Importance of Credit Bureaus in Microfinance – Part 1

Credit Information Bureaus (CIBs) are a somewhat new agenda in microfinance, even though they have been an integral part of traditional finance for decades. Quantitative data (income sources, cash flow repayment rate, number of outstanding loans, etc.) used for credit risk scoring of microfinance clients is vital considering the growth rate of the sector as well as the booming competition within. Obstacles related to credit reporting in this high-touch model must be swiftly overcome in order to leverage the huge benefits credit scoring has to offer in the microfinance context.

Four Benefits of Credit Scoring for Microfinance Clients

Microfinance clients stand to gain a lot through the installation of credit rating systems. Here are four benefits:

1. Quick service

Credit bureaus can efficiently provide access to information needed to sort out high-risk clients from low-risk clients. Automation of the loan approval process significantly reduces the time taken to evaluate loan applications, thereby saving the client’s time, which may be better invested in the actual business. The quicker the loan is approved, the quicker the client may start his/her business project.

2. Better financial discipline

Credit scoring mechanisms penalize microfinance (high-risk) clients with poor repayment histories and reward microfinance clients with good credit discipline. Default-prone clients are subjected to unfavourable loan conditions (smaller size, higher interest rate, frequent repayment schedule, etc.), while low-risk clients are eligible to avail favourable pricing structures and better customer service. In other words, credit scoring helps encourage microfinance clients to adopt prudent financial management practices (such as prompt repayment, avoidance of over-indebtedness, reduce chance of personal bankruptcies, etc.) which improve their credit report.

3. Access to more options

Credit bureaus centrally store information about all microfinance clients in a country and this data can be universally accessed by different microfinance institutions. As a result, clients can easily apply for microcredit in different towns or cities and this ‘frictionless transferability of borrowers’ increases the range of MFIs clients can approach (which also encourages MFIs to be more competitive).

4. Fair selection process

There is always a possibility that loan officers manipulate client information in order to favour certain customers, or that loan officers mistakenly refuse credit to valid applicants. This possibility of nepotism and false negatives is greatly reduced if quantitative, non-subjective data is systematically analysed to arrive at a credit score.

Four Types of Benefits of Credit Scoring for Microfinance Institutions

It goes without saying that microfinance institutions benefit if their clients benefit; however, apart from that indirect advantage, credit bureaus benefit MFIs in four areas.

1. Financial benefits

Credit bureaus impact financial statements in three ways: firstly, owing to the theory of economies of scale, credit bureaus reduce the transaction cost of credit risk assessment; secondly, because of efficient loan processing and universal access to client information, microfinance institutions can advance more loans to clients, thereby increasing sales; and thirdly, the microcredit pricing structure is optimized as per client risk (i.e. interest rates and provisioning for bad debts can easily be varied according to the client’s credit score).

2. Risk Management

Credit scoring systems essentially help microfinance institutions manage credit risk, whether the end result is risk mitigation or avoidance. Keeping in view in-depth knowledge of client’s credit histories, high-risk clients may be accepted and put through certain processes to reduce risk exposure.

For instance, client with high outstanding balances can be asked to submit their repayments more regularly, may be monitored more frequently, or may be accepted for small loan sizes only. Greater analysis of a high-risk profile may reveal certain low-risk characteristics (such as promising business plan, expected bumper crop in the next season) that balance out the overall profile and make the client eligible for favourable terms.

As mentioned earlier, the quantitative analysis of risk reduces the chance of mistakes, and this automated risk assessment is carried out at comparatively lower costs.

…cont.

The next post talks about two other benefits MFIs stand to gain through credit scoring systems, as well as the macro-level advantages of microfinance credit bureaus.

ATMs in Microfinance – Part 2

Getting the ATM Solution Right…Cont.

• Usage Barriers – new technology itself can be slightly intimidating, especially for those who are unfamiliar with the English language, which is commonly used in gadgets such as cell phones and ATMs. The rural population in many developing economies may find is easy to operate ATMs through pictorial instructions, or instructions written in their local languages.

• Communication line – ATMs need to send transaction details over a reliable wireless network to the relevant database in order to record debit and credit entries in user accounts, whether they are bank accounts of mobile wallet accounts. A good and cost-effective internet connection is required to instantaneously process data online (an OLAP database may be used). In order to keep internet costs under control, transaction details may be sent to the database for processing in batches, perhaps twice a day (an OLTP database may be used).

