Preliminary Analysis of an Institutional Crisis in Microfinance
This summary was prepared by Michael Chu, Carlos Castello, Craig Churchill
and Tim Nourse..
Over the past year, Finansol, a regulated microfinancial intermediary in
Colombia and an affiliate of ACCION International, experienced a crisis that
caused a severe deterioration of portfolio quality. ACCION felt compelled to
intervene in this crisis for two reasons. First, 40,000 microentrepreneurs
and their families depend on the financial services provided by Finansol.
Second, Finansol represents a model of microfinance that ACCION believes is
essential to unlock resources for the large scale provision of microfinancial
services: the transformation of an economically viable non-governmental
organization (NGO) into a regulated financial institution. If Finansol was
allowed to go under, as it appeared destined to do, it would have been a
disaster for the microentrepreneurs of Bogot and a major set back for
With the assistance and collaboration from both the private and non-profit
sectors, ACCION developed and implemented a recovery plan. New management is
now on board, portfolio quality has improved, and new investors have
recapitalized the institution, with more to follow.
To share this experience for the benefit of the field of microfinance, ACCION
hosted a symposium entitled Corposol/Finansol: A Preliminary Analysis of an
Institutional Crisis in Microfinance on September 9, 1996 in Washington DC.
The three objectives of the symposium were 1) to analyze the origins of the
Corposol/Finansol crisis; 2) to explain the recapitalization package recently
completed for Finansol; and most importantly, 3) to identify lessons that
emerge from this experience. Presentations by Michael Chu, the President and
CEO of ACCION International, Carlos Castello, ACCION's Vice President for
Latin American Operations, and Maria Eugenia Iglesias, the new President of
Finansol, were followed by an informal question and answer period.
II. Corposol/Finansol's Institutional History
Finansol emerged from Actuar Bogot (hereafter referred to as Corposol), an
NGO founded by influential local business persons with ACCION's support to
provide services to microentrepreneurs in Colombia's informal sector. From
its start in 1987, Corposol was noteworthy. It grew at an unprecedented rate,
providing integrated training and access to credit to more than 3,000 clients
in 1989, and escalating to nearly 25,000 active borrowers at the end of 1992.
Corposol was also one of the first microlending institutions to initiate its
lending activities by obtaining lines of credit from commercial banks,
initially through the personal guarantees of the founders, and afterwards
through guarantees from ACCION's Bridge Fund and FUNDES. However, these
different sources of capital were insufficient to sustain the institution's
rapid growth. By 1992, Corposol began to explore ways to tap directly into
financial markets by forming a regulated financial intermediary.
After examining the feasibility of a number of options, Corposol decided that
a commercial finance company (CFC) was the preferred type of regulated
financial institution. Not only would Corposol avoid raising the large
minimum capital requirement (US$13.7 at that time) to create a bank along the
lines of BancoSol, but it could purchase an existing CFC license and begin
operations immediately. In October 1993, with 71% of the shares, Corposol
became the controlling owner of a CFC which was renamed Finansol. Joining
Corposol as minority shareholders were ACCION International, Calmeadow,
FUNDES, a local development bank and private individuals.
Finansol inherited a loan portfolio of excellent quality, a proven lending
methodology (i.e. short term, working capital loans and sequential step
lending), large volumes and consistent operational profitability.
Nevertheless, a number of factors quickly led to the deterioration of
Finansol's financial position.
In the first place, the relationship between Corposol and Finansol was
structurally flawed. Corposol, the NGO, retained the credit extension staff
while Finansol, the financial institution, served only as a booking and
financing agent. Since most of Corposol's operating revenues were generated
by training fees charged concurrently with loan disbursement, this created an
incentive to disburse and a disregard for collection. In addition, except
during the first few months, Finansol was managed by a long-time associate and
subordinate of Corposol's President. Together, these factors left Finansol
without the ability to control loan placement, nor the will to conduct
Secondly, Corposol became overly ambitious. Buoyed by its previous success,
the management of Corposol set out to provide completely new services and
expand quickly at the same time. Due to their entangled relationship,
Finansol was dragged along as Corposol launched three new untested
microfinance projects: Mercasol, a chain of retail outlets for
microentrepreneurs to purchase supplies with credit lines; Agrosol, a rural
credit program with larger borrower groups and different repayment schedules
than the urban program; and Construsol, a home improvement loan scheme. In
some cases, Corposol allowed two or three different loan products per client.
The results were dismal. The new products were largely unsuccessful; the
management information system could not keep up with product diversification;
and the institution lacked appropriate staff training for the new products.
In order to stop the monthly P&L hemorrhage caused by provisioning for
deteriorating loans, management launched a massive refinancing of the
portfolio, that included lengthening loan terms and rescheduling bad debts.
