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Maneuvering the bumpy road of MFI transformations

In this interview with Elisabeth Rhyne, Managing Director of Center for Financial Inclusion at ACCION International, she speaks on aligning interests especially among NGO management and founders, donors and new investors.

One of the lead authors of Aligning Intersts: Addressing Management and Stakeholder Incentives during Microfinance Institution Transformation, delves deeper into the key lessons she learnt during research on Micro finance operations in East Africa.

Culled from Microfinance  Gateway

What was the research process like for this paper? What were the main challenges?
In most cases, preliminary research supplemented on-the-ground research, in which researchers travelled to the institution and met directly with key players who were present during the transformation. In addition, the team conducted more than 30 interviews with present and former MFI board members, donors, investors, technical assistance providers, practitioners, and industry experts.

We faced a number of roadblocks given the sensitive nature of the information we were seeking. The human dimensions of MFI transformations are not openly or comfortably discussed in microfinance, so there was little previous research to build upon. Obtaining specific information on the incentives offered to key stakeholders and the dynamics of the negotiation process was even tougher. In the end, we decided not to include three of the eight cases in the final paper because of these difficulties.

The Uganda Microfinance Union (UMU) case study highlights this challenging nature of the negotiation process that can exist between founders, donors, and investors. What can the industry learn from this case?

Ultimately, the derailment of UMU’s first attempt at transformation was directly related to the absence of accepted industry norms or consensus guidelines in micro-finance concerning properly aligned interests and appropriate incentives. Stakeholders had no external reference to consult on these matters and thus, each stakeholder maintained widely different perspectives. Several important lessons drawn are:

– Donors, founders, and investors often perceive issues surrounding stakeholder interests very differently;
– NGO founders and managers have a great deal of power in maneuvering the transformation process; and,
– It is crucial for founders and managers to find investors whose views are congruent with those of the institution. We hope that transparent and honest discussions among stakeholders, in conjunction with broad-based guidelines, will help NGOs navigate the transformation process in a way that preserves and strengthens the organization and its social mission.

The paper focuses on ownership and financial compensation through employee stock ownership programs (ESOPs). What other models can effectively incentivize staff?

Financial rewards can be used to incentivize staff but they are limited in their effectiveness. During transformation, staff often has concerns about job security and career advancement. Ways to address these issues include education and training on new staff roles, workshops to explain the transformation process and its impacts on employees, and by clearly communicating a shared vision among employees for the new MFI.

ACLEDA, an MFI in Cambodia, successfully garnered the support of employees through an intensive education effort, targeted to all staff from loan officers through senior management. In the two years prior to transformation, ACLEDA dedicated significant time to workshops for employee. This provided an opportunity for open dialogue among management, technical advisors, and staff to discuss motives for transformation, to clarify the process, and to explain new roles and responsibilities.

What findings in the case studies most surprised you?
Most surprising was how similar concerns arose in each case study, despite the range of circumstances, regions, and cultural contexts. To me, this emphasizes the deep need within the industry for standard practices and approaches to address conflicting human interest issues among stakeholders more openly.

Can you expand on what you would like to see in such industry standards?
They need to take into consideration a wide range of institutional circumstances and offer a menu of options for MFIs to select from to align interests in ways that best fit their institutional culture. Good practices might include:
– Transparent discussion of the topic during the transformation process;

– Mediation by an external consultant during sensitive transformation discussions; and,
– Basic guidelines agreed to regarding compensation and recognition for founders’ (and other key stakeholders) involvement in the original institution. This would most likely occur through forward-looking equity participation in the new MFI.

What are next steps for creating standards and continuing this discussion?
There have been a number of roundtable discussions since the publication of this paper and we’ll hold additional workshops throughout the year. The research team is trying to encourage dialogue on good practices and considering the best mechanism for creating good practice guidelines.


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