In 1996, Finansol, a regulated microfinancial intermediary in Colombia and an affiliate of ACCION International, underwent a crisis that resulted in a significant deterioration of its portfolio quality. ACCION’s intervention was crucial for two reasons: the well-being of 40,000 microentrepreneurs and their families relying on Finansol’s financial services, and the representation of a microfinance model deemed essential by ACCION—the transformation of a financially viable non-governmental organization (NGO) into a regulated financial institution. The potential collapse of Finansol could have spelled disaster for Colombian micro-entrepreneurs and dealt a major setback to the entire microfinance sector.
A. Origins:
Finansol originated from Actuar Bogotá (referred to as Corposol), an NGO established with ACCION’s support to provide services to microentrepreneurs in Colombia’s informal sector. Corposol experienced rapid growth, providing integrated training and credit access to over 3,000 clients by 1989, escalating to nearly 25,000 active borrowers by the end of 1992. In 1993, Corposol transitioned into a regulated financial intermediary by acquiring a commercial finance company (CFC) license, renaming it Finansol. The new entity had minority shareholders, including ACCION International, Calmeadow, FUNDES, a local development bank, and private individuals.
B. Deterioration:
Despite inheriting a high-quality loan portfolio and a proven lending methodology, Finansol faced challenges that led to its financial deterioration. The structural flaws in the relationship between Corposol and Finansol, coupled with Corposol’s ambitious expansion into new and untested microfinance projects, contributed to the weakening of Finansol’s financial position. The entanglement of the institutions, poor decision-making, and a flawed credit extension structure further exacerbated the crisis.
A. Discovery:
Despite outside directors sensing the issues, effective analysis and intervention were delayed by Corposol’s strategic presentations and a clean audit by a prominent accounting firm. ACCION eventually pushed for a comprehensive evaluation (CAMEL) in May 1995, with results reported in July, revealing worrisome trends. This led to a more thorough appraisal after the resignation of Finansol’s President in September 1995.
B. Solution:
In October 1995, Finansol engaged banking consultant Luis Fernando Tobón to design a turnaround plan centered on a return to the basics. Finansol regained control over its portfolio, terminated new product offerings, severed ties with Corposol, and focused on cost reduction, improved reporting, and quality hiring. Maria Eugenia Iglesias, with extensive banking experience, was appointed as Finansol’s new President in March 1996. The crisis prompted a split in the portfolio, distinguishing “New Bank” loans post-October 1995 from the problematic “Old Bank” loans.
This crisis highlights the critical need for robust risk management practices across all aspects of an MFI’s operations to detect early signs of trouble. The Finansol experience underscores the importance of a microfinance model based on economic viability and performance, showcasing the potential for attracting private sector investors even in times of crisis. The significant turnaround, while challenging, prevented the crisis from reaching a disastrous stage and emphasized the resilience of a well-managed microfinance institution.
Source Credit: https://www.gdrc.org/icm/corp-finansol.html
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