• Security and trust – since ATM machines are a modified version of bank branches, they are exposed to criminal theft and misuse in a variety of ways. ATM machines may be tampered to steal ATM cards, funds may be given to the wrong person if the pin-code is misplaced by a user, or currency notes may be stolen altogether. While there are many ways to address these concerns, one not-so-obvious solution is to use biometrics, instead of pin-codes to correctly identify people. Mass usage will only entail once customers trust the technology, and good security arrangements facilitate the development of trust.

Benefits and drawbacks of ATM Machines in Microfinance

ATM networks offer plenty of benefits to microfinance institutions and fulfil the vision of financial inclusion in three ways:

• Cash float management – supply chain management is slightly complicated in mobile banking because of cash-float issues. Mobile banking agents need to keep plenty of cash in hand in order to service cash-out requests from customers, the frequency of which are difficult to predict. As a result, these agents must travel to the nearest bank, which could be several miles away, or be inaccessible in the evening or at night. ATM networks can solve this problem based on their ubiquitous nature.

• 24/7 availability – The day-and-night availability of ATMs offers three benefits:
  • Customers enjoy a great deal of freedom in paying back their loan instalments as they need not leave their jobs/businesses to attend weekly or monthly group meetings.
  • Customers based in regions far and wide can easily access low-cost financial services.
  • These machines replace loan officers to a certain degree (customers can deposit their money on their own) which leaves them with more time to focus on customer acquisition and personalized interactions that have a lot of value.
• Easy distribution of government support funds for the poor, such as social security payments or post-disaster relief assistance.

• Customer empowerment – customers grow accustomed to using an array of services offered through ATM networks, which improves their financial independence, as highlighted in the following excerpt from a CGAP report:

For Prodem FFP, the primary benefit of the ATM network was greater convenience for customers and increased deposit mobilization. Customers used the ATMs for many transactions that previously required staff attention, and were able to conduct business in many locations. In turn, this makes it more convenient for clients to save, which increased the volume of deposit funds available to the institution.

• Safety – Low-income groups usually rely on unsafe means of storing money, such as underneath their mattress, or by investing it in livestock, which may be sold at a later date when cash is needed. ATMs are a safe way to store this money and the service is offered free of cost.

Lastly, here is a video of an ATM prototype that is ideal for the developing world.

ATMs in Microfinance – Part I

During the last decade, microfinance has explored new horizons thanks to innovations in the field of technology. One such innovation is branchless banking, which covers three distinct mediums relevant to microfinance – mobile banking, point of sales devices and finally, ATM networks. This article covers the third element, highlighting the role played by ATM networks in the microfinance sector.

Functions and Features of ATM Networks in Microfinance

ATMs have traditionally been associated with stable financial lifestyles of the medium and upper class; however, that is beginning to change as microfinance institutions (MFIs) leverage the outreach of these machines. Microfinance clients often reside in disparate a rural location, which makes it difficult for loan officers to reach them. Mobile banking services (such as M-Kesho) and POS devices (as in Brazil’s case) may solve the problem, but ATMs have their own role to play here.

MFIs can partner with existing ATM networks (Banco Ademi, Dominican Republic and Nationlink, Philippines) or setup their own system, in order to distribute loans and provide constant access to the client’s savings account. ATMs can also be used to accept deposits on behalf of loan officers and banking agents (used in POS-based microfinance solutions). The benefit using this system have been described later.

Customers typically need a smart card to avail these services, but if an ATM network collaborates with a mobile banking solution, clients may draw cash from on the basis of their mobile wallets (yuCash, Kenya).

Getting the ATM Solution Right

Developing an ATM channel to offer financial services to the poor is no easy task. Here are some factors microfinance institutions need to look at to ensure the ATM delivery channel rolls out properly.

