More and more microfinance operations are migrating out of not-for-profit associations (like NGOs) and into for-profit companies (like banks).  Similar transformations have occurred in other industries that began with pro bono efforts but went on to mobilize commercial capital.  These transformations create important challenges.  Some of the challenges inherent in migrating to for-profit microfinance have been discussed widely—for instance, the question of maintaining a social mission when for-profit investors enter the scene. 

Calmeadow and Center for Financial Inclusion at ACCION have just published an important new paper flagging another transformation challenge that occurs often but has received little attention so far.  Moving a microfinance operation into a new for-profit structure can make the managers and directors of the old not-for-profit NGO worse off individually rather than better off.  For instance, NGO managers may feel frozen out of the profits that are expected to result from their years of hard work. More pointedly, smart NGO managers are aware of the very real risk that they may lose their jobs after transformation when owners of the new company decide that a different set of skills are needed to run a bank. If angels have been running the NGO, there will be no problem—angel managers will cheerfully ignore consequences for themselves and resolutely pursue whatever is best for the microfinance operation and its clients.  But quite a few non-profit MFIs are run by humans rather than angels, and humans have a spotty record when it comes to enthusiastic support for changes that hurt their private interests.

In “Aligning Interests: Addressing Management and Stakeholder Incentives During Microfinance Institution Transformations,”  Beth Rhyne and her co-authors present examples of such transformation problems, along with various tools to compensate managers, directors, and staff so that the success of the transformation will make them better off rather than worse off.  The paper analyzes the ethical and practical issues involved, and takes a strong first step in the direction of articulating good practice guidelines for structuring incentives.

This paper does an impressive job of flagging and analyzing the problem.  But the authors recognize that a lot more work needs to be done before an industry consensus can emerge about appropriate ways to manage incentive conflicts when MFIs commercialize.  The working group that supported this paper is mounting a series of regional workshops to explore the subject, and is considering a database to inventory compensation and incentive arrangements in transformations around the world.  I hope that many members of the microfinance industry will engage in moving this discussion forward.