Accelerating Impact of Technology to the Microfinance Bottom Line
- Tuesday, June 22, 2010, 1:44
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By Jiten Patel, CEO, MicroPlanet Technologies
Microfinance Focus , June 21, 2010 : The key message from the recent Banana Skins survey was that the climate for microfinance has changed given the changes in the broader financial and economic climate globally. The reasons are painfully familiar to all: credit risk, liquidity crunch (drying up), global recession, over indebtedness. In addition MFIs still see “core” back-end technology as a major constraint. The systems MFIs use are often inflexible, expensive, hard to support, and incapable of enabling innovation for the MFIs.
MFIs, big and small, non-regulated and regulated, are faced with business challenges like lack of funds, high operating costs, reliance on banks for fund collection and disbursement, increasing Portfolio-At-Risk and low data quality. It is therefore critical for MFIs to be operating nimbly with streamlined processes that are fully documented, maintained and automated as possible. They need to provide the front-line and back office staff on-going training on operational policies and practices. Further, consistent and quality credit decisions should be made on a timely basis using technology, and customer’s challenges and needs should be understood.
To address the vast majority of these business challenges and to achieve operational scale and efficiency, MFIs must leverage information and technology to realize these objectives. I deliberately emphasize information and technology as these are two discrete and critical aspects to be focused on and utilized in the MFI’s supply chain. It therefore behooves MFIs to have a sound Information and Technology (IT) strategy, and one that focuses on “basic blocking and tackling” and researches and pilots disruptive technologies to change the rules of the game.
It is important to point out that technology by itself is not the panacea, but when coupled with strong and effective operational process management, MFIs can gain significant benefits that flow to its bottom-line, strengthening its competitive positioning and improving its ability to meet customer demands. Microfinance is an excellent example of a “disruptive” concept – banking to the poor was heresy to formal sector banks just a decade or two ago. MFIs that use technology in an innovative and effective way can bring about disruptive change and leapfrog their competition.
Primary Focus Areas
Microfinance organization must take a holistic approach to review, revise and streamline organization or network-wide operational processes and governance. A sound planning framework is required to develop a strategic Information & Technology Plan based on the organization’s long term business strategies. MFIs of all sizes cite technology and the “core” back-end software in particular as one of their biggest challenges. It is the back-end that is the heart, the processing engine – processing thousands of transactions on a daily basis that enables MFIs to grow and scale their operations. “Core” back-end software may not be as hip and cool as the attention grabbing front-end technologies but without it MFIs cannot survive. A good number of MFIs do have a “core” back-end, however a significant proportion of those systems are not supporting the growth and increased impact of the institutions running them. MFIs must invest in a good, robust, and scalable “core” if they are serious about growing their operations effectively and efficiently.
‘Core’: The Processing Engine
Strong core MIS (Management Information Systems) enable MFIs to process large numbers of relatively small transactions efficiently, and can provide insight into an MFI’s business that enables MFI leadership to tune their products and operations to more effectively serve more poor clients. A core MIS system can provide MFIs and their stakeholders with the tools to more effectively measure both financial and social performance and, in turn, enable the MFIs to tap new sources of capital and tune their business for greater impact. Innovations like mobile banking, ATM integration, new products and business models need to be tied together in order to achieve network and scale. Those innovations must plug into and be supported by strong back-end technology to transform the innovations into a new baseline of operations for MFIs. Even though ‘core’ is the processing engine for MFIs, it is preferred that they should buy the software instead of developing it in-house.
Conclusion
Microfinance is a high touch, high cost business. As a business model, its greatest challenge is to lower operating costs in order to reduce the cost of service borne by borrowers. Hence it must marshal its resources to identify areas of greatest potential for lowering operating costs, and execute relentlessly to achieve these cost savings using technology where appropriate. MFIs must continue to take prudent risks to grow and scale their operations and to lower their operating costs through the use of technology – customers are counting on it.
