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.

Importance of Third Party Technology Players in Microfinance

One may appreciate that despite numerous challenges, the microfinance sector at the global level, over the last three decades, has experienced a sustained growth. However, the original objectives of microfinance and the business models adopted by a number of market players did not complement each other as some microfinance institutions saw this as an opportunity to maximize the return on their investment, instead of optimizing it. In support for this approach, some stakeholders may seek refuge in higher risks associated with microfinance lending as well as higher operational costs for doing the business; however, a number of risk mitigation options are now available to such MFIs.

Since the microfinance sector has been a seller’s market and consumers with no alternative were receptive to any financing options offered to them at the seller’s (microfinance institution’s) conditions. The microfinance sector is still largely an unexplored world with tremendous potential and it was eventually realized that microfinance clients need to be served in new ways, with new tools and products.

Initially, a number of microfinance institutions, some with a view to make quick money and others willing to make a positive difference, entered the field with great ease and aplomb but little or no tactical tools to assure and sustain their growth. These players having suffered from a lack of efficiencies and without operational controls or risk discipline indulged in wayward financing that not only harmed themselves, but also their clients.

However these experiences underscored that the latest challenges for the microfinance business world were:

• Risk management,
• Ever-increasing operational expenses,
• Outreach to far-off areas
• Difficulties in repayment process, and
• Loan recovery processes.

Therefore, issues like business efficiency, reduction in operational costs, software development and communications are becoming increasingly relevant to the success of microfinance.

There are two ways to overcome these challenges:

• Invest substantially in relevant business areas which, at the end of the day, would affect return on investments (ROI), or
• Engage third party players that offer specialized services related to overcoming these challenges.

Whichever path is taken, it can be safely assumed that today, for the success of any microfinance business model, the role of third parties is becoming increasingly important.

Similar to commercial banking, the dynamics of microfinance needs better technical tools for almost every step of the model, be it evaluation of prospective borrower’s profile, monitoring of repayment schedules, anticipating impending threats and taking remedial measures.

Understandably, credit bureaus are well positioned to fill in this void as they have the infrastructure in place and by adding information regarding microfinance borrowers and other clients, credit bureaus can offer to significantly reduce credit risk for microfinance institutions. Real time integration between credit bureaus and MFIs is enabled through the telecommunications sector, which also have a role to play in enhancing service outreach while controlling transport and other costs. Mobile banking can significantly lower the cost of delivering these services, as stated in a recent CGAP report.

In today’s business, manual or semi-computerized environments in microfinance institutions is a recipe for disaster. Only sound office management policies and operational controls can ensure effective risk management and reduction in administrative expenses. However, improving business efficiency often requires investment in software development and communications and that is where the real obstacle lies, because capital cost of such inputs is beyond the capacity of most microfinance institutions.

In such a scenario, specialized third party solution providers (be they manufacturers of off-the-shelf solutions or software hosted in the cloud) emerge as viable alternatives. These outfits have in-depth knowledge about microfinance as well as ability to service numerous customers under bilateral fee based agreements without compromising the information security of the constituents.

Such an arrangement, on one side, enables microfinance institutions to avoid related capital cost for technological implements and on the other, improves capacity building processes within the organization, and allows them to focus on their core business.

While operational efficiency and telecom related solutions are easy to handle, presently the concept of cloud computing is likely to face two major obstacles:

• local regulations for microfinance institutions vary from country to country,
• under the existing mind-set, microfinance institutions prefer to have physical control over their database.

Naturally, the first challenge is far easier to overcome than the second.

People are normally resistant to change so it would entail a long continuous awareness campaign on part of stakeholders (technology firms, microfinance investors, etc.) to change the psyche of microfinance practitioners engaged and to convince them that the emerging role of specialized third party players is going to change the dynamics of microfinance in favour of the MFIs.

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.

Financial Perspective: Achieving Sustainable Growth in Microfinance – Part IV

This is the fourth part of a four-post series that discusses capacity building measures which microfinance institutes (MFIs) must take to ensure their high growth rates are sustainable.

