The Collapse and Recovery of Microfinance Institutions in Latin America and the Caribbean

Corposol to Finansol to FINAMERICA. The Creation, Decline and Resurrection of a Microfinancial Institution

Conception, Birth, Crawling, Running Tumbling ......

The story began with Actuar Bogotá an NGO which was dedicated to providing training and financial services to the millions of poor residents in Santa Fe de Bogotá. Like PRODEM and other NGO's which eventually became financially viable institutions, Actuar Bogotá was started by prominent Colombian businessmen who were concerned about the state of affairs in their country. Actuar Bogotá was founded in 1988 and did well in its initial years as there was a high demand for credit among microentrepreneurs in Colombia. By 1995 when it officially became Corposol it had an active portfolio of over US$ 38 million and over 24 offices.

By 1992 Actuar Bogotá (henceforth referred to as Corposol) was considering ways to convert itself into a commercial financial institution. Up to that point the organization had been operating on loans backed by guarantees from ACCION's Bridge Fund, FUNDES, its board of directors and other similar sources. These funds were not sufficient to sustain Corposol's rapid growth however. By this time Corposol had begun to spread itself into new areas through subsidiaries such as Agrosol a rural credit and training program, Mercasol a retail line which allowed microentrepreneurs to buy supplies on credit in small quantities at wholesale prices and Contrusol a loan scheme geared towards home improvement (Contrusol did not begin operations till 1994, one year after Corposol was formed). By the end of 1992 COINFIN had done a feasibility study to assess whether Corposol could potentially become a bank. At the time government restrictions held that formation of a bank such as BancoSol a required minimal starting capital of $10,146 million (US$13.7 million). This was a viable option but Corposol instead decided to pursue a more cost-effective path and opted to buy into an existing CFC (Commercial Finance Company) called Financiera Fenix, S.A., which was renamed Finansol.

The union of the the two entities was structurally flawed as Corposol which retained its NGO status, had over 60% ownership of Finansol even after outside investors such as the IDB, the Calmeadow Foundation and ACCION had taken minority shareholdings. Corposol also maintained the credit extension staff and while Finansol was responsible for administering loans for the group of companies (Corposol, Mercasol, etc.) and being the only regulated institution was to fund itself through capital markets.

These were highly restrictive factors for an emerging Microfinancial institution. In addition the new ventures were growing too quickly for proper management and training of staff to be instituted. The loan portfolio deteriorated in light of this poorly managed growth. As a result management engaged in a massive refinancing process, lengthening loan repayment times and taking other haphazard measures to improve the situation. This alleviated the short-term problems but only served to cover up much larger long-term problems which continued to grow under the surface. On top of all these factors in 1994 banking regulations changed and in order to control inflation asset growth of regulated institutions was limited to 2.2% per month. In order to maintain a high rate of growth, management decided to start switching portfolios transferring loans from Finansol to Corposol, which being an NGO, was not affected by the new regulations. These factors in combination with a myriad of others led to a decline of both institutions which went undetected for some time, until ACCION ordered a CAMEL (Capital Adequacy, Asset Quality, Management, Earnings and Liquidity) evaluation in 1995. At around the same time the President of Finansol resigned.

Checking the bruises, finding their feet, why did they trip?

In order to continue the story we must stop to answer this most important of questions. Listed below are some of the things which went wrong, why they caused problems and some lessons to be learned by observation of this situation.

• The relationship between Corposol and Finansol was too restrictive with regards to Finansol and gave too much of power to Corposol. This was facilitated by poor management selection. For example the President of Finansol was an associate and subordinate of Corposol's President. The lack of synchronization in management led to poor decisions such as the arbitrary lengthening of loan repayment times, and swapping portfolios between organizations, which are options that should not have been considered, especially not under the Corposol-dominated management scheme that existed. One potential lesson to be learned from this outcome is that in situations where an NGO is converting into a commercial financial institution, the new institution should have a fair level of autonomy and most of all should not be limited or dragged down by the former NGO.
  
  
  
• Driven by Corposol's management the organizations were attempting to grow too quickly. The launch of three (3) untested programs (with plans to launch others - Fundasol: for Education, Sergusol: for Insurance, Saludsol: for Health care - which would have materialized, and would probably have caused even greater problems, had outside investors not stepped in) was not a sensible undertaking for an institution that was just reestablishing itself. The accelerated growth prevented Corposol/Finansol from training new staff to the degree that was necessary. Also proper low level management was not put in place as the number of field officers doubled within a one-year period whilst the number of field managers remained the same changing the ratio from 1:13 to roughly 1:26 with respect to the number of managers relative to the number of officers. To compound the problem even further these officers were being put under extreme pressure to increase growth at rates which were "impossible" to achieve. It reached a point where the director of urban lending was "almost fired" for submitting a budget with anticipated returns below the amounts the President of Corposol's expected. The director's projections were based on previous years' budgets, whilst the President's quotes, which were more than double those of the previous year had no justified basis . Situations like this one discouraged middle management and slowly cut off the communication flow from the field up, as employees were afraid to talk, lest they lose their jobs because they were not performing up to "expectations".
  
  
  
• Another major factor was the inability of ACCION and other outside investors to monitor the situation effectively or to ascertain what was going on. Firstly ACCION (the outsider investor/intermediary which was most responsible for and active in monitoring) due to its maxim of noninvolvement in local organizations was on the Board of Finansol as an investor but was not on the board of Corposol. As a result of their inability to monitor from this position the deterioration of both organizations continued on longer than was necessary. It should be noted that Corposol/Finansol delayed a proper evaluation of their firm as long as possible, even getting a Big Six firm to come in an give them a clean audit. It should also be noted that when ACCION discovered the extent of the damage the acted quickly to institute corrective measures, returning to basic loaning operations, replacing management in Finansol with capable professionals and detaching the two (2) organizations. The general lesson to be learnt on the part of ACCION and other investors is that consistent, proactive monitoring is necessary especially in the early stages of a project even if the desire is to have that project become an independent financially sustainable institution someday.

Getting back on their feet again ..... and walking this time!!

The final question is therefore how did ACCION avert the disaster and what happened to the two (2) organizations.

Firstly they terminated all the alternate programs and returned to the basic loaning model which had served them successfully in the past. They also formulated a plan to severe connections between Corposol and Finansol, transfer the credit extension staff to Finansol and reduce costs. These and other changes were accomplished under the capable and experienced direction of Maria Iglesias a former Citibank executive with experience in Colombia as well as internationally.

The changes were working but Finansol's bad debt from previous dealings was dropping its net worth below a level where it violated Colombia's SuperIntendency standard. As a result ACCION in conjunction with ProFund, Citi-Bank Colombia and other investors formulated a recapitalization plan to remove Finansol's bad debt and to give it the capital needed to fund future growth. In addition by June 1996 ACCION had achieved its goal of legally separating Corposol and Finansol so that Finansol could continue further operations without that impediment. The capitalization plan was instituted from 1996 through 1997 and was successful. In 1998 with recovery continuing the organization was renamed FINAMERICA, the guise under which it currently operates. FINAMERICA is financially stable, is backed by investors such as ProFund, FUNDES, Calmeadow and of course ACCION. As of 1999 it had an active portfolio of over US$ 15 million, servicing over 9000 clients (53% of whom are women) at its 14 branches.