This provided brief cosmetic relief at the huge cost of hiding and worsening
their asset quality, and undermining the ACCION methodology. At the same
time, loan officers came under intense pressure to increase loan volumes to
generate revenue for Corposol, disregarding the past concern for credit
Thirdly, management made poor decisions in response to banking regulations.
In 1994, the Colombian government attempted to control inflation by limiting
the asset growth of regulated financial institutions to 2.2% per month - an
extremely low figure considering that annual inflation was in excess of 20%.
Finansol was immediately affected, but as an NGO, Corposol was not. It became
expedient for Corposol to retain a portion of the loans to permit the combined
portfolio to grow at a faster rate than the regulated system. Thus began a
practice of shifting portfolios between the institutions that lacked
transparency and misrepresented their financial position.
Thus, the combination of a flawed structure, overly ambitious policies, and
poor decision-making led to the worsening of Corposol/ Finansol's financial
position. The loan portfolio deteriorated; the credit methodology was
weakened; and neither ACCION nor the Superintendency were able to get a clear
picture of the situation.
III. The Turnaround
Although ACCION and the other outside directors sensed these problems, they
found it difficult to analyze and tackle these issues effectively. By
presenting its new projects and later reporting on them, its attractive
opportunities, shifting assets between the two institutions, and assuring
critics that it was dealing with the problematic signs, Corposol was able to
delay effective review of its operations. In addition, a clean audit by a big
six accounting firm bolstered its case.
In May 1995, after eight months of delays, ACCION prevailed upon Corposol to
perform a CAMEL evaluation of the entire microlending operation. The results,
reported in July, identified worrisome trends, but because the CAMEL was
restricted to a period ending December 31, 1994, it did not capture the true
magnitude of the deterioration. However, the CAMEL was instrumental in
effectively articulating the concerns of the outside Board Directors and
launching the move for change. After the resignation of Finansol's President
in September 1995, a totally open appraisal of the institutions occurred.
In October 1995, Finansol obtained the services of Luis Fernando Tob\n, a
prominent banking consultant formerly with Citibank, to analyze the operations
and design a corrective plan. The turnaround plan rested on a conceptually
simple solution: a rigorous and uncompromising return to the basics. Finansol
regained control over its loan portfolio by terminating new product offerings,
returning to the basic loan model, severing most arrangements with Corposol
and taking management responsibility for the credit extension staff. In
addition, Finansol implemented a comprehensive plan to reduce costs, improve
reporting and budgeting, and focus on quality hiring, training and evaluation.
In March 1996, Maria Eugenia Iglesias, a former colleague of Tob\n's at
Citibank with extensive local and international experience, was hired as the
new President of Finansol.
To track the progress of the turnaround, the portfolio was split into a "New
Bank" containing loans since October 1995, and an "Old Bank" with the
portfolio of the past. The trend of the New Bank's performance indicators
have been similar to other ACCION programs, indicating the efficacy of the new
policies. Finansol is also eliminating non-productive assets that at one
point comprised a significant portion of all assets, and effected a capital
increase of $2 million to cover loan losses. The problem was correctly
diagnosed, a highly competent management took corrective measures, and the
affected portfolio, although significantly worse than in the past, was no
longer at the disaster stage.
C. Regulatory Context
Although the operational problems were diagnosed and the cures already
implemented, the regulatory framework presented another set of challenges for
Finansol. Since Colombian banking rules mandate the gradual provisioning of
delinquent loans, the effect of writing off the Old Bank's debts flowed
regularly through Finansol's books for the first nine months of 1996. During
this period, the monthly losses caused an erosion of Finansol's net worth to
the extent that it violated the Superintendency's standard that a regulated
financial institution may not lose more than 50% of its starting net worth in
a given fiscal year. This "thin red line" was crossed in May 1996, creating a
situation where the Superintendency could have intervened.
The potential ramifications of intervention are significant. This could have
sent a signal to the market that Finansol was entering a crisis situation,
rather than coming out of one. Not only could this have caused Finansol's
collapse due to a lack of market confidence, but it would have had a serious
effect on the broader Colombian financial market as well since Finansol issued
paper amounting to approximately $30 million at that time. Accordingly,
averting this crisis was of the utmost concern. Intense efforts to launch a
recapitalization plan were quickly initiated to forestall intervention.
Working with IFI (Instituto de Fomento Industrial), Colombia's second-story
development bank, ProFund, Citibank-Colombia and others, ACCION led a full
recapitalization plan in July 1996. The plan had two goals: 1) to sever the
relationship between Corposol and Finansol; and 2) to raise enough capital to
meet the capital requirements of the Superintendency and to provide for future
growth. The first goal was achieved when Corposol surrendered its majority
stockholder position through a debt for equity swap with its banks to whom
those shares were pledged. Although the timing was complicated by the
intricacies of Colombian corporate law, this swap was effected by the end of
August. The second goal was achieved when the new investors purchased $3.5
million of equity in Finansol. To raise additional capital, Citibank-Colombia
is placing shares for $4 to 7 million on the Colombian market in September and
October 1996. This represents the first time that a premier bank has become
an investor in a microfinance institution and provided investment banking
services in the commercial placement of shares.
