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Introduction
Transformation Transformation in the microfinance industry generally refers to the institutional process whereby an NGO microfinance provider or a microfinance project creates or converts into a share-capital company and becomes licensed as a regulated financial institution. Transforming from an NGO or project to a regulated financial institution may involve becoming licensed to be a deposit-taking institution or only as a credit institution. Other forms of transformation include a donor or government project transforming into a locally managed and registered institution (but not regulated), either independently or with international partners as did Microenterprise Development Fund-Kamurj in Armenia (box I.3).
Box I.3 Transformation in Armenia The nonprofit organization Microenterprise Development Fund-Kamurj (“bridge” in Armenian) provides small loans in support of microentrepreneurship. The goal of MDF-Kamurj is to build a bridge to greater financial security for Armenian families. MDF-Kamurj emerged by joining the efforts and resources of two microfinance projects created in 1998 by Catholic Relief Services (with an investment fund of U.S.$190,000) and Save the Children Federation U.S. (with an investment fund of U.S.$280,000). These programs merged operations in September 2000 to create one professional local institution that clients could rely on in the long term. The transformation resulted in synergies and economies of scale, and expanded the geographic outreach necessary to achieve financial sustainability. By joining the technical and monetary resources of the two organizations, consolidating overhead expenses, and improving economies of scale for training and capacity development, MDF-Kamurj is constantly increasing its efficiency and scale and paving the way for long-term sustainability. Source: MDF-Kamurj 2005. Web site http://www.mdf-kamurj.am/ aboutus.htm.
For the purposes of this book, transformation is defined as the process of a credit-focused MFI (either an NGO or a project) creating or becoming a regulated deposit-taking financial intermediary. An intermediary is an institution that mobilizes deposits and then on-lends these deposits to its borrowing clients. It is important to highlight that this book focuses on deposit-taking institutions and thus addresses the two crucial aspects of financial intermediation: 1. The need for a sound and reasonable regulatory environment and capable supervision by the central bank or relevant regulatory authority 2. The institutional capacity and culture required to be a true financial intermediary taking deposits from the public, on-lending these deposits, and in doing so, complying with regulations and being supervised by a regulatory body
Regulation and Supervision The existence of an appropriate and enabling regulatory and supervisory environment is critical to the success of MFI transformations. The Consultative Group to Assist the Poor’s (CGAP’s) 2003 “Microfinance Consensus Guidelines: Guiding Principles on Regulation and Supervision of Microfinance” defines regulation as the “binding rules governing the conduct of legal entities and individuals, whether they are adopted by a legislative body (laws) or an executive body (regulations)” and supervision as the “external oversight aimed at determining and enforcing compliance with regulation” (CGAP 2003, p. 6). Simply put, regulations are a set of rules to govern financial operations while supervision ensures compliance with those rules. As microfinance has continued to grow, financial regulators have come to realize that most current policy frameworks need to be adapted to regulate