A technology platform for MFIs

During my summer at the IFC I surveyed a few MIS (Management Information Systems) solutions for an MFI in Papua New Guinea. They realized that as they scaled, they would have to abandon their Excel spreadsheet in favor of more a more sophisticated and robust system. In my search I realized that the microfinance industry still lacks a standard for information management, tracking, and communication. Having a single standard and system would allow MFIs to not only organize their records better and reduce errors, but also allow potential investors to have more transparency into their accomplishments and connect them with other entities that would streamline other parts of their business.

Last week IBM presented just the solution I imagined: a platform that adds some much needed structure to MFI information management and provides communication between various constituents in the process. Today around 45% of MFIs are still using either a manual pen-and-paper or simple spreadsheet system; IBM has identified that gaining access to proper back-office technology was the single most important obstacle to growth of MFIs, and developed the "microfinance processing hub" which allows MFIs to connect to a central hub via client software (which they buy, making this a for-profit venture) and from there, to other entities in the microfinance process. While there is some resistance from MFIs due to their having to outsource information to an external vendor and relying on an Internet connection for their basic needs, the benefits are many, inlcuding (1) allowing MFIs to work in groups to negotiate standard prices from service providers, (2) branchless banking requiring only an Internet connection, which dramatically reduces fixed costs and increases reach, (3) portfolio and KPI information is readily available, making outside investors and banks more comfortable funding MFIs and increasing the overall transparency of the industry, and (4) decreasing client default risk (and hence, interest rates) once clients build credit reports which will be available.

In Africa, IBM has partnered with CARE to develop an African Financial Grid which will initially target 11 countries and over 400 million people. I do think adoption of this system will take time, since each country (or even region) will have a different set of banks, cellphone providers, credit bureaus, etc. that will need to "plug in". Still, the microfinance industry is long overdue for a technology standard; hopefully this will prove to be effective and gain more adoption.

Microfinance made simple

Last night I attended an event organized by JP Morgan and the Microfinance Club of New York (http://www.mfcny.org/) on successful microfinance strategies, featuring Mr. Shafiqual Haque Choudhury, founder of ASA Bangladesh (http://www.asabd.org/) which was recently ranked #1 on Forbes 50 top microfinance institutions list. He focused on strategies and innovations for achieving profits through operational efficiency and cost reduction rather than top-line growth (e.g. higher interest rates). Many may sound simple but, as he described, are often neglected by MFIs around the world:

1. Proximity to clients. Mr. Choudhury emphasized that MFI outlets "should be at the doorstep of people". This minimizes the travel cost for clients and makes funds more accessible. To have this ubiquitous presence also requires outlets to be as low cost as possible so they can be greater in number. I would add that developing infrastructure for micro-level funds transfer through mobile devices (as Globe Telecom has done in the Philippines) can further increase reach as well.

2. Observe after borrowing, as opposed to the more familiar methodology where the bank observes and evaluates the borrower before providing the loan. The benefit is reduced transaction cost and trust built up front by the MFI that motivates clients to repay the loan on schedule. I am slightly skeptical of this; while trust is important, I feel it doesn't address a borrower's ability to repay which can be partly assessed before transaction.

3. Minimize administration costs. While it seems obvious, the innovation is in how this can be done. ASA has done away with the complicated loan application form that requires multiple documents, pictures, etc. as well as long processing times and multiple visits by the client (thus decreasing access to funds). It also has no dedicated accountant or cashier. A branch may have just four loan officers who do everything from meeting clients to disbursing loans to managing the office (a loan officer at ASA handles an average of 412 loans).

4. Efficient branch design. Proximity to clients requires ubiquity of branches, making minimizing branch cost key. Contrary to many MFIs, which Mr. Choudhury described as having professional fronts, imported furniture, multiple rooms, and airconditioning, ASA branches are very minimal. The waiting area is in the same room as loan disbursement and a few ceiling fans substitute for airconditioning. Clients sit on a long bench as they await their turn.

5. No training. While training is a key component of the NGO model (Mr. Choudhury added that some MFIs spend up to 6 months on training officers), ASA follows a model of training through following a senior officer for six days, then learning on the job.

For all these innovations, ASA's cost for a $100 loan is $3 which is impressive. ASA is also able to maintain a 12.5% interest rate (though it should be noted that ASA follows a non-profit MFI model) and a NPL ratio of less than 1%. Comparing these ideas with my observations at Sahabat, the MFI I worked with in Indonesia, at first I was skeptical; from my experience there should be a balance between simplicity and excess. But then I realized how it works for ASA; with an average loan size of $130 and over 5.42 million borrowers (and 4.99 million savers) it is much more of a volume game, compared with the average loan size of Sahabat which was over $1000. The smaller loan size also implies a lower level of client sophistication which further reduces the need for sophisticated processes on the MFI's part. While I do feel these practices don't apply to every type of MFI, ASA stands as a testament to the value of operational simplicity.