Cloud Computing (Saas) in Microfinance – Benefits, Challenges and The Future

Last week’s article covered a comparison of cloud computing solution for microfinance institutions, with off-the-shelf software and propriety software. The article went on to discuss three benefits of cloud computing in the context of microfinance, and this post continues under the same topic.

4. Improved Internal Control Through Cloud Computing

Once automated procedures and real time reporting are in place, the microfinance institution can exercise better control over its operations across all its branches. Specific benefits of such a step can be:

• Reduced default rate through the administration of sound credit underwriting procedures – these procedures can be created to minimize default risk and loan officers will be obliged to adhere to these steps while approving loan applications.
• Better customer service through instant data availability – any queries from clients about the status of their loans can be immediately answered and any alarming behaviour on the part of clients can be promptly identified through real time data availability. Additionally, loan officers will have more time on their hands to deal with clients because paperwork will be minimized.
• Greater accuracy of internal and external reports – microfinance institutions need to give a detailed account of their activities to investors and creditors, as well as donors, which is a tedious and time consuming task, susceptible to deliberate and accidental inaccuracies. Automated reporting procedures eliminate this risk and provide instantaneous reports to multiple stakeholders.

5. Greater Data Security

Data security and protection is vital in every type of business and microfinance is no exception; however, microfinance institutions often setup numerous branches in far off areas, each collecting their own sets of client data, which makes back-up a hassle. Cloud computing software providers take care of data security themselves, regularly backing up all information and protecting servers against viruses as well.

Some Challenges of Cloud Computing For Microfinance

Cloud computing, like any other software solution for microfinance providers, is not without its risks, the biggest one of which is related to regulatory hurdles. Microfinance institutions are bound by different laws about reporting and information management across different countries and software solutions need to abide to those laws too. For instance, sometimes the main server must be hosted locally to ‘prevent discontinuation of operations during an internet blackout, and to keep a copy of all customer data locally’. For this reason, several information system hubs may be setup in different countries to cater specifically to local microfinance institutions.

Secondly, microfinance institutions with other forms of information system may face trouble adopting the new cloud computing solution, because employees must be retrained, data must be shifted to the new database, etc.

Thirdly, a large gap will be left behind by cloud computing vendors that go out of business, even though that is an unlikely scenario. Microfinance institutions must chalk out what happens to the data in such an event, before signing any agreements, and may further avoid this risk by selecting vendors with previous experience in this area.

The Future of Cloud Computing and Microfinance

Cloud computing has a lot of potential in the context of microfinance, as explained previously. The future will see greater penetration of this software solution as the microfinance sector transforms into an industry. Some notable cloud computing developers are setting up information system hubs in microfinance hotspots around the world, such as India, Kenya, and Brazil. These hubs will have the capacity to serve multiple MFIs simultaneously, drawing the benefit of scale economies to further drive down costs and improve outreach as well as product development.

The strategic implications of setting up microfinance information hubs around the world have been mentioned by Ashta and Patel (2010):

It would strengthen knowledge sharing across the region (and) increase opportunities for pricing discounts from vendors…regional coordination would enables sharing of IT staffing costs, which in turn offers opportunity to lower IT costs at the affiliate / partner level and can further lower their operating costs.

The dream is to enable high transferability of microfinance clients, whether it is from one MFI to another, from one mobile banking carrier to another, or even from an MFI to a commercial bank, if need arises. Of course, all this is only useful if costs are well under control, which is something cloud computing promises to offer.

Cloud Computing (Saas) in Microfinance – Risks and Benefits

Microfinance is witnessing a revolution on the front end, as microfinance institutions engage in product innovation and market exploration to serve diverse needs that venture beyond the financial realm. Naturally, this front-end revolution has driven a back-end revolution, that of the microfinance sector infrastructure, where cloud computing is the next big thing.

Cloud computing is also known as ‘Computing as a Service’ (CaaS), which includes the famous ‘Software as a Service’ (SaaS) model that is quickly gaining acceptance among microfinance institutions who wish to streamline their growing operations while keeping costs under control. SaaS models involve the provision of a complete suite of software applications through the internet to microfinance institutions (clients), who only access the software as and when needed, i.e. the software is provided on demand. Cloud computing goes a notch above SaaS because it covers the provision of on-demand software and hardware.

Before we go any further, one may stop and wonder why it is important for microfinance institutions (MFIs) to shift from manual processing to automated processing in the first place, considering MFIs have been relying on manual systems for years. This topic has been previously discussed through a blog post series about the role and importance of technology in microfinance. Once we determine the high-tech way is the right way for quickly growing microfinance institutions, the question arises as to why cloud computing is a good idea in the microfinance context, and the answer lies in the multiple benefits cloud computing has to offer MFIs.

