‘There is no trade-off between financial stability and staying close to clients’: an interview with Comlan Ignace Dovi on microfinance sector reform in Benin

The implementation of new microfinance regulations in Benin offers useful lessons for other countries in the region affected by the reform. ADA and Luxembourg Aid&Development supported the development of a compliance assessment and a practical guide to help institutions navigate this transition.

What is the main aim of the reform and which challenges does it seek to address? 

The reform’s primary aim is to ensure that microfinance institutions operate on a sound footing over the long term. It seeks to strengthen institutions’ transparency, financial stability, resilience and sustainability while preserving their core mission of financial inclusion.

It addresses challenges that the sector has faced for several years: weak governance, chronic undercapitalisation, inadequate credit risk management and internal controls, weak management information systems that cannot communicate with one another, and inadequate mutual support mechanisms among local institutions within the same network.

Identifying these weaknesses is all the more important given the substantial growth of Benin’s microfinance sector. Outstanding loans rose from CFAF 36.7 billion in 2012 to CFAF 430.6 billion in 2025, with around 100 formal institutions serving more than 4.9 million clients. This growth has been accompanied by a deterioration in loan portfolio quality and excessive geographical concentration, among other issues.

What are the main practical changes that the reform brings for microfinance institutions in Benin?

The reform introduces several changes. First, the term ‘decentralised financial systems’ is being replaced by ‘microfinance institutions’ (MFIs). This reflects a shift from a special status to that of fully regulated financial institutions.

Second, only two legal forms are now permitted: public limited companies with fixed share capital (SAs) and cooperatives with variable share capital. Associations, mutual societies and private limited companies (SARLs) are therefore excluded and must change their legal form.

The reform also introduces minimum share capital requirements and makes network membership mandatory for every primary cooperative institution, unless it can demonstrate that it has sufficient share capital and a large enough membership to operate independently. This provision explicitly encourages institutions to form groups.

Governance is subject to more clearly defined standards, with specific requirements for internal control, risk management, audit and compliance. The reform also requires compliant, interoperable information systems, strengthens protection for cooperative members and clients, and broadens the range of permitted activities to include Islamic finance operations.

What are the main challenges institutions face in meeting these new requirements, particularly smaller institutions and those operating in rural areas?

Financial constraints are the most visible. Restoring capital to the minimum required level and turning negative equity positive cannot be achieved in a matter of months, especially as many cooperatives have a modest rural membership base. There are also legal and institutional constraints associated with the procedures needed to convert an association, mutual society or SARL into an SA or a cooperative.

Technical constraints are currently the most demanding. Management information systems (MIS) are obsolete or poorly configured, head offices and branches are not interconnected, reporting is still done in Excel, and system migrations fail or run into difficulties.

Staffing is a structural challenge. The law requires institutions to perform functions such as internal audit, ongoing internal control, compliance, anti-money laundering and counter-terrorist financing, risk management and client protection. Small institutions lack both the resources to recruit staff for these roles and a sufficient pool of qualified staff locally, particularly outside Cotonou.

Finally, I would highlight the issue of geographical coverage. It is often the smallest institutions that serve areas where larger ones, particularly SAs, do not operate. Applying the same requirements to all institutions, without differentiation, would create a real risk of leaving some rural municipalities without access to financial services.

How can the sector become more professional, financially sound and credible without limiting institutions’ ability to serve the most vulnerable people or those with the least access to financial services? 

I firmly believe there is no trade-off between financial stability and staying close to clients. A fragile institution is not inclusive; it simply puts the savings of already vulnerable people at risk. But everything depends on how the transition is managed.

For small rural institutions, pooling resources must be the priority if they are to survive. By joining together in networks, they can retain their local roots while pooling capital and sharing information systems and internal control, audit and compliance functions.

Requirements also need to be proportionate to institutions’ size, risk profile and location, rather than applying a single standard designed for the largest institutions.

We advocate raising professional standards through training that leads to certification, rather than relying on sanctions alone. We also believe that client protection must be part of day-to-day operations, rather than simply a declaration of compliance. This means clear contracts and pricing, products suited to clients’ circumstances, effective means of redress and responsible debt collection that respects people’s dignity.

What tools and support have been made available to help microfinance institutions adapt to the reform, and what contribution have ADA and LuxDev made?

ADA and LuxDev have made a decisive contribution through the Inclusive and Innovative Finance programme, funded by the Luxembourg Development Cooperation.

They supported the transition with two key tools. The first is a baseline compliance study conducted by Horus Development Finance, which assessed 48 MFIs to identify compliance gaps and support needs. The second is a practical compliance guide, which explains how to implement the available options for changing legal form and provides factsheets on governance, internal control, information systems and client protection.

The regulator began preparatory work and awareness-raising at an early stage. For our part, we developed our own support framework for members, comprising assessments, transformation plans, legal support and training.

To sum up, the regulator set the direction, ADA and LuxDev provided the funding and tools for the transition, and the sector translated this into practical support on the ground, one institution at a time.