With its difficulties nearly solved, Finansol's future looks bright. It has a
proven presence in a potential market of 1.2 million clients. When it resumes
lending operations in the near future, it is projected that Finansol will be
able to turn around its finances by the end of 1997 and become solidly
profitable in 1998.
IV. Lessons Learned
Although the narrative leading up to and through the crisis at
Corposol/Finansol is interesting, it is more important to share with the
microfinance community the lessons learned from these events. These can be
drawn by examining the institutional characteristics that allowed the crisis
to occur, the role of ACCION in monitoring and eventually helping to rectify
the situation, and the implications for MFIs in the event of a serious crisis.
A. Institutional Characteristics
The institutional relationship between ACCION and Corposol/Finansol must be
taken into account. Typically, ACCION has co-founded institutions in its
Network with local partners drawn from the leaders of the private business
sector. While working intensely to establish new microfinance operations,
ACCION does not involve itself directly on the Board of local organizations in
order to promote the full involvement, and the attendant strong sense of
ownership, of its local partners. ACCION believes that the development of
these deep roots is an essential ingredient in the Network's success in
reaching both economic self-sufficiency and scale. As a result, in the
Colombian case, ACCION was on the Board of Finansol as an investor, but not on
the Board of Corposol. Thus there was little opportunity to influence
Corposol's diversification into untested activities.
This aggravated a governance issue that arises from having an NGO parent as
the majority shareholder of a regulated microfinance institution. While the
problem is not impossible to resolve (as the example of BancoSol suggests), an
NGO parent nevertheless establishes a controlling party which is not
inherently bound to the same standards of economic performance or fiscal
prudence that may be reasonably expected in the business sector. In fact,
some may argue that the NGO's own mission is to assume greater risk precisely
in order to accomplish its vision.
Because of this possible tension, in the best cases the NGO parent must
consciously guard that, in dealing with its regulated microfinance subsidiary,
it sets fiscal standards appropriate to the financial sector, even if these
are not applicable to its other activities. In the worst cases, the lack of
normal shareholders at the NGO parent may translate into a disregard for
economic performance that influences how it runs the MFI. Unfortunately, this
was the case in Colombia where, in pursuit of its own aims and the
maximization of its own income to cover operating deficits of its new
initiatives, Corposol pushed for the expansion of services and the explosion
of clients at Finansol.
The lack of management autonomy at Finansol, for reasons previously noted,
aggravated this state of affairs. But even if there had been a will to oppose
Corposol's initiatives, the structural relationship between the institutions
═ěhere Corposol retained all the credit extension and supervision
capabilities═ěould have made it difficult to intercede.
One direct result of this structural flaw was the dramatic distortion of the
lending methodology. Under pressure from Corposol to increase clients, the
credit officers allowed larger loans for longer terms, without the credit
history from sequential lending. Even worse, management allowed loans to be
refinanced to circumvent the provisioning requirements, solving a short term
problem, but creating the conditions for the future crisis. These resulting
problems underline the fact that microfinance institutions cannot relax
standards under pressure to increase services or the client base.
Given the CAMEL's importance in mobilizing the Board of Finansol, it is clear
that the application of such a global analytical review even a few months
earlier may have made a significant difference. This underscores the
conclusion that an effective quality control instrument, applied on a regular
basis by professionals with microfinance experience, is one of the best
safeguards against the kind of institutional deterioration seen at Corposol/
Finansol. In addition, the importance of such specialized reviews is
heightened by the realization that neither external audits by prestigious
accounting firms, nor the supervision of banking regulators, is sufficient
assurance that an alarm system will be tripped, either at all (in the case of
the faulty audit) or early enough (in the case of the Superintendency of
B. The Role of ACCION
In examining the role of ACCION, the first fundamental question is why the
perception of the true magnitude of the problem was delayed. A variety of
factors contributed to this: local management that, in the best cases,
suffered from an excess of salesmanship and, in the worst cases, intentionally
provided faulty information; a clean external audit by the local office of a
Big Six accounting firm; an institutional structure that for a variety of
reasons lacked transparency and made comprehensive analysis difficult; and the
persuasive power of a highly successful prior track record. However, perhaps
the most damaging was ACCION's own reluctance to accept the depth of the
This failure at an early date to push for the ultimate implications of the
various troublesome signs perceived by ACCION personnel at various levels was
due to two major reasons. In the first place, Finansol had been widely held
as a leading example of where ACCION believes the microfinance field must go
to fulfill its promise: the insertion of successful programs into the capital
markets. While Finansol's problems are due to deviations from ACCION's
methodological model, and as such this crisis does not reflect on the
conceptual framework of ACCION, there was nevertheless a heightened sense of
symbolic visibility of Finansol which, in retrospect, clearly introduced
elements of wishful thinking into ACCION's perceptions. Secondly, these
blinders were further exacerbated by the importance of Finansol in the
statistics of the Network, particularly in terms of microentrepreneurs
reached. This experience has emphasized the importance of clarity of
analysis, regardless of image or other non-operating considerations.
