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. Mote to the point MFI's must actively consider gaining access to such software using Software-as-a-Service (SaaS) approach. The SaaS approach opens the door for Microfinance Institutions to more easily afford robust and scalable core banking software.
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.
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