• System integration – a proficient system development team, preferably with expertise in the microfinance sector or a related area, should be contracted to provide a capable technology platform, adequate support and troubleshooting. The ideal technology solution would allow various microfinance institutions to hook on to the ATM network, which means hardware and software interoperability of the database is key. This is essentially a cloud computing model, which has many benefits to offer.
• Cost Management – ATMs are expensive compared to POS networks and mobile banking and microfinance institutions may pause for a moment to consider the cost implications of selecting this delivery channel. There are two options available to cost-conscious MFIs in this regard:

Leverage an existing ATM network – the cost of system integration and service charges will still be present, but the colossal setup cost will not apply.

Approach low-cost ATM manufacturers – recent developments in the Indian financial sector have led to the creation of low-cost ATM machine by Vortex. It uses “about as much electricity as a 70-watt lightbulb. Backup batteries and solar panels can keep it online if the grid fails. Vortex installed a biometric touch pad to combat fraud and assure villagers new to banking that their money is safe.” This machine costs 35% of the typical market price of 20,000.

Next week’s post lists three other important factors that need attention when rolling out an ATM network from the financial inclusion perspective, and lists a few benefits of using ATM networks as a means of reaching the masses.

Point of Sales (POS) Devices in Microfinance

While mobile banking is often promoted as a convenient medium for money transfer (sending or receiving money), it is not the only medium available for the masses at the bottom of the pyramid. Other carriers include:

• Point of Sale (POS) terminals, devices and vendors, and
• Automated Teller Machines (ATMs).

Even though these two technologies are not traditionally associated with the lower income group, they promise to offer convenience, safety and accuracy to both microfinance loan officers and clients.

Point of Sale (POS) terminals, devices and vendors

These are often handheld devices that are wirelessly connected to the main information database of the microfinance institution, and allow for the easy processing and routing of loan repayment transactions. POS devices can be setup at retail stores, pharmacies, petrol stations, and even post offices in rural and urban areas, provided they have a stable connection network. Alternatively, they may be carried by loan officers to each client’s house during periodic field visits for the collection of loan installments.

The POS device often contains a fingerprint scanner to identify the borrower and some sort of slot to swipe a smartcard that holds encrypted details of the client’s loan and required repayment. A keypad and screen helps punch in the transaction details, which are sent to an online database that processes the transaction and makes relevant changes to the customer’s account.

Capabilities of advanced POS devices is not limited to receiving loan payments – services offered include withdrawal, utility bill payments, balance enquiry and account openings – all of which are financial services used by the lower income group.

Russia has recently setup a series of automated payment terminals, which are a step ahead of POS devices. Apart from the features mentioned earlier, these terminals allow users to purchase mobile airtime, pay taxes and rent, without the need to open up a bank account. Additionally, these terminals do not require human operators and offer services day and night, which is not possible in other POS models.

Not all is as good as it seems:

Russia’s payment terminal model isn’t perfect. Consumer protection questions abound. A good chunk of payment terminals are operated by unregulated non-banks, and these don’t always provide a customer service number or even a company name to contact, should your money be taken. (CGAP)

Of course, this can easily be addressed if a solid cloud computing infrastructure is established.

Benefits of Using POS Terminals

POS devices have long been used to process credit card transactions in retail stores, and now their potential in delivering value to microfinance institutions is widely known. As mentioned earlier, loan repayment transactions are not only processed in a secure environment (with a few exceptions), but can also allow the delivery of financial services in far off areas with little infrastructure.

Since the information system takes care of all the data processing and recording, loan officers can allocate more time to customer relationships, which are vital in the microfinance sector. The other benefit of linking this to a centralized information system is the ability to link customer repayment rates to comprehensive credit ratings (through a credit information bureau).

Customers benefit as well since they can safely store their wealth in the form of e-money in their smartcards, and can convenient visit the nearest POS to repay their loans or bills, instead of commuting over large distances to reach the utility company. This is a plus point from the microfinance institution’s perspective as well, since loan officers need not visit each client as his/her home – this saves time and money.

Comparison of POS and Mobile Banking

Since POS terminals and devices are an alternative to mobile banking, it makes sense to compare them. While POS systems process transactions quicker, the cost of mobile banking devices (personal cell phones) is lower. Secondly, POS terminals can be easily used for high-value transactions because smartcards have the ability to store large sums of e-money. You can read other comparisons here.

