> Posted by Elisabeth Rhyne, Managing Director, CFI

Since 1992, when Accion created BancoSol in Bolivia, the first private commercial bank dedicated to microfinance, Accion’s aim has been to create a financially inclusive world, primarily through building financial institutions that serve the base of the pyramid. Accion has contributed to the birth, growth, or strengthening of 66 microfinance institutions in 34 countries, which together serve millions of clients with a broad array of financial services.

Through the years, Accion has gradually evolved its own unique microfinance institution partnership model. I recently spoke with Michael Schlein, Accion’s president and CEO, Esteban Altschul, chief operating officer, and John Fischer, chief investment officer. I asked them how and why Accion’s model for working with microfinance partners has taken its current form, and what has been learned along the way.

Michael Schlein said that the starting premise for Accion’s model was, “the recognition that charity – though very important – is insufficient to the task of building a financially inclusive world. You have to tap the capital markets.” As a non-profit organization originating in the international development arena, this premise set Accion onto a path that was “disruptive” in the 1990s, though it is widely adapted today in the impact investing movement.

The model assembles private investors around the common purpose to build a healthy and profitable financial institution that can grow and provide services over time. To succeed for investors, it must produce adequate financial returns and an exit path so the returns can be realized. To succeed for Accion’s mission it must result in quality financial services for people who would otherwise be excluded. Accion also looks for a demonstration effect. When business success inspires others to enter the market and thus creates an industry, that’s how Accion’s broader vision advances.

What has now crystalized is a model of partnership in which a web of incentives meets the needs of each organization involved, aligns all the players behind the mission, and elicits strong performance from each partner – including Accion itself.

Here’s how it operates.

The tools are common enough: equity investment, governance, management services, and technical assistance; but the key is how they are assembled into a mutually reinforcing package. Accion’s ideal model couples a significant minority equity investment and seat on the board with secondment of one or more Accion staff members to a senior management position, supplemented by technical assistance on special topics, from credit scoring to crisis management. As Schlein remarked, “It is not rocket science to realize that we can have greater impact when we provide services as a package. Each part of the puzzle significantly strengthens the others and our impact overall.”

As a shareholder, Accion has a financial stake that aligns it with other investors and requires that Accion takes financial returns seriously. Management services allow Accion to give the institution the technical know-how it needs, particularly in the early years. Its day-to-day inside presence, coupled with active shareholding, gives investors confidence in the institution’s future. And with this package, Accion can invest in institutions with capacity gaps that might not otherwise attract investors – and strengthen them.

Accion also relies on agile donated resources devoted to sharpening and expanding technical knowledge, pushing into marginal markets and client segments, and contributing to industry strengthening, among other purposes.

The cornerstone of Accion’s model, and its most unique feature, is the decision to take a significant minority stake, typically between 20 and 40 percent. This level of ownership gives Accion a leading but not exclusively dominant voice in the boardroom, which management and technical services reinforce. As Fischer said, “We prefer to influence others rather than to direct them. We like the situation in which Accion is first among equals, but with no one party able to call the shots.”

If you’re going to be a minority shareholder, you’d better be choosy about your co-investors. “We choose investors we admire,” says Schlein, and Fischer explains, “We want to have a diversified shareholder group of generally like-minded investors with a fairly long term horizon.”

Ideally, there are local or regional investors to whom the institution can be ceded over time. It’s not easy to find a local partner with the right combination of outlook, mission, and competence, especially in frontier markets. When it first began investing, in the 1990s, the local partners were non-profits created in concert with local businessmen. These NGOs started microfinance operations, then spun them off to become regulated financial institutions. Such were the origins of BancoSol in Bolivia, Mibanco in Peru, and Compartamos in Mexico, which were long Accion’s flagship banks. More recently, local owners include individual promoters like entrepreneur Veena Mankar, founder of Swadhaar in India, or banks like Ecobank, a partner in Accion Microfinance Bank Nigeria. Strong local partners know the culture and business environment, can rally local funds, and have standing in discussions with regulators.

The non-local shareholders in the mix also add value. They are often international investors that share Accion’s double bottom line, though purely commercial investors are sometimes involved. At Accion Microfinance Bank Nigeria, for example, the shareholders include IFC, a multilateral bank, Citi, a global bank, Ecobank, a regional bank, and Zenith, a local bank. A multilateral like IFC in a risky environment like Nigeria provides a quasi-official presence that can be of great value in solving regulatory and government relations problems. Major international shareholders like Citi bring global connections, resources, and prestige.

These investors sign up with Accion because they do not wish, or are not equipped, “to play a leadership role in terms of strategic direction,” said Altschul. “Just being an investor is an easier business model. More institutions can readily do that.”

If international investors sign up because they want Accion to lead, I asked, why doesn’t Accion go for majority ownership and let the other investors be passive?

