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 2.0

Two days ago, I had the chance to meet Premal Shah, the CEO of Kiva.org (http://www.kiva.org/) and ex-Mercer consultant. My thoughts after his presentation on Kiva, how he got involved, and its impact on the developing world:

1. The Internet is game changing in that it brings micro-investing to the average person by creating an accessible and (relatively) transparent channel. It does this through (1) accessibility, as the Internet is ubiquitous, (2) aggregation, allowing a single user to donate a smaller amount and aggregating donations across multiple users, and (3) experience, making it fun for the users to give money through tools such as social networking, blogs, etc. Like eBay in auctions or Kiva in micro-lending, I don't see why the model can't be extended to things like funding projects (a typical AID project required $3000; that's 200 people donating $15 each), micro-VC, or any application that can benefit from the power of masses.

2. Internet development companies are fragile and heavily dependent on press and perception. More specifically, there is a high risk associated with bad press, which on the Internet spreads like wildfire. I experienced this AID, when (during the tsunami relief effort) accusations of donor money being used to fund extremist organizations such as the DYFI and RSS started appearing on blogs and web forums. As chapter coordinator of a highly decentralized organization, it was incredibly difficult to do anything to stop it; only time and repeated public statements quenched that fire. While the Internet can bring people together en masse, it can also turn them away as dramatically; all it could take is one account of fraud, laundering, or a major washout.

3. It's incredibly difficult to make the jump from non-profit to for-profit, so companies should make this call early on. And there are benefits to both... being a non-profit gets you 501(c) status, lets you play the "social good" card with donors, and draws less scrutiny from your investors / users, while being a for-profit makes you (hopefully) financially self-sustainable, increases the scalability of your work, and attracts a larger set of investors who invest in you for returns. But by switching from a non-profit to a for-profit you stand the risk of confusing and alienating your existing user / donor base (which aligned with your social mission) and destroying brand equity.

4. There is tremendous untapped potential in individuals. Kiva itself has over $11 million in loans and 100k lenders to date, and I realized the bottleneck here is the current lack of outlets to connect people with causes they care about. Microlending is just one thing; there are also ways to buy micro equivalent of carbon credits (see Terrapass, http://www.terrapass.com/), among other important causes. What would be nice is if a branded player, such as Google, could create a consolidated forum to connect people with their passions with at least some level of ROI.

5. As stated in Premal's presentation, "Consulting is excellent preparation for the challenges of startup life". I'm loving it.