In Central And Eastern Europe - Microfinance Centre

in Central and Eastern Europe and the New Independent States
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by international NGOs in Azerbaijan. Given the limited number of private credit-only MFIs, they are grouped
and analyzed with NGO MFIs.
Capital Structure
NGO MFIs in the region are nonprofit organistions that have typically been capitalised by donor grants or
concessional loans. However, most of them aim to become financially self-sufficient and earn a positive net
income. Any profit is reinvested in their activities, rather than distributed to shareholders.
The income-earning nature of microfinance has created legal ambiguity for NGO MFIs. The assumption that
foundations and associations are supported, primarily or exclusively, by grants, individual donations, and other
gratuitous transfers is built into the law of some countries in the region. In other countries, where the law is
silent or ambiguous on the matter, public officials frequently interpret it to mean that earned income is restricted
or prohibited.
However, the importance of “earned income” for NGOs is growing. In fact, most countries surveyed now explicitly
permit income-generating activities by both associations and foundations. In some cases, though, the NGO
must establish a separate commercial, legal entity to house its income-generating activity, such as microfinance,
particularly if the activity is unrelated to the NGO’s declared, socially beneficial purpose.
Another potential source of capital for NGO MFIs is borrowing, whether on a concessional basis from donors
or on a commercial basis from banks. In many countries in the region, the legal power for NGOs to borrow is
not entirely clear, or there are ambiguities surrounding the permissibility of borrowing funds for on-lending (see
Chapter 8 for further discussion).
Because of their legal structure, NGO MFIs cannot accept commercial equity or take deposits. Hence, some
have chosen to transform into another legal form, such as a private finance company or a bank, in order to
expand their sources of capital. Examples include XAC in Mongolia, which transformed from an NGO to a
finance company and then to a microfinance bank; Moznosti in Macedonia, and Microcredit Montenegro, both
of which have transformed from NGO MFIs into banks with the help of Opportunity International; and the
Aga Khan programme in Tajikistan, which is planning to transform from an NGO operation into a bank.
Clients
About 60% of the 136 NGO MFIs surveyed reported that they target the economically active poor. The remaining
NGO MFIs do not target the poor per se but typically lend to clients engaging in informal-sector activities,
and registered microenterprises. These clients often fall in the lower-income segments of society.
The NGO MFIs surveyed are more focused on reaching poor women than are other MFI types. In fact, only
among the NGOs in the region are there organisations that target women exclusively. These include the
members of the Russian Women’s Microfinance Network, and MI-BOSPO and Women for Women in Bosnia
and Herzegovina. Because poor women typically suffer greater financial exclusion than men, microfinance has
made them an important target group.
Some NGO MFIs in post-conflict countries explicitly target war-affected groups, particularly displaced persons and
returning refugees. One NGO MFI (VAAD in Romania) lends to nonprofit community enterprises (see Box 3.2).
Organisational Models of Microfinance in CEE and NIS