Next week’s post discusses the role of ATM machines in microfinance.info

Technology and Microfinance Services Part II: International Remittance

Migrant worker sent over $550 billion in remittances to their home countries in 2008, which is almost 20 times the total US budget for international aid. No doubt, international remittance services offer a lucrative opportunity for microfinance institutions (MFIs) and mobile banking operators because most workers rely on informal methods to send money home since they lack access to banks.

To offer international fund transfer services to clients, MFIs and mobile banking operators must leverage linkages with money transfer operators (MTOs) within migrant-sending countries (Pakistan, India, Philippines, Bangladesh, Mexico, Poland, etc.) as well as within migrant-receiving countries (Saudi Arabia, USA, Australia, Russia, Germany, among others; see map). Since this post series is about the role of technology in microfinance services, this particular article limits itself to international remittances. (Part 1, which looked at the different technological elements of mobile banking, is a supporting post.)

Basic Requirements of Information Systems That Handle Remittances

Any effective remittance system must possess the following capabilities (Hastings, 2006):

Managing large volumes of low value transactions at low costs

Ensure speedy delivery of funds across the globe

Ensure safety and privacy of transaction orders (encrypted files are sent through different servers to communicate details about credit card numbers, bank account numbers, remittance amount, subscriber’s mobile phone number, etc.)

Interlinking with different MTOs (microfinance bank, exchange firms and money service bureaus, such as Western Union, Dollar East, MoneyGram, etc.) and clearance houses in numerous countries.

Getting Money From Customers

Customers can send remittances in a variety of ways, some of which are:

Visit MFI in person and hand over funds that are to be remitted,

Use their mobile wallets to transfer funds internationally (see previous article on mechanics of mobile banking), and

Deposit cash through specialized kiosks or extensive ATM networks electronically integrated with a variety of MFIs (details in next week’s article).

Processing in Banking Hub

Transaction details are conveyed to the information system so they may be processed along the following dimensions.

Service pricing: Each MTO has a unique service charge for different countries, and an MTO’s information platform must select the most economical option for each transaction. The World Bank has published a list of remittance prices across the world for various MTOs, which individuals as well as MFIs can leverage.

Exchange rate handling: banking systems (of the remittance-sending bank) must also determine the most favourable daily exchange rate, which varies from MTO to MTO by a few decimal points. (These decimal points make a big impact when the aggregate transaction size is large.) Exchange rates also come into play when MFIs deposit funds as floats in their bank accounts with various banks in the remittance-receiving countries.

Communicating transaction details: payment instructions and details (credit card number, account number, amount, receiver’s mobile phone numbers, etc.) are sent via the internet to the partner MTO’s system. If the remittance-sending MTO relies on its own processing system, a bridging interface may be used to connect the two portals, or the sending partner’s interface may suffice on its own.

Account settlement: the final account is settled by the core banking system (through an auxiliary application system, in the case of mobile banking – read more) behind the scene as the individual draws money out of the system. There are two ways this transaction is finalized:

Pull transaction: sometimes, a remittance-sender may not specify a bank from which his/her family can collect the money. In that case, the MTO stores transaction details and instruction in cloud computing system which can be accessed by various banks in the remittance-receiving country (provided the MTO owns bank accounts into those institutions). All transactions are pooled in the cloud and ‘pulled’ individually by banks as needed.

Push transaction: when remittance-senders specify the receiving bank, MTOs simply push the transaction instructions to that bank.

Compliance: lastly, information systems ensure compliance with regulatory standards related to customer authentication, documentation, reporting, fraud prevention, etc.

Giving Money to Customers

Three basic options allow the remitted funds to come under the possession of family members back home:

Place money in the relevant bank account at the microfinance institution

Deliver cash directly to individual, or

Deposit the funds in the relevant mobile wallet account, where it can be used for various purposes (read more).

This concludes the second article in the post-series about the role of technology in microfinance services. Part 1 looked at the various technological elements of mobile banking. Next week’s post will discuss how technology enables the setup of ATM networks and POS terminals in microfinance.