References :
http://www.cgap.org/p/site/c/template.rc/1.9.35203/
http://www.cgap.org/p/site/c/template.rc/1.26.10622/
© 2010, Microfinance News. All rights reserved. 2008-09
4 Comments on “Accelerating Impact of Technology to the Microfinance Bottom Line”
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Technology, as pointed out, is vital for the scalability of microfinance operations as the sector grows at break neck speeds. A well designed MIS can help ensure smart management and expansion, and avoid a situation where the MFI gets in over its head and risk it’s investors and clients. Another important contribution by technology is a credit rating agency that helps mitigate the overall risk in the sector and allows MFIs to adjust their risk appetite. Therefore, technology is required by MFIs in the following contexts (and more) – internal control, managerial and marketing decision making, investor returns, and credit information bureaus.
Fehmeen … I would say that MFIs first need to inculcate a “credit culture” internally whereby they develop, manage, and maintain a set of credit decisioning policies and guidelines, and have a senior experienced credit risk manager whose responsibility it is to ensure that these policies and guidelines are strictly being adhered, and develop risk management based Key Performance Indicators (KPIs) to manage, track and assess the organization’s credit risk state, and institutionalize monitoring and random spot checks on the loan portfolio.
If the country where the MFI operates has a credit rating agency /credit bureau and if such an organization offers services to MFIs then the MFI very seriously ought to consider providing customer repayment info to such an organization on a periodic basis, and at the same time utilize their service, if available, whereby the MFI can check whether a prospective customer or a current customer seeking a new loan has any other loans outstanding anywhere else.
Most MIS and whatever technology tool one comes up with to try and bring down costs of banking so far unbanked people does not result in sustained increased banking inclusiveness. To say that MIS and technology is new in MF is just a cover of past failures.
The main challenges that money and financial services face in integrating the poor in formal economic growth and asset strengthening processes cannot be resolved by MIS and whatever technology exists or will ever be developed. Poor people live in poor, insecure and unstable environments; physical infrastructure is poor, people are less educated, they don’t have easy and assured access to basic public services such as police protection and legal systems. They are easily discouraged, impatient and opportunistic as they live from day to day busy scraping small amounts of money together to help survive their loved ones and dependents. An environment that thus also blurs dividing lines between social and anti-social, moral and immoral, criminal behavior.
Consequently the role of MF and MFIs is truly there to make lasting linkages that solve all problems at once, linkages that are between public authorities on all levels, private businesses and citizens wealthy and poor. This is not academic but practical work, which brings out the complexity and long-term nature of Microfinance. This is the work that makes building good transport networks possible, public health, good and accountable governments, education, strong consumer/citizen protection, etcetera. All these areas require money that is circulated by inclusive sustainable financial support services.
Trying to bank people with technology and “electronic money” has been tried by those who have the most to spend and they, bankers and banking researchers. They conclude time and again that physical contact (branches, staff, physical safety arrangements for money handling and exchange) is essential. They also conclude time and again that MIS and technology is only as good as the people who use it.
What many MF academics seem to have in common with the poor is easy discouragement, impatience and opportunism; not seeing or not accepting the big (complex) picture. Those are not the skills required for building inclusive financial systems. Those are not the skills required to integrate MF at all levels of poor people’s real problems. Worse even, some MF practitioners and academics now even “milk” the technology paradigm by accusing important partners in building inclusive financial systems to exploit the poor. That really is sad and frustrating.
What I am saying is that MIS/Techno can only contribute marginally and only when the basic challenges in banking the poor are being faced. I did not read that in this article.
Cheers, Peter
Peter … Your comments are much appreciated and very true, but only relevant if the topic was, Is Technology the only path to alleviate poverty?
The topic here is can technology positively impact the MFI’s bottom-line, and the answer is it can provided all the stated factors are acted on. Note that technology in itself is not a panacea, but it sure plays “a” key role in enabling MFIs to be able to lower their operating costs.