> Posted by Lizzy Bolze, Analyst, Investing in Inclusive Finance, CFI

How does a microfinance institution know what transformation will be like from an NGO to a formal financial institution? In an increasingly complex industry with competition from commercial banks and the entrance of fintechs, many microfinance NGOs are considering transformation to realize their growth potential and help attract investment. However, the road to transformation can often be bumpy, as noted in the Center for Financial Inclusion’s publication Aligning Interests: Addressing Management and Stakeholder Incentives During Microfinance Institution Transformations.  Regulatory compliance issues, information technology hurdles, and aligning with the needs of the NGO and investors can often complicate the process. For Enda Tamweel, the largest and oldest microfinance organization in Tunisia, the decision to transform has come with external pressures, operational challenges, and a focus on maintaining their mission.

Essma Ben Hamida and Michael Cracknell founded Enda Tamweel in 1990, “to become actors and not just talkers about development.” They began by offering health education for women and training classes for children and started offering microcredit in 1995. They haven’t stopped growing since—despite government and economic instability in Tunisia. By the end of 2016, their portfolio was TND 372 million (USD 190 million), serving 300,000 micro-entrepreneurs via 80 branches.  In 2015, Enda became the first microfinance institution in the Middle East and Northern Africa (MENA) region to be Smart Certified, demonstrating their commitment to treating their clients with adequate care.

Transformation has been a consideration for Essma and Michael since Enda’s founding. They’ve spent years reading about and visiting large foreign microfinance NGOs that transformed into banks. They also sought advice from Ajay Bhandoola, former Senior Director with HSBC in MENA. Ajay notes, “Transformation is not a one size fits all. In Enda’s case, it was absolutely the right thing to do.” As confident as they were in the decision to transform, Enda faced some challenging realities.

Navigating Competitive Environments

In 2011, the Tunisian government instated a microfinance law that aimed to attract capital and expand the commercial microfinance market. It allowed new entrants into the market and raised the loan ceiling from TND 5000, for microfinance associations, to TND 20000, for microfinance companies. This was particularly relevant for Enda’s involvement in the agricultural sector (where higher loan amounts are often needed) and for long-standing clients whose businesses had grown. Competitors targeted Enda’s clients, and by 2013, Enda was close to their debt-to-equity ratio limit and needed more capital to move forward. By creating operational pressure and increasing competition, this law encouraged Enda to pursue its transformation plan.

Essma Ben Hamida Headshot

Essma Ben Hamida, C-founder, Enda Tamweel

Searching for Like-Minded Investors

Having run Enda as a socially-focused NGO for so many years, it’s been hard for Essma and Michael to consider profit expectations, short investment timeframes, and finding the right investors. Essma likens it to arranging the marriage of your child, and making sure they find the right partner. “We are so scared of leaving this beautiful institution in the hands of someone who’s not right. There’s a problem of trust. You don’t know how people will react.”

Enda has always had a strong emphasis on social change and women’s empowerment. Essma recalls, “My mother used to weave carpets, but never went to the market to sell them. There was a middle man who came to take the carpets and sell them for a big profit. She knew nothing about negotiating or about how much he actually sold the carpets for.” She notes, “Earning their own money, together with financial education, empowers women and lets them contribute in decision-making.” Finding the right investors has involved an investor agreement that gives Enda the veto power over issues specific to mission-adherence when they are no longer the majority shareholder. The IPO of Compartamos in Mexico saw a similar “poison pill” to protect their social mission.

Michael Cracknell, Co-Founder, Enda Tamweel

Moving a Giant

When Enda began to transform in 2015, they had 200,000 active clients and were well over the average client size of 30,000 – 50,000 when MFIs usually transform. The size was a logistical challenge, Michael states: “Every client had to sign an agreement for the transfer of their account from the NGO to the company. Some had problems understanding the process. A few refused. All of the 1,300 staff members had to sign new contracts with the company, except 20 who remained with the NGO. All other contracts had to be transferred, including the rental of branches and loans from our financial partners.” Taking steps to transform earlier, as a smaller and more nimble organization, is a consideration Enda has learned from, and would advise other organizations to think about.

The realities of Enda’s transformation are just a few considerations for aligning interests during this process. Their story was recently shared as a case study at the MENA Governance and Strategic Leadership Seminar in Amman, Jordan. The seminar was modeled after the Center for Financial Inclusion’s Africa Board Fellowship Program, and brought together over 40 CEOs and board members from 19 leading MFIs in the MENA region to strengthen board capacity through peer learning and exchange. A technical needs and demand assessment (TNDA) was also conducted with MFIs in the MENA region, and revealed approximately 25 percent of institutions are considering transformation in order to grow and attract investments. The Enda Tamweel story is applicable to some, but does not cover all of the issues microfinance institutions must consider when transforming into a formal financial institution.

Stay tuned for regional governance findings in the upcoming TNDA report. In the meantime, we’ve love to hear your transformation stories and any words of advice you would share with others considering a transformation. Please share in the comments section!