But even if an understanding of the depth of the crisis was delayed, what
should ACCION have done differently? Clearly, ACCION should have made its
confrontations with Corposol management more open and forceful. ACCION should
not have contented itself with just stating its objections at the Finansol
Board level while the company veered in directions it found disturbing.
Serving on Boards always presents the dilemma of deciding which is more
effective: vocal opposition at Board meetings or suggestions and
recommendations to management in the corridors. In the case of Finansol,
ACCION believes it should have confronted earlier the fact that, until the
CAMEL, it was not being effective in either venue. In this regard, the
ultimate lesson is that, for apex organizations to be truly effective, they
must have the political will to put an organization's affiliation with the
Network at stake when fundamental issues are concerned and when its
effectiveness has severely diminished.
It is also important to analyze what ACCION did do, once the depth of the
crises was communicated by Finansol's new management. ACCION immediately
mobilized an internal team to lead a rescue effort while simultaneously
alerting its international partners (FUNDES, Calmeadow and ProFund) and
stakeholders (both actual and potential, such as the Inter-American
Development Bank, USAID and the World Bank). The last several months of
intense efforts illustrate several key lessons for ACCION as an apex
organization. Firstly, at the vanguard, MFIs have become full-fledged
participants of the financial sector. The ability to deal with crises in this
context, with all its implications for functional and management expertise, is
now a necessity. Secondly, such efforts require an inter-disciplinary team
that combines both microfinance methodology and financial-business experience,
preferably involving complex capital restructuring. Thirdly, in addition to
quality, there must be the sufficient quantity. Fully two-thirds of ACCION's
senior management team was directly involved in the Finansol crisis and the
remaining third was redeployed in order to prevent other activities from being
seriously impaired. Had this crisis occurred eighteen months ago, ACCION may
not have been capable to field all the professional resources required.
Fourthly, the assistance of other organizations in crafting a viable solution
is critical, as demonstrated by the involvement of FUNDES, Calmeadow and
C. Implications in the event of a MFI crisis
As successful microfinance institutions scale up and become regulated
financial institutions, although the specific reasons may differ, it is
inevitable that some of them will go through crises. In that event, some
additional lessons may be applicable. The importance of management quality is
foremost. In the entire restructuring process, the exceptional quality and
experience of its current President, Maria Eugenia Iglesias, has been
fundamental. Without a similar capability, none of the vital components of
the proposed solution could have come together. The institutional changes
required, the support of the ACCION Network and colleague institutions, the
sustained confidence of the financial markets, the credibility with the
Superintendency of Banks, and the involvement of new investors.
In addition, the time frame in which crises in open financial markets must be
resolved is inconsistent with the response time of multilateral institutions.
During the entire process, ACCION received strong encouragement and benefited
from the advise of many international agencies interested in microfinance in
Latin America. They clearly understood the severity of the crisis and the
importance of the Finansol emergency for the nascent microfinance industry.
However, there were only two months between the new management's report of the
extent of the crisis in March and the crossing of the "thin red line" that
opened the possibility of intervention by the Superintendent of Banks. The
injection of the first round of new equity occurred three months later, at the
outside limit of the Superintendent's flexibility. None of the multilateral
institutions could act within those time limits.
This further emphasizes the importance of specialized financial investment
funds such as ProFund. In practice, it was through ProFund that multilaterals
could translate their strong support of microfinance into action in short
order. Perhaps it is through similar vehicles, structured as independent
units with professional investment management, that multilateral institutions
can achieve the necessary reaction speeds to resolve microfinance emergencies.
Finally, the Finansol experience demonstrates the importance of a microfinance
model that is based on economic viability and performance. Without a past
experience as a profitable NGO, and a firm commitment in the future to serving
the most fragile sectors of the community while producing sustained and
attractive returns, it would have been impossible to consider attracting
investors from the private sector, such as Citibank-Colombia and the potential
buyers it will be mobilizing in the coming weeks. Paradoxically, it may have
taken a major crisis for commercial investors, as opposed to
socially-responsible investors, to assume a majority ownership of a
Hari Srinivas - email@example.com
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