A comprehensive survey of microfinance institutions (MFIs) listed in and linked to the Virtual Library on Microcredit, was made to study the range and types of ways in which MFIs are incorporated or 'registered. The survey not only highlighted details of incorporation, but also the advantages and disadvantages of registration, and the effectiveness of the MFI.
Firstly, it is important to understand the precedence of microfinance that is usually ignored - informal finance. People have always borrowed and lent from/to each other, at a very micro or community level, long before the advent of modern banking systems. They have responded directly and immediately to a need with resources that they had with them. Savings has also been also popular - in fact more than provision of loans - either in cash/gold or in other forms.
Many current laws and legislation regarding the financial system is largely biased towards the formal banking system, and hence looks at 'informal' systems as illegal and non-formal. This in turn has affected the nature and range of activities allowed of MFIs.
It was observed that the following issues affect the decision to 'incoprorate' an MFI (in terms of whether to incorporate itself, and what form it should take):
- Local and national laws and legislation regarding various financial activities
- Laws regarding taxes and other related rules
- Laws on regulation of financial institutions in general, including commercial banks.
- Methodologies to incorporate and register a 'public' or 'community-based' organization.
- Regulations regarding non-profit, voluntary and public service activities
- Rules and regulations regarding fund rising, membership fees etc.
- Laws and regulations regarding the collection of savings and charging of interest rates on loans etc.
Depending on the above issues, MFIs choose to incorporate themselves as any one or a combination of the following:
- non-governmental organization (NGOs) or its variations - private voluntary organization, non-profit organization, etc. (as an entity outside the target borrowers or communities).
- Self-help group, association, club, society or other community-based organizations (as an entity within the target borrowers or communities).
- Cooperative, based on the respective country's co-op law (if present)
- Credit Union, based on the respective country's credit union laws (if present)
- Foundation or Charitable institution (especially those related to religious groups).
- Private/commerncial Bank
- Company, or specifically a 'financial company'
- Special state-owned bank (e.g.: village or rural banks).
- As a specific programme or project within an existing organization, including those of commercial and governmental banks
Notwithstanding the above forms of incorporation that MFIs have used, many have also chosen to remain informal or unincorporated and unregistered, particularly those that are community based, or where laws and legislation simply do not exist.
In other situations where the rules and regulations have been restrictive, MFIs have identified ways to circumvent barriers to suit their goals and objectives. For example, they have done this by
While these are adhoc and short solutions, they do affect the outreach and long-term sustainability of MFIs.
- 'defining' activities in a different way (e.g.: collection of a membership 'fee' instead of charging an 'interest' on loans provided)
- using existing forms and institutions to serve the purpose (e.g.: collect all savings and deposit in a commercial bank, rather than keep the money with the MFI).
- partnering and collaborating with existing institutions (e.g.: an NGO working with a bank to provide group loans to a community organization).
- incorporating as a different organization, for which finance is just one activity (e.g.:a training/vocational school that provides loans for its students to set up their own enterprise).
- fund-raising or collecting savings using other means when prohibited by law (e.g. by collecting 'fees', shares, non-financial inputs, donations or grants etc.)