For a company to make money, it helps if its employees have a money-making mindset. But that’s not what Roman Hingorani found when he joined FINCA International as its CFO in 2015.
FINCA was formed in 1984 as a non-profit microfinance organization providing business loans to economically disadvantaged entrepreneurs in developing countries. It acquired capital largely through grants.
By 2012, it became apparent that relying on grants would no longer be a sustainable approach to its mission, Hingorani tells CFO. So the organization created a for-profit joint-stock company. The idea was that by acting more like a traditional financial institution with a business purpose rather than only a charitable one, profits would follow.
It didn’t work.
“They tried to operate it with the staff of the original non-profit,” says Hingorani, who initially was CFO of both the for-profit and non-profit entities. “For example, I had a head of FP&A who had previously been with another major non-profit organization. If you don’t have banking professionals running a bank, it’s very hard to succeed. You create value by having people with the right mindset.”
Hingorani, who had worked for 30 years in money-center banks, private equity, and family offices, was hired to execute on a decision by the company’s shareholders to split the organization into two entities. He spent 2016 working out how to get that done and hiring the right people. On Jan. 1, 2017, the for-profit entity was spun off as a limited liability corporation, FINCA Microfinance Global Services, doing business as FINCA Impact Finance.
Results were immediate. Whereas the joint-stock company had lost $23 million in 2016, the new entity earned a profit of $11 million last year. Hingorani expects the bottom line will grow to $14 million to $15 million this year.
Registered in the United States as a holding company rather than a bank, it owns one bank in each of 20 developing markets. It has 100% ownership of its subsidiaries in each country but Pakistan, where it has an 87% stake. There are six shareholders, including development banks, mutual funds, and a private foundation.
The company’s loan portfolio at present totals about $790 million. A customer can qualify for a loan as small as $1,000. Such an amount could be used, for example, to buy a car for operating a taxi service.
That aspect of the business hasn’t changed. However, says Hingorani, “We have succeeded because we professionalized the business.”
For example, previously the organization’s capital policy was that regardless which assets a subsidiary bank had, it had to allocate 20% for capital. Now FINCA, like many banking organizations, is adhering to the Basel III approach. That standard calls for allocating capital based on a bank’s risk profile, taking into account factors like the ratio of collateralized to unsecured lending.
“We’ve freed up a lot of capital that had been unnecessarily sitting in some of our subsidiaries because of that arbitrary 20% number somebody came up with 20 years ago,” Hingorani says.
Under the company’s old model, which he refers to as FINCA 1.0, a non-profit mindset reigned, even though the business was ostensibly a for-profit one. Metrics were focused on things like the level of outreach and the degree of success in reaching ultra-poor customers.
Under FINCA 2.0, says Hingorani, “we’re catching up to what normal banks do, with credit-scoring models, the Basel III approach, appropriate liquidity-management policies, borrowing and lending at commercial rates, managing our losses, and pricing our products accordingly. We’ve been able to take a very simple organization and bring it to that level relatively quickly.”
But acquiring the right talent was the single biggest key to the company’s transformation. The new FP&A leader was hired from Capital One. A new capital markets group is headed by a person who formerly ran a $40 billion private equity fund. There is also, for the first time, a treasury department, whose leader has a PhD in economics.
And, importantly, a tax manager “is making sure that as we get our dividend flows from our subsidiaries, we are channeling them to the appropriate countries so we get tax-treaty benefits and the like,” Hingorani notes.
“A Pretty Good Business to Be In”
As to the lending business itself, many economically disadvantaged people in developing countries are, counterintuitively, actually good credit bets, according to the CFO.
In fact, the company’s loss ratio is only about 3%. “In the United States there are credit-card companies with higher loss ratios,” he says. “Our ratio is close to where the U.S. mortgage industry is today. It’s a pretty good business to be in.”
At the same time, the company still has a social mission as well as an economic one.
“We make sure that our lending practices are responsible — that we’re not over-indebting people,” says Hingorani. “We don’t want to lend so much money that we’re taking food off people’s tables. We want our customers to be productive members of society and move up the economic ladder.”
FINCA Impact Finance, with almost $1 billion on its balance sheet, gets its capital from various sources: shareholder equity; customer bank deposits — 11 of the company’s subsidiaries are full-service banks, while the other 9 are lenders only; credit lines with Citibank and other mainstream lenders; bonds issued at the local level; and, still, some grants.
Looking to the future, Hingorani is working toward yet another version of the company, FINCA 3.0. In large part that will involve transforming into a more digitally based organization. The CFO has been meeting with a number of startup fintech companies that he says “have great ideas and are getting a lot of funding but are challenged in commercializing the ideas.”
He’s pushing the fact that FINCA has more than a million customers worldwide, providing a potential market for fintech products. The vision is to “bolt on a lot of these products to our distribution network, which will both help our customers and provide efficiencies that allow our profits to go up.”
He’s also looking at creating revenue-sharing arrangements with the fintech firms.
Such plans are designed to satisfy the shareholders. “If we do that, when we want to expand I can go back to the shareholders and get more capital, because we’ve given them the rate of return they were expecting,” Hingorani says.
The countries where FINCA has subsidiaries are Afghanistan, Armenia, Azerbaijan, Democratic Republic of Congo, Ecuador, Georgia, Guatemala, Haiti, Honduras, Jordan, Kosovo, Kyrgyzstan, Malawi, Nicaragua, Nigeria, Pakistan, Tanzania, Tajikistan, Uganda, and Zambia.