“The other investors are there to hold us accountable for doing a good job. They provide a check on our ability to do whatever we want,” said Fischer. Altschul noted that if Accion were to become an owner-operator – the path ProCredit, Access Holdings, and Finca have taken – it would require retooling the organization to focus single-mindedly on operations. Altschul believes that the demands of running organizations require an all-absorbing and fairly inward focus that is at odds with Accion’s broader aims of developing a socially-beneficial industry. By engaging in partnerships with various organizations and co-investors Accion can spread its knowledge and promote its mission with a broader and lighter touch than if it were an owner-operator.

Ultimately, it’s healthy to have multiple voices at the table. “When you are in the majority,” said Altschul, “you only hear yourself speak.” In fact, Accion experimented with full control when it launched a new microfinance institution in Manaus, Brazil, an effort that encountered serious problems. “It’s good to have the other voices. To challenge, to question assumptions,” said Fischer.

The intent to leave the institution in local or regional hands puts exit on the horizon from the start, and exit is, of course, necessary for investors. “Exits are important as a mindset,” said Altschul. “In the back of your mind you are always thinking of an exit, whether in eight or fifteen years.” Fischer maintained that the idea of exiting to owners that will carry the mission forward focuses attention on long term institutional health rather than short term results. It’s different, he noted, from the “greater fool theory” of exit whereby the seller has no stake in the company’s future. If Accion leaves behind a poorly performing institution, its mission is compromised, as is its reputation with the global community of investors in microfinance.

Building institutions takes longer than the relatively short time horizon of most development projects and many commercial investors, and this is another way Accion’s non-profit status makes a difference. Most relationships last for at least 10 years, and unlike many investors, Accion can adjust its exit horizon as events demand. Accion has often chosen to allow its holdings to be reduced over time as institutions mature, rather than exiting entirely. For example, it currently holds less than 3 percent of Banco Compartamos. Accion shifts gradually from its early leadership position into a less intensive relationship in which it focuses on upholding the mission, ensuring that the institution has access to the latest know-how, and backing the institution in the event of problems.

Schlein emphasized that the dynamic aspect of the model is important to stakeholders. “Investors like to invest with us because we’re inside and we understand the relevance of exit. Local partners appreciate how we roll up our sleeves, add value, and then leave. And donors value the way we redeploy resources to where they can have the greatest impact.”

Over the years, Accion’s staff has developed an internal culture of ownership in which governance is the lynchpin. Accion takes governance very seriously. “In the early years, our board members are likely to be our own staff, but as the institution matures, we lean toward strong, independent board representatives,” commented Schlein. Governance is especially important because financial institutions are naturally prone to conflicts of interest and related party transactions, both of which are minimized by the transparency demanded in a multi-voiced partnership.

The value of any model is perhaps best demonstrated in times of stress, like the crisis that erupted in Nicaragua’s microfinance sector in 2009. Accion’s partner, FAMA, was a relatively mature organization with little day-to-day need for Accion technical support. But when Nicaragua’s populist government encouraged non-payment of microloans, defaults soared across the sector, and access to funding disappeared. The largest microlender, Banex, went under, and FAMA, with 17 percent of its portfolio at risk, was in danger of collapse if it could not raise funds. Accion stepped in with a $1 million loan and intensive technical assistance. Accion and FAMA’s local management worked zealously to secure funding from the other creditors. When Accion combined its own money with direct operational engagement, it sent a more powerful and convincing signal to other investors than with either intervention alone. As lead international shareholder, Accion and local management organized the other investors and crafted a turnaround plan. Since then, FAMA has recovered nicely and is once again a healthy institution with three straight years of growth and a portfolio at risk just under 2 percent.

In contrast, Banex, which lacked a similar international anchor, succumbed with its investors in disarray (see the Harvard Business School case on Banex). Accion’s credibility stemmed directly from its model: when the investors opted in, they were counting on Accion to protect its own financial, reputational, and mission concerns.

And this, in brief, is the crux of Accion’s model. It puts Accion in a position in which it has financial and reputational resources at stake that can only be protected if Accion does its job well, subjects its decisions to scrutiny by others, and maintains cooperative partnerships. That, essentially, is its pitch to partners: if you invest beside us, you can count on Accion doing its utmost – with you – to help the organization succeed.

On paper, Accion’s model may sound easy. It isn’t. Being just an investor is easier. Providing technical services without ownership is easier. Being a majority owner may not be easier, but it does not draw in other players. Partnerships that nurture institutions to stand on their own require skill, finesse, wisdom, and plain hard work. It’s not just the money, though that provides “skin in the game”. It’s not just the board seat, though that is the key strategic leverage point. And it’s not just the management and technical services, though that adds development impact. It’s deploying all of these elements in a dynamic dance with other players that enables Accion to pursue its mission.

Image credit: Accion

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