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Skip to 0 minutes and 2 seconds K-REP transformation from an NGO into a regulated financial institution took place in the mid-nineties. The environment was very different then, NGO microfinance institutions operated completely outside the purview of the regulatory framework. There was no window to licensed microfinance institution let alone consider NGOs as owners of a licensed financial institution. Like most MFIs, K-REP depended entirely on donors for its funding, yet like most too it had developed a very successful lending program. The demand for its services growing but it could not grow or expand without acquiring more funds from donors, additionally its clients needed a broader range of financial services such as deposits and money transfer which K-REP could not do because it was not a regulated financial institution.

Skip to 1 minute and 14 seconds On the other hand as an NGO, some of the clients perceived K-REP to be a charitable organization, a view which undermines the legitimacy of a financial Inclusion. So these concerns lead K-REP to consider transforming into a regulated financial institution. At the same time the microfinance sector globally had started pursuing transformation as a major strategy, it was urging regulators globally to establish a special window in the regulator regime for microfinance institutions and also lead a global campaign for transformation. So this is the background against which K-REP embarked on its transformation in 1995.

Skip to 2 minutes and 10 seconds The objective that it wanted to accomplish was basically to become a legally legitimate financial institution to secure funding from the market especially in the form of equity, deposits and borrowed funds as a means of eliminating dependence on donors. It also wanted to enhance its ownership structure especially considering that NGOs were considered to not have any real owners and this would in turn improve its governance practice through participation of investors. It also wanted to improve its brand recognition as a legitimate finance institution as opposed to a charitable organization, and finally to improve its organizational culture as a financial institution. So this is basically the history that led K-REP to consider transforming from being an NGO into a regulated financial Institution.

History of Transformation

We have just defined the term of commercialization and seen that it applies to the transformation of microfinance institutions into regulated for-profit organisations .

If you are not active in microfinance, you may be surprised by the fact that many NGOs in microfinance decided to become banks. Did Muhammad Yunus not say that microfinance was set up in opposition to banks thereby simply expressing that he wanted to do exactly what banks were not doing.

A first step in understanding this phenomenon of institutional transformations is to take an interest in the historical setting in which such transformations have emerged. This is why I invite you to watch this interview with one of the leading experts in the world on transformation of microfinance, Kimanthi Mutua who pioneered the transformation movement with K-REP in Kenya.

I also invite you to watch the video suggested below where Muhammad Yunus explains the differences between microfinance and conventional banking.

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This video is from the free online course:

Commercialization of Social Enterprises: Stemming the Tide of Mission Drift

Université Libre de Bruxelles