Accounting and Auditing

Managing information that will improve the accounting and auditing functions of microfinance providers.

Problems related to the accounting and auditing functions of high-growth MFIs are rather straight-forward:

Quick disbursement of larger loans may present difficulty in maintaining accuracy and transparency,

Rapid rise in client size, branch network, and loan portfolio can flood poorly developed or manual accounting and administrative systems.

Each microfinance product (business loans, housing loans, consumption loans, micro-savings, micro-insurance, etc.) requires unique handling in the accounting system.

MFIs need to keep track of their own costs and performance, and ensure their own creditors and investors get the return due, in the form of interest or profit.

Growing delinquency rate as a result of poor credit control.

As expected, these points stem from decisions about marketing, human resource, and internal control functions because they all impact an MFI’s bottom line. The solution to these problems, therefore, is twofold:

Establish automated reporting and auditing mechanisms that bring any anomalies or problems to the attention of managers, and then,

Rectify the main causes of these anomalies and problems (mentioned under human resource, internal control and marketing solutions in earlier posts).

The first point is detailed below:

1. Regular Reporting About Various Business Areas

The management information system must be programmed to generate daily, weekly, monthly and yearly reports about managerial and financial data, such as:

Loan portfolios of individual clients, workers, branches, and markets,

Market penetration statistics,

Client data pertaining to geographic concentrations

Credit ratings of each client, from internal and external credit information bureaus,

Interest receipts and dues (loan tracking)

Late payments, overdue loans portfolio and updated ‘portfolio at risk’ figures,

Provisions for bad debt,

Loan write-offs, against each client and market, and

Performance of each product, etc.

Accurate and timely reports summarize a microfinance provider’s overall performance and highlight critical trends, specifically in terms of loan delinquencies, which serve as a warning against the threat of a repayment crisis. Alternatively, positive trends can be discovered, such as under-served markets, which promise to yield long term benefits for MFIs.

2. Internal Audit and Credit Risk Management

MFIs can minimize the frequency of deliberate errors (fraud, covering poor company performance or preferential treatment of certain clients), as well as accidental mistakes (during manual bookkeeping), if they follow strict internal auditing practices. Once full disclosure of financial performance, accounting policies, internal controls and risks are out in the open, managers can quickly take control and rectify the situation.

3. Delinquency Management

Although delinquency management is largely the function of internal credit controls (minimizing defaults), a small part of it actually falls within the financial terrain of ‘determining a sustainable interest rate’. Calculating the cost of credit to the poor is a complex task since it depends on various factors, such as operational costs, cost of funds for the MFI, contingency reserves, tax expense, credit rating, and profit, etc.

Furthermore, once interest rates have been set, possible variations on an individual basis may be necessary, depending on risk or other factors. For instance, after natural disasters strike, some borrowers may request that their loans are either rescheduled, or waived altogether, or even that new loans are distributed to cover the loss.

MFIs must realize that such restructuring often conceals poor portfolio quality, and unless robust information systems are in place, trends in delinquencies will keep rising, until the organization is faced with a full-fledged repayment crisis, as in Pakistan, Nicaragua, Bosnia and Herzegovina and Morocco.

This concludes our series of posts about the role of technology in ensuring sustainable growth for MFIs. The next blog entry will discuss the importance of management information systems in delivering cost savings and bonding together the microfinance provider’s business. You can previous parts on the following links:

Internal Control Perspective: Achieving Sustainable Growth in Microfinance – Part III

This is the third part of a four-post series that discusses capacity building measures which microfinance institutes (MFIs) must take to ensure their high growth rates are sustainable. Read Part 1 (Marketing Perspective) and Part 2 (Human Resource Perspective).

Other Non-Financial Internal Matters

Managing information that will improve internal controls, specifically, credit discipline of microfinance providers.