The benefits of cloud computing are immense, but there are two sides to every story. This article discusses the advantages cloud computing promises to deliver to the microfinance sector and mentions a few problems associated with this model, accompanied by their solutions.

Benefits of Cloud Computing for Microfinance

The following benefits directly apply to microfinance institutions and indirectly impact microfinance clients and the microfinance sector.

1. Ease in Setup and Administration

The importance of a technology-based information system for microfinance institutions has already been established, and the next step is to determine which type of software is most suitable. A basic comparison of the three choices available to microfinance institutions in this regard explains why it is easiest to select cloud computing:

Comparison of Technology Solutions for Microfinance Institutions (Limited to Setup and Administration)
Technology Solution	Pros	Cons
Off-the-shelf software solution	Costs less (investment in plenty of hardware, such as servers, PCs, air conditioners, administrators, etc.)	Mew features May not cater to unique needs of MFI Need to train employees to use the software, Need to contact software developers for troubleshooting and support Regular maintenance required
Propriety software solution	Feature savvy	Costs more (investment in plenty of hardware and software programming fees) Need to train employees to use the software Need to contact software developers for troubleshooting Regular maintenance required
Hybrid between the two options, i.e. a software hosted in the cloud (cloud computing)	Costs are moderate (reduced hardware cost, no software programming fee, usage fee applies) Feature savvy Cloud computing service provider takes care of maintenance, support and software up-gradation	Employees need to be trained in the front-end area only (i.e. software usage) Internet connectivity is a must Cost of data migration

2. Cloud Computing and New Microfinance Services/Facilities

The cloud computing SaaS solution helps microfinance institutions introduce new services with relative ease, because the software developers handle all technical elements while the MFI can focus on product details (as well as serving their clients and maintain good repayment rates). For instance, together with a telecom firm, the CaaS team can setup a single mobile banking application on their platform that can be accessed by a variety of MFIs as they begin to roll out the service to their clients. In this instance, all that is needed is to integrate the microfinance provider’s information system with the mobile banking solution and they are ready to go.

Similarly, any decisions to rely on ATM networks and Point of Sale devices for remittances or loan disbursement can be quickly implemented throughout the microfinance sector if a centralized cloud computing hub integrates these applications. These hubs enable the easy portability of various financial and non-financial applications that are relevant to microfinance today, as mentioned in the following excerpt:

The network of partners in the hub permits interface with payment networks, remittance networks, credit bureaus, proprietary applications, ATM Networks/ switches, Mobile devices and national banking networks.(Jimenez 2008b).

3. Cloud Computing and Cost Control for Microfinance Institutions

The cloud computing SaaS solution uses an affordable pricing policy where microfinance institutions pay in accordance to the software usage (a fee is typically charged on a per-user basis), apart from a subscription fee. As a result, a small MFI can get away with using the information system for a small fee as a limited number of employees use the system to communicate details about a limited number of clients. The biggest benefit is that small microfinance providers can can enjoy the benefits of economies of scale despite their size.

On the other end of the spectrum, large MFIs pay discounted user-fees owing to the sheer size of their users (the aggregate fee is obviously more but the pricing is constructed in a manner that makes it economical compared to proprietary software). As their scale grows, the comparison between stand-alone solutions and cloud computing may shift in favour of the former, but as far as small and medium sized MFIs are concerned, the balance is in favour of the former.

This infrastructure-sharing mechanism along with the lower system development and maintenance cost enable microfinance institutions to control their operational expense in the long run, which will theoretically lower the high interest rates charged on microloans.

Next week’s article mentions a few other benefits of cloud computing in microfinance as well as a few risks.

Reference:
Jimenez, Alberto. 2008b. Microfinance Processing Hub: Latin America, Presentation at Asia Microfinance Forum, August 26 – 29, Hanoi, Vietnam.

Looking at Technology in Microfinance from an Investors/Donors Point of View

We have previously covered the role technology plays in reducing costs and improving the efficiency of microfinance institutes, and following the drift, this article explores the microfinance investor’s take on technology.

It is in the best interest of investors to emphasize the development of a microfinance institution’s (MFI’s) core systems through capacity building measures such as employee training, management information system (MIS) deployment, vertical and horizontal integration, knowledge development, external alliances, governance frameworks, and the list goes on. Although expanding outreach and/or enhancing efficiency may be an interim measure , an increase in shareholder value is the end goal from an investor’s perspective.