Reference:

Hastings, A. (2006). Entry of MFIs into the Remittance Market: Opportunities and Challenges. Available: http://www.google.com/url?sa=t&source=web&cd=1&ved=0CBQQFjAA&url=http%3A%2F%2Fwww.microcreditsummit.org%2Fpapers%2FWorkshops%2F23_Hastings.pdf&ei=G2-STM6YNc6XceeSxLUG&usg=AFQjCNED_bGYoqf7J0NvrtI-4NrIO. Last accessed 10th Sept

Technology and Microfinance Services Part I: Mobile Banking

Over the last decade, microfinance has quickly evolved into a complex sector with a lot of third-party service providers participating in the overall supply chain. Telecom operators, credit information bureaus, ATM and POS network providers, and specialized information system developers are some of the new entrants in the sector, each offering a unique benefit to microfinance institutes (MFIs). This post-series looks at how technology has shaped the dynamics of the microfinance sector, making it more resilient and expansive.

Mobile banking has taken certain economies in the developing world by storm, in some cases acting as a link between the microfinance mission and the poor (even though the reach of mobile banking solutions is far beyond this market segment). Made possible by specialized technology platforms that enable the delivery of financial services through mobile phones, mobile banking is now accessible to anyone with a cell phone and mobile reception. This article specifically looks at how technology enables the provision of the mobile banking service.

Interoperability of Mobile Banking Technology Solutions

The type of mobile banking technology solution depends on where it is hosted and who interacts with it, (as depicted in the Figure 1; credit: Gauravonomics.com), which is sometimes determined by the mobile banking model being followed (bank-focused, bank-led and non-bank-led models). For instance, a bank may operate its own mobile virtual network (MVN) in a bank-focused model, while a mobile operator hosted mobile banking platform is more appropriate for a non-bank-led model (which are run primarily by telecom firms, e.g. Kenya’s M-Pesa and Philippine’s Smart Money).

Any solution hosted with selected banks or mobile operators will limit branchless banking’s progress in the long run as new entrants must evaluate the capital requirements of self-hosting or the ramifications of collaborating with old players in the market. The diagram shows a third alternative, ‘third party hosted mobile banking platform with bank and mobile operator interoperability’ (labelled ’8′), or in other words, cloud computing (which is particularly suited to add value to the developing world). As a number of participants (telecom firms, banks, credit bureaus, network agents, retailers, utility firms, etc.) connect to one another through a single interface, they can gain certain efficiencies that can lower costs and drive growth.

Functions Performed by Mobile Banking Technology Solutions

The range of services supported by advances mobile banking technology platforms is impressive by all means, as it includes:

Airtime purchase / balance recharge

Funds deposit and withdrawal

Fund transfer from one client to another

Mobile wallet functionality

Microloan distribution and collection

Foreign remittance handling, and

Interbank funds transfers.

Different functions are performed to process these transactions in a safe, accurate and timely manner, as explained next.

Sending Data Over the Wireless Carrier

Text messages sent by clients reach the bank’s database instantaneously and securely thanks to advances in technology. Data travels in the form of Short Message Service (SMS) through a wireless carrier network (MNO’s network) and reaches a Short Message Service Centre (SMSC), which acts as an intermediary between the MNO and bank. Once these instructions are converted into a format that can be sent over the internet (HTTP or SMPP), the SMSC interacts with the bank’s specialized mobile banking application, which deals with the bank’s core financial technology solution. (See a detailed diagram). Data is sent back the same way.

These SMSCs have the capability of instantaneously processing messages in bulk so the mobile banking experience is as smooth as possible for client.

Types of Mobile Banking Applications in the SMSC

Each type of mobile banking transaction needs a different application. For instance, the process explained above starts from the customer’s end as s/he requests specific information from the bank’s database, hence a ‘Pull’ application is used to receive customer requests and forward them to the bank’s technology platform.

Alternatively, the bank could initiate the communication through an ‘E-mail to Mobile’ (E2M) application which converts promotional/informational e-mails received from banks into an SMS that can be forwarded to multiple users. The third type of mobile banking application is called ‘Database to Mobile’ (D2M) where any changes made to the client’s account (use of credit card, money deposit, etc.) are automatically conveyed to the client’s cellphone.

Data Security in Mobile Banking

Mobile banking offers no value if transactions are not secure. In order to avoid spam and theft of personal/financial information, all text messages are encrypted, passed through a firewall and verified through digital signatures.

Next week’s post will focus on the role technology plays in transactions related to international remittances services (published).

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.

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