1. Client Analysis and Selection

Short-term incentive schemes (mentioned in the last post) encourage loan officers to acquire as many clients as quickly as possible, and therefore, compromise on quality. Instead of making them more efficient, employees may deliberately shorten or ignore rigorous loan approval procedures because following them takes time, and strict guidelines may reject several applicants. Poor decisions are made as little consideration is given to:

Crucial facts of loan requests,

Repayment capacities of clients,

Viability of business plans, and

Credit history and credit risk.

Some solutions are as follows:

Establish detailed and sound credit policies and procedures, and

Automate approval process so all steps are followed and special concessions are not possible without managerial approval.

2. Multiple borrowing and Credit Pollution

The traditional rule of ‘one loan per client’ is overlooked as microfinance providers compete for a limited customer base in saturated markets. The alternative is to search for new clients in other markets, but that option is more costly in the short-run, and therefore, less appealing. As a result, microfinance shifts from a supplier’s market to a buyer’s market and customer bargaining power rises, because of which, three problems can arise:

Reduced incentive for client to invest loan money into productive uses (because a he/she can easily take out a second loan to pay off the first),

Clients may be inclined to borrow more than they can repay and become over-indebted (simply because they have access to additional funds), and

Clients will not worry about defaulting and losing their credit history with their MFI (because they can get a new loan elsewhere and build fresh credit histories with other MFIs).

Some solutions are as follows:

Establish a centralized credit bureau to gather data about clients, based on their incomes, businesses, occupation, family size, age, present and past loans, skills, etc.  MFIs must be given quick access to this information to make timely, informed decisions that will come in handy at the Client Analysis and Selection stage, mentioned above. (Note: The topic of credit bureaus in microfinance is extensive and complex and deserves an individual post, which will come soon).

Program the organization’s information system to track more than one loan per client (in cases where client’s repayment capacity is adequate).

3. Lax Credit Monitoring and Recovery Policies

Traditionally, loan officers visit clients once a week, or conducted weekly group meetings to work out possible problems and to collect loan installments. However, as MFIs quickly add to their client base, these tasks present logistical and economic problems. Therefore, managers often reduce the frequency of field visits or deploy external agents to conduct group meetings and collect money on the MFI’s behalf. As this responsibility is relinquished to non-employees, so too is control over the process and this decentralization can lead to the following problems:

External agents are in a position to amass more influence over borrowers than the MFI itself (which can be dangerous if used against the microfinance provider), and

Non-compliance with credit procedures, along with possibility of fraud or transactional errors.

Some solutions are as follows:

Install mobile banking solution to deliver cost savings and efficiencies (permit repayment of microloans through mobile phones),

Set up automated payment terminals that reduce frequency of field visits for collection purposes, and

Generate reports that highlight clients who missed payments, so loan officers can prioritize their visits.

4. Poor Informational Flow Between Organizational Functions

As microfinance providers spread out to accommodate more clients, products, workers and markets, they need to efficiently gather and digest masses of information for various purposes, including those mentioned under marketing and human resource issues. Naturally, a manual communication and reporting system will crumble within no time because for the MFI to be responsive and successful, information needs to move between various functional areas and departments promptly, if not in real time.

The solution, of course, is to develop an extensive automated information system.

The next, and last post in this series will discuss various problems a high-growth microfinance provider faces in the areas of auditing and accounting. Read Part 1 (Marketing Perspective) and Part 2 (Human Resource Perspective).

Human Resource Perspective: Achieving Sustainable Growth in Microfinance – Part II

This is the second part of a four-post series that discusses capacity building measures which microfinance institutes (MFIs) must take to ensure their high growth rates are sustainable. Read Part I (Marketing Perspective) here.

Human Resource Related Issues

Managing information that will improve the human resource function.