A recent report by CGAP about the microfinance repayment crises in Morocco, Pakistan, Bosnia and Herzegovina, and Nicaragua, adds meat to this argument. The study reveals weak information systems, among other factors, exposes microfinance institutions to the dangers of fast paced client and portfolio growth. Interestingly, the global economic recession was only a secondary cause of the repayment crises.

This ‘technology-funder’ relationship works in inverse too; microfinance institutes stand a better chance of attracting funds from donors, banks, individual investors and venture capital firms if they show a higher degree of transparency, have good performance results and decent back office systems (e.g. management information systems – or MIS – and governance structures) to support rapid growth of clients, products, employees and markets, and to communicate performance data to funding partners. This not only reduces the investment risk, but also helps gain the attention of investors and donors looking for better returns or high impact.

In this context, Triple Jump and Developing World Markets, are just two investment funds specializing in microfinance that follow this strategy. Despite this, MFIs resist the idea of full disclosure:

… MFIs may not have the relevant data to report or may not have the tools
(MIS), or the time (fast growth, time pressure) to provide it. Also, MFIs have no incentive to report any data as long as they benefit from available donor funding.
Kulik, N and Molinari, P. (2004). Sustainable Microfinance and Technology . Ford Motor Company Fellowship.pg 20.

To put this into perspective, back in 2000, only 200 microfinance institutions (MFIs) out of several thousands, submitted financial reporting data to the MIX Market database, and even though this number drastically improved to over 1200 in 2008, last year, only 786 MFIs reported their performance figures.

To improve the flow of data between microfinance institutes and investors, several microfinance rating agencies have been established to look at specific financial and non-financial indicators of MFIs. Most calculations for quantitative indicators require the availability of detailed data that information systems promptly provide. For instance, MicroRate’s financial performance measures include Return on Equity (ROE), Portfolio Yield, Portfolio at Risk, Operating Expenses, Net Operating Margin, Average Loan Size, Percentage of Write-Offs, Loan Provisioning as a Percentage of Portfolio at Risk, and the Current Ratio, to name a few (Source: rating report on ABA SME, Egypt).

No doubt, investors and donors have a fundamental role to play in the establishment and progression of core microfinance systems, and the recent series of Information System Conferences arranged by CGAP reveal the following thoughts:

“Donors and investors can:

• Require MFIs to provide feedback on (technology) vendor and solution (information system)
• Enforce minimum reporting standards
• Invest in IT companies that focus on MFIs
• Encourage and incentivize partners to invest in technology, as a mean to accurate and transparent reports
• Incentivize, through funding, the usage of technology and automated reporting
• Work with partners to develop and implement technology strategies and sound selection of back office solutions
• Allocate funding to procurement/support of back office systems and capacity building in management and maintenance of them.
• Impose funding conditionality related to improvement and standardization of MFI processes and systems
• Develop a robust diagnostic to identify MFIs that are most likely to benefit from support in back office systems…then focus on those MFIs who wish to scale and are not yet big enough to fund their own investment in this area.”

Read full summary of all recommendations.

Other thoughts:

Influence MFIs to adopt lending policies that are less ‘’risk centric’’ and be more ‘’reform oriented’’.

By lowering their financing charges MFI will avert the risk of being labeled as a reformed replica of traditional loan sharks.

This concludes the series of posts about the role of technology from the investor’s perspective. Next week’s post will look at how technology is changing the dynamics of the microfinance sector.

4 Ways Technology can Increase an MFI’s Efficiency Level

This is the third part of the three-post series on enhancing cost-effectiveness and efficiencies in order to improve the overall social and finance performance of a microfinance provider.

The following points refer to different measurements of efficiency, which have been mentioned against each.

1. Computerized Operations and Setting Targets

Efficiency measure: Output/Time

As mentioned in an earlier post, one of the benefits of automating labor-intensive paperwork, is the reduction in the time taken by each loan officer to record his/her daily activities as well as each borrower’s repayment transactions. The same goes for most data collection, analyses and reporting activities of the remaining workforce.  In order to support this end, employees should be given strict performance targets to improve their individual performances (output).

Saving time and increasing the amount of work done by workers increases productivity in two ways; workers not only have extra time to deal with more borrowers, they can also take on additional responsibilities. The added benefit is the ability of managers to quickly analyze the growing amount of raw data (market research, client trends, and competitor analysis) in order to make prudent decisions.

