comply with the bank laws. Is it the bank laws which apply, if the non-bank financial institution company [becomes] a bank, [or do] the non-bank financial institute laws apply. So this also takes a lot of time….

I just want to give you some examples of successful transformation. I took one case from South America, Mibanco in Peru. One in Asia in Mongolia, XACBank. And one from Africa, K-REP in Kenya. So this is like the advertising, you know what happened before and after. So, if you look at the information on Mibanco, you see that they had a portfolio outstanding of twelve million before transformation in 1997 and in 2003 they have $114 million. So it means they multiplied their portfolio by ten times. Deposits increased a little bit, up to fifty-four million.

Before, as an NGO, they were not allowed to mobilize deposits. What is interesting to see here is that the deposits form fifty percent of their loan portfolio. And then leverage. Leverage was pretty high, thirty percent, and they increased it again to twenty-two. It's almost five. So their assets are five times their equity.

So then the story of XACBank is maybe a unique case. I think it's an organization in Mongolia that has done a double transformation in three years. Double transformation because there were four NGOs in the first step transforming [into] the first non-bank financial institution in Mongolia. And then they merged with another non-bank financial institution to create a commercial bank. So it is two transformations in a row. What is interesting in the example of XACBank is that they managed through the transformation to a bank to mobilize a lot of savings and their savings represent almost 85-90 of their loan portfolio and their leverage is very high at five.

The example of K-REP, I guess, is in between. They also multiplied their loan portfolio by about five times. But they were not so successful in mobilizing savings. They mobilized only $4.3 million. So, savings are only one third of the loan portfolio and leverage is low, only two. I think that gives you three interesting pictures.

Read remarks by Victoria White