7 Ways Technology Can Deliver Cost Savings for Microfinance Providers – Part I

This post stems from an earlier post about different roles of technology in microfinance.

Regardless of the fact that investors are drawn to the sector by high financial and social returns, microfinance institutes (MFIs) must improve cost-effectiveness and efficiency to become sustainable, competitive and to protect clients from high interest rates. Even if the intentions of an MFI are noble, financial services ought to be offered to the poor at the least possible cost, which are essentially driven by efficient management systems.

This is the first of three posts that look at the different ways technology, in the form of management information systems (MIS) can be used to reduce costs and increase the efficiency of microfinance providers.

Reducing Costs Through an MIS

‘Lose the fat and keep the muscle’ – PWC.

Microfinance providers must analyze possible cost reduction in different business areas through regular, detailed reports (easily generated by an MIS) about different Operating and Financial Costs (two major cost components for MFIs, 2010 MIX Publication). Managers must prioritize various elements in terms of ‘absolute essential expenses’ (muscle) and ‘dispensable expenses’ (fat), while keeping in mind the microfinance provider’s unique mission (social development, product innovation, client relationships, financial returns, and so on). As explained in detail below, excessive spending in the following areas can be quickly controlled:

• Labour intensive manual activities (administrative costs),
• Communication and information redundancy
• Personnel salaries and training,
• Provisions for bad debt,
• Cost of financial services and distribution (covered in next post)
• Cost of funding (covered in next post)
• Data processing (covered in next post)

Regular measurement of these elements through key performance indicators will enable managers to significantly lower their overall costs.

1. Automate Labour-Intensive Manual Activities (Collection of Loan and Other Administrative Work)

A lot of paper work about loans and repayments of clients is done manually by loan officers, which not only consumes time, but also increases the risk of errors. By relying on an MIS that incorporates:

• computerized accounting systems,
• automatic hand-held devices for recording payments,
• ATM or debit cards, and,
• payment terminals,

microfinance institutions can greatly:

• reduce the administrative burden on loan officers,
• lower the purchase of office supplies,
• reduce transaction fees,
• improve data accuracy and security,
• facilitate data sharing between different employees, and,
• allow loan officers to handle more clients during the same period of time.

2. Improve Communication and Lower Information Redundancy

As a small MFI grows, its informational needs grow as well; employees need to be in contact with one another, as well as data about new clients, products, branches, agents, markets, etc. Unless efficient information and communication technology (ICT) is deployed (to enable real time exchange of information), over time, there may be significant shortage or duplicity of information as it gets harder to communicate ideas and knowledge across various functional areas and teams of an MFI.

For instance, the accounts department and sales department may both keep duplicate records about the loans advanced to each client, simply because the two departments are located in different geographical areas. A central database, easily accessible by all employees, solves this problem while improving data security and accuracy.

3. Control Personnel Cost

Since microfinance is a unique high-touch financial service, loan officers are hired abundantly to deal with thousands of clients, and the back-end staff is specially trained to work within the differentiated business framework. Additionally, MFIs may wish to keep their salaries competitive, therefore, the following techniques may be used to control personnel-related expenses:

• Strictly matching salaries to the worker’s job responsibilities and performance (against targets and Key Performance Indicators, KPIs), and avoiding any concessions that may raise operating costs,
• Improving the productivity/efficiency of workers (through technology, as shall soon be explained in another post)
• Controlling training and development costs, possibly through job rotation programs or an informal knowledge management system.
• Educate workers about the importance of cutting costs, and set an environment for cost reduction,
• Limit hiring of workers to pre-planned business targets to avoid under-employment, and
• Improve labour productivity – this will be discussed in a post scheduled for publication.

Evidently, these tasks are difficult to manage through standalone manual management systems; therefore, large microfinance providers may consider using a human resource MIS (HRMIS).

This concludes the first of two posts on the ways technology can deliver cost savings for microfinance providers. If you would like to receive immediate notification when the second part is published, please subscribe.

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