2. Planned Field Visits

Efficiency measure: Output/costs

Regular field visits are an important element of the microfinance model, which means loan officers need to be sensitive to fuel prices and vehicular maintenance expense in order to achieve a win-win situation. By improving the utilization of available transport vehicles (rickshaws, bicycles, scooters and motorcycles) and planning each round of field trip in order to minimize the fuel consumption, MFIs can considerably lower their transport costs. Of course, all this is just a matter of common sense for smaller microfinance providers and can be done manually, but as the client base grows to accommodate several thousands of customers, managers may rely on route management software to make trips as efficient as possible.

3. Benefit From Economies of Scale and Vast Product Range

Efficiency measure: operating expense ratio (OER) / average gross loan portfolio (GLP)

A recent study by The MIX shows MFIs can improve their efficiencies through economies of scale, i.e. by gaining experience in serving more clients through services offering beyond microloans (micro-savings, education, health, etc.). The results were not as straight-forward as expected, but significant enough to lead microfinance managers to grasp the need to rely on technology to ensure higher growth translates into higher social and financial returns. This entire sub-heading is linked to an earlier post series about the different ways technology supports sustainable growth, which you can read here.

4. Credit Rating Agencies / Credit Information Bureaus

Efficiency measure: operating expense ratio (OER) / average gross loan portfolio (GLP)

The same study, mentioned above, revealed that the presence of a credit rating agency dedicated to microfinance (public and private) in business environment increased efficiency of MFIs. The results indicate that higher efficiency possibly results from ‘some form of access to the credit bureau and client information, thereby reducing efforts in screening borrowers, and collecting and enforcing contracts due to the value that borrowers put on their reputations and future access to credit’.

Once large/high-growth MFIs realize the importance of integrating technology with their operations, they are faced with the decision of whether to build the system in-house, buy an off-the-shelf product, or purchase an open-source software that can be customized to the MFI’s unique needs. This, of course, will be discussed in another post.

This series ends with two important points:

• Technology alone cannot reduce an MFIs cost; it must first be aligned with the organization’s ‘people, processes and mission’,
• The process of developing cost-saving and efficiency-enhancing practices is continuous.

The next post will look at the importance of technology in MFIs from the investor’s perspective.

Cont…7 Ways Technology Can Deliver Cost Savings for Microfinance Providers – Part II

4. Minimize Credit Risk (Reduce Provisions for Bad Debt)

According to the report mentioned previously, portfolio losses (provisions for bad debt and write-offs) account for 7% of a microfinance provider’s costs, and although this isn’t the largest source of expenses, it is something that can be easily controlled by strengthening credit discipline. An MIS can help in the following way:

• Strict tracking of loans made to individuals and groups (repayments made and overdue, as well as the quantified risk of default)
• Thorough selection procedure of client by analyzing business plan, family size, personal assets, skills and knowledge, current employment, if any, etc.,
• Assessment of credit ratings (through internal or external credit rating agencies),
• Determine maximum exposure an MFI should take on a borrower, through a product (insurance and microloan), or on a geographical market,
• Collaborate with microloan guarantee services,
• Creation of specialized products (that compensate) for high-risk clients,
• Offer incentives for prompt repayment by borrowers (integrate this information with microloan pricing models).

2. Introduce Low-Cost Financial Services and Lower Distribution Costs

Some financial services, such as micro-savings, are less expensive to administer than others, such as micro-insurance, and MFIs, depending on their mission, can alter their service offering to focus on low cost services that are adequately supported by technology. Additionally, this decision concerns the medium of service delivery, where m-commerce offers significant cost-saving opportunities, as publicized by a recent report by CGAP (On average, branchless banking is 19% cheaper than banks).

3. Lower Cost of Funds

A well-managed MIS allows MFIs to work in real time, which improves operational and financial transparency, market responsiveness, and customer protection, to name a few. This transparency, which is not common in the development sector owing to the informal organizational structures of NGOs, will serve to attract investors that may be willing to provide capital at lower costs, thus reducing the financial expenses of an MFI.

4. Pool Resources and Reduce Processing Costs

Lastly, MFIs can lower their collective data processing costs and improve the market research function if they all rely on a central processing hub that is efficient, affordable, secure, and scalable. This requires that several MFIs outsource their back-end technology department to a single competent technology vendor who offers an MIS following the ‘Software as a Service’ (SaaS) model. The centralized database will handle integration with each MFI’s operations, as well as any third party delivery channels (in the case of branchless banking) so the benefits of economies of scale can be transferred to MFIs, and hence, to their clients. These service hubs will also allow MFIs to focus on their core business while the technology partner handles all technical issues.

This is by no means an exhaustive list of the ways and MFI can reduce its costs through an MIS, however, it covers the bulk of the methods. Next week’s post will discuss the different ways an MFI can improve the efficiency of its operations, which will go on to improve overall management and investor returns, if any.

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.