Ibm Microfinance

IBM GLOBAL BUSINESS SERVICES
Copyright IBM Corporation 2008

June 2008
DISCUSSION DOCUMENT
IBM Microfinance Initiatives
Lee Tenny, IBM Global Microfinance
2
0
100
200
300
400
500
600
700
2004 2005 2006 2007 2008 2009 2010
Source: Demirguc-Kunt, Beck and Honohan, 2007, Policy Research
Report on Access to Finance, World Bank
Households with at least one bank account
2007
N
u
m
b
e
r

o
f

a
c
c
o
u
n
t
s
Supply and demand of Microfinance
Number of accounts, millions
Population in need of Microfinance services (# accounts)
1
Population with access to Microfinance services (# accounts)
2
83%
(500+ Million)
Accounts
Unserved
72%
(475+ Million)
Accounts
Unserved
Supply
Demand
Over 3 billion people live on less than two dollars a day and only 17% of them have
access to formal financial services
20-40%
40-60%
60-80%
< 20%
> 80%
Notes:
1
Based on CGAP data and population growth rates from the UN Population Division
2
Current and forecasted numbers based on Microcredit Summit Campaign data, 2005
Assumption that 1 Account = 1 Family = 5 People
3
Description
Low customer profitability does not support cost of traditional banking channels
High costs of distributing the services to remote locations with low volume
The lack of formal credit history of individuals in these markets makes risk assessment
difficult; lenders must rely on more qualitative factors and often charge higher interest
rates to offset this additional risk
Low literacy rates make traditional tools such as loan applications and bank statements
less relevant
There is a higher burden at the point-of-sale to educate consumers verbally on the
various banking products
Remote cash terminals (ATMs, microbranches, etc.) are subject to security issues in
certain markets. Successful MFIs business models have established partnerships with
safe distribution networks
Costs of
Distribution
Credit
Uncertainty
Literacy
Physical
Security
Transparency
Lack of transparency into operations of MFIs discourages established financial
institutions from using them as distribution channels or limiting the amount of capital they
commit to the MFIs
The traditional financial services business model face several hurdles in serving
the unbanked segment
Challenges for
Traditional Banks
4
Traditional retail banking models are often inappropriate for efficient microfinance
operations
Daily Income*
Personalized,
high touch
Low touch
US$ 500
US$ 1
Unbanked
Segments
Traditional
Banking
~ 2 Billion
People
~ 4 Billion
People
Private
Banking
Type of Service
vs. Daily Income
Global Banking
Pyramid
* Log Scale
Service includes origination, management and collection
Current model
in traditional
banking
Microfinance innovation
+ technology required to
lower the cost of this
high-touch model
Inappropriate
microfinance
distribution model
US$ 10
Type of Service
5
In the past, the vast majority of microfinance institutions did not have access to
appropriate back-office technology
77%
76%
33%
36%
54%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
E
.

E
u
r
o
p
e
/

C
.

