Financial Times

NGOs to become regulated financial outfits
Ailing non-governmental organisations plagued with management, governance issues, lack of funds and the inability to provide a broad range of financial services now have the option of transforming themselves into regulated financial institutions.
Dr. Nimal A. Fernando, Rural Finance Specialist of the Asian Development Bank, said that following such a transformation, NGOs would be able to create an ownership structure with risk capital, strengthen governance, gain access to loans from commercial sources and provide a broader range of services such as accepting voluntary deposits.

NGOs had a social mission to help the poor by providing them with micro credit services, Fernando told a recent Colombo forum on 'Transformation of non-governmental organisations into regulated financial institutions: Expectations and achievements'. "If the NGOs want to serve their social commitments effectively and efficiently whilst maintaining sustainable and transparent governance, then a transformation of such a nature would be the best option," he said.

While observing that NGOs did not possess the legal charter to provide voluntary deposit services, money transfers, leasing facilities and payment services. However, NGOs have recognised the significance of these services for the growth and achievement of their social mission, and therefore can provide such financial services only if they were to transform themselves into regulated financial institutions.

"The main aim of such a transformation is to get social investors to take a significant stake in the ownership of NGOs as opposed to donors, and also encourage private investors and employees to help raise capital," he said. NGOs would then be able to obtain funds from loans and bonds through financial institutions as opposed to being dependent on aid by donors.

Fernando said that the Central Bank had a role to play in improving the functions and the transparency of NGOs. He added that the training of NGO personnel in the area of financial services would help deal with some of the problems crippling these organisations. "However, the role of improving NGOs remains with NGOs themselves," he said. If NGOs want to serve the poor over a significant period of time, a strong capital base is vital. Unpredictable donors must be replaced by shareholders committed to social investment.

"This will be possible, only if NGOs will embrace this transformation," he said. BancoSol in Bolivia, Mibanco in Peru and K-Rep Bank in Kenya are some of the NGOs which have successfully transformed themselves into regulated financial institutions with new shareholders, increased equity capital, improved governance and a far greater outreach to the poor. The Asian Development Bank has pledged a loan of Rs.70 billion for the development of the micro finance sector in Sri Lanka for 2004. Some of the money is to be used in poverty alleviation projects, strengthening co-operative societies and NGOs. (SG)

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