A human resource information system can offer detailed reports on various elements of human resource management, and therefore, help managers prevent various issues that emerge with rapid expansion of a microfinance provider’s business:

Credit: nasaimages.org

1. Deficient Human Resources

The speedy penetration of an MFI into current or new markets requires an instantaneous rise in workers (loan officers, branch managers, administrative staff, etc.) to handle more clients, products and branches. Once the necessary appointments have been made, MFIs are eager to send workers out into the field, and hence, they resort to shortening the required training period of 3 to 6 months. The organization ends up relying on poorly skilled workers who are unable to analyze the cost and benefits related to each client, product and market, and consequently, risky and misinformed judgments are made.

Some solutions are as follows:

Maintain an updated profile of each loan officer’s capabilities (formal training, qualification details, skills, and past experience),

Determine areas that need improvement through various resources available (books, CDs, other workers, etc.), and

Automate certain management processes to ensure better managerial control.

Identification of market trends through analysis of sales figures, based on which managers can quickly make lucrative choices.

2. Short-term and Commission-based Compensation System

Some incentive schemes reward loan officers for the monthly or quarterly growth in their client base and the quality of their loan portfolios. This approach is more staff-centric than customer-centric, because it not only leads to poor analysis of customer risks and needs prior to the approval of loan applications, but also results in hostile credit recovery methods by loan officers (as mentioned in the previous post).

Some solutions are as follows:

In-depth analysis of a loan officer’s portfolio and performance to determine ‘real quality’,

Remove or dilute detrimental and conflicting compensation policies,

Develop robust credit risk management mechanisms, and

Take regular client feedback to check performance of loan officers.

3. High Turnover Ratios

Microfinance providers in competitive markets usually face high turnover ratios because of soaring demand for skilled workers. As new entrants expand into different markets, ‘market followers’ try to attract workers who have already been extensively trained by new entrants, leading to the following inconveniences:

Instability in human capital of new entrant as employee retention rate wavers,

Severe shortage of skill, and

Significant waste of time and money for the new entrant, as benefits of investment in human resource is reaped by competitors.

Some solutions are as follows:

Create compensation programs and HR policies that promote worker retention and improve employee loyalty and morale,

Analyze costs and benefits associated with high turnover ratios, and minimize losses,

Identification of strategic job families that must have back-up human capital, i.e. identify positions that must be filled at all times and create succession plans, and

Introduce job rotation programs as a tool for employee motivation and growth.

4. Job Descriptions of Middle Management

As the top management of a high-growth microfinance provider becomes involved in public relations with donors, investors and regulators, the task of supervising the expansion of an MFI’s operations is handed down to the middle management. Since most position holders in the middle management are promoted after working as loan officers, they lack the experience essential for dealing with the organization’s forays. Consequently, haphazard managerial control may ensue as complex strategic changes to policies and processes are required to sustain developments in clients, lending portfolios, products, branches, external agents, markets and employees.

Similarly, the job responsibilities of junior officers may be expanded to handle additional administrative tasks, and if delegated incorrectly, certain workers may end up overburdened with work.

Some solutions are as follows:

Set up robust and well-integrated information systems that translate the MFI’s strategy into automated operational mechanisms,

Create well documented job descriptions that match each worker’s experience and expertise (this point is linked to the solutions for Deficient Human Resources)

Generate periodic work plans, budgets and other reports that monitor and evaluate the performance of various internal and external organizational elements, and assist managerial decision making,

The last component of technology (generation of various periodic reports) assists in solving problems related to internal control and accounting as well, as we shall see in the next two posts.

This was the second part of a four-post series that discusses capacity building measures which microfinance institutes (MFIs) must take to ensure their high growth rates are sustainable. You can read the other three parts of this series at the following links:

• Marketing Perspective: Achieving Sustainable Growth in Microfinance – Part I
• Internal Control Perspective: Achieving Sustainable Growth in Microfinance – Part III
• Financial Perspective: Achieving Sustainable Growth in Microfinance – Part IV.

