Guest Post by Ben Lyon Vice President of Business Development for Kopo Kopo
Ben Lyon is Vice President of Business Development for Kopo Kopo, which offers a software-as-a-service platform for integrating mobile money with core banking and enterprise resource planning software.
The Microfinance Revolution
Microfinance has taken a serious beating recently. With news of massive loan defaults and even suicides continuing to pour out of India and an order by the Bangladeshi government that Muhammad Yunus step down from Grameen Bank, things are looking grim for the industry. But trouble is only one small side of the story. On the other side, a technology revolution that promises to increase transparency, lower costs, and streamline reporting is in full swing.
Of the roughly 10,000 microfinance institutions (MFIs) globally, well over 9,000 are classified as Tier 2, 3, or 4, meaning that they are likely less regulated, mature, and sustainable than their Tier 1 counterparts. These institutions also tend to lack sufficient information technology budgets and, especially with Tier 3 and 4 institutions, are likely to keep track of loans on spreadsheets or in ledger books. All told, these institutions – the ‘long tail of microfinance’ – grapple with inefficiency and usually lack the means to make the necessary upgrades.
Only a few years ago, the MFIs above would have had little recourse but to live with their inefficiency and survive by passing costs onto their customers in the form of high interest. With the advent of free and open source management information systems (MIS) like Mifos, Octopus Micro Finance Suite, and MostFIT, even Tier 4 MFIs can now access robust accounting systems. These free MIS, along with the emergence of affordable software-as-a-service (SaaS) MIS like Kopesha and Mambu, bring MFIs the benefits of increased efficiency, accuracy, transparency, and reporting without the hassle of an upfront investment or lengthy deployment period.
Cash management is another major challenge for MFIs, especially those that serve remote, rural customers. Maintaining tills and transporting cash involves expensive courier and security services, not to mention an ability to predict when and how transactions will peak. Now that mobile money services like Safaricom M-Pesa are becoming the norm (there are roughly 200 mobile money systems globally), MFIs now have the ability to pass cash management costs onto mobile money providers. In Kenya, for instance, a growing number of MFIs use M-Pesa for both loan disbursement and repayment, allowing them to focus less on moving cash and more on offering new products and services, monitoring the quality of their portfolios, and enlisting new customers.
As indicated above, a nascent move toward SaaS is starting to emerge, both with regard to back- and front-end processes. SaaS is interesting because it offers MFIs affordability and convenience. What makes SaaS exciting, though, is that it centralizes data. Loan cycling (paying off one loan with another), for example, was one of the major factors behind the microfinance meltdown in India. If MFIs in impacted areas had used a common SaaS platform, it would have been simple to flag customers whose unique identifiers popped up on multiple MFI accounts, which would have enabled MFIs to more properly assess risk as well as lay the foundation for a credit reference bureau.
Despite the very real challenges facing the microfinance industry, there is more than ample reason to be hopeful – even optimistic. Technologies tailored for MFIs are becoming more accessible and affordable by the day, and everyone involved stands to benefit.