Marketing Perspective: Achieving Sustainable Growth in Microfinance – Part I

It has already been established that microfinance institutes (MFIs) who seek profits through aggressive growth of clients, are at risk as their systems and controls begin to strain under the pressures of expansion. CGAP recently revealed that MFIs in the four countries facing repayment crises (Nicaragua, Morocco, Bosnia and Herzegovina, and Pakistan) enjoyed years of high growth, and then developed vulnerabilities in the following areas:

• Marketing function – rapid rise in client base and delivery channels, steep business targets without laying emphasis on long term client relationships with micro entrepreneurs.
• Human resource function – deficient human resources, short-term & commission-based performance incentives, high staff turnover ratio, and inability of middle management to handle growth of microfinance institute.
• Other Non-Financial Internal Matters – lopsided & disorganized loan approval processes, widespread multiple borrowing and credit pollution, lax credit monitoring and recovery policies of microloans, poor informational flow between organizational functions.
• Accounting function – unsuitable accounting function, poor risk management, incomplete internal audit, and inadequate delinquency management.

Avoiding such hazards is a matter of management wisdom, rather than luck. Proper capacity building, led by an efficient information system that supports the MFI’s strategy and integrates all business processes (finance, marketing, human resource, technology and operations), will ensure sustainable growth due to prompt recognition of threats and opportunities. Various functional pitfalls, as well as their solutions, which have been gathered from the CGAP report and other sources, will be presented through a series of blog posts over the next few weeks.

Marketing function

Managing information that will improve the marketing function of microfinance providers.

1. Sudden Expansion in Client Base and Delivery Channels

With a rapid rise in client base, MFIs need to deal with more individuals, groups, as well as micro enterprises in new locations, through different delivery channels. Each one of these client groups have unique needs, backgrounds, religions, political opinions, working styles, skills, etc. and microfinance providers must be privy to these characteristics so customers can be better served. In other words, high growth MFIs must quickly face the daunting task of information logistics associated with micro-segmentation as its finest.

Some solutions are as follows:

Keep track of customer details and behavior through an information system (both formal and informal) and use it to devise Customer Relationship Management programs,

Link this information system (customer database) to a credit rating bureau,

Detailed analysis of market shifts to identify strategic opportunities and threats, and

Regular review of product performance and value proposition.

Identification of high-value and profitable clients that can be focused on to generate profits.

Details of seasonal spikes and troughs in demand to help the development of customized products.

2. Business Targets and Client Relationships

The high-touch nature of microfinance surges the importance of client relationships. Loan officers regularly visit clients at their homes or in groups, not only because clients value personal relationships over professional ties, but also to ensure everything is in order at the client’s end. Naturally, this becomes difficult and costly once the number of clients balloons up.

Furthermore, workers are rewarded for the quality of their loan portfolios (default rate, loan write-offs, etc.) which often leads to aggressive credit recovery practices by loan officers who are primarily concerned with their own performance, instead of the long-term welfare of struggling clients. As a result, the quality of customer service deteriorates, relationships between clients and MFIs become unsustainable, and credit discipline takes a toll (which will be discussed in a later post in this series).

Some solutions are as follows:

Search for cost savings through technology-led operational efficiencies and not by shifting to a ‘low-touch’ model, which sacrifices control and monitoring,

Establish good quality client service procedures and marketing practices relevant to microfinance,

Regular assessment of social performance(feedback and surveys) to determine client satisfaction levels,

Install appropriate credit  risk management tools to create specialized products and credit recovery procedures for high-risk clients,

Integrate compensation policy with risk management mechanisms, and

Analyze client retention and acquisition rates to determine how much is sustainable.

This was the first part of a four-post series that discusses capacity building measures which microfinance institutes (MFIs) must take to ensure their high growth rates are sustainable. The other three posts of this series can be read at the following links:

• Human Resource Perspective: Achieving Sustainable Growth in Microfinance – Part II
• Internal Control Perspective: Achieving Sustainable Growth in Microfinance – Part III
• Financial Perspective: Achieving Sustainable Growth in Microfinance – Part IV.