A
s
i
a

(
2
6
)
L
a
t
i
n

A
m
e
r
i
c
a

(
2
5
)
S
E

A
s
i
a

(
4
3
)
S
u
b
-
S
a
h
a
r
a
n

A
f
r
i
c
a

(
4
4
)
A
l
l

R
e
s
p
o
n
d
e
n
t
s

(
1
3
8
)
Use of Information Management
Systems by Region
Type of Information
Management System
Source: CGAP
Custom
Outsourced
25%
Spreadsheet
35%
Off-the-shelf
10%
Manual
11%
In-house
19%
6
One reason MFIs have had difficulty finding & using suitable banking software is that
their functionality requirements are very different from those of traditional banks
Microfinance Functionality Traditional Retail Banking Functionality
Securities
Mutual funds
Trade finance
Foreign exchange
General ledger
360 customer view &
cross sell
Guarantees
Leasing
Syndicated loans
Bill pay
Contact log
ATM / POS
Credit cards
High-volume
transaction
processing capability
Brokerage
Custody
Market positions
Cash
management
Mortgages
Order book
Settlement
Product catalog
Capital markets
Money market
Swaps
Futures / options
Bonds
Application
integration
Individual savings &
lending
Configurable
products
Flexible organization
hierarchy
Role-based user
admin
Loan rescheduling
workflows
Custom fees &
interest calculations
Group lending & savings
Basic life / funeral insurance
Collection sheets
Bulk entry of collection sheets
Custom schedules for loan repayments
Partner-agency model
Microfinance reports, surveys, and PPI
Back dating of transactions
Enable loan officers to go to the
customer
Joint liability rules & enforcement
Offline capability
Simple customer communications
Easy application maintenance via
management console
Our analysis indicates that leading core banking ISV solutions may not effectively
address key functional and technical needs of the microfinance industry
7
In summary, todays established banks often find it difficult to efficiently reach the
poor, while MFIs often have challenges in scaling up and reducing costs with volume
Established Banks
Underbanked/Rural Segment
Expensive network of branches,
ATMs, and call centers
Internet banking not easily used by
the unbanked
Cannot serve illiterate customers
Inflexible and expensive IT systems
Rigid credit management &
collection philosophies dont
leverage group / social lending
practices
Traditional scoring systems depend
on quantitative credit history
Established Banks
Underbanked/Rural Segment
Microfinance Institutions
Innovative distribution including
mobile branches and group lending
Inflexible back office (45% of MFIs
using paper or spreadsheets)
Larger MFIs use traditional applications
that are expensive and lack full support
for key microfinance functionality
Banking regulations very challenging
8
The Microfinance Processing Hub provides a shared technology platform for MFIs that
helps reduce costs, scale rapidly, and get access to reliable and secure banking software
Servers, databases
Loan officers
Branch workstations
Networking
IT Staff
MFIs with in-house or custom MIS 44%
Software developers
Loan officers
MFIs with no MIS 46%
Pen/paper or spreadsheet loan tracking
Managers & analysts trying to manually
calculate reports & performance data
Loan officers
Branch
workstations
Internet access
to data center
MFIs with off-the-shelf / package MIS 10%
Local software
shop
Pay-per-use arrangement, with low
startup costs and easy scale-up as
MFI grows
Easier reporting & compliance
Robust technology and security
Ready access to rich features and
new products
All banking functions
are available via web
browser on a basic
PC
Processing Hub data center
(serves 100s of MFIs)
Software
developers
IT staff
$ for
services
used
CURRENT SITUATION MICROFINANCE PROCESSING HUB
Servers, databases
Loan officers
Branch workstations
Networking
IT Staff
Software
developers
$ for license + maintenance
Outsourced MIS
Source: CGAP
9
Finally, the Processing Hub helps MFIs electronically link with other key players from
across the financial industry to drive a more efficient and vibrant economy
Microfinance Processing Hub
Governance
R
e
g
u
l
a
t
o
r
y

&

C
o
m
p
l
i
a
n
c
e
MFI Onboarding
Operations Mgmt
Connectivity
Model
Microfinance
Application
Data Center & Security M
o
b
i
l
e

I
n
t
e
r
f
a
c
e
s
Established Banks
Intl Payment Networks
Regulators
Credit Bureaus
Telcos
1. Lend funds to MFIs at
commercial rates. MFI
performance reports
available thru the Hub.
2. Sell products through the
Hub, leveraging MFIs as
distribution networks
3. Banks can also use
online banking software
of the Hub to expand into
MF activities themselves
The Hub delivers automated,
accurate, and transparent
regulatory reporting & compliance
IBM can negotiate cost-effective
deals with payment or ATM
networks, giving MFIs global
payments capabilities
The Hub can read from, and provide data
back to, credit bureaus. This helps end
customers establish an identity and get
larger and cheaper loans over time
The Hub can integrate with one or
more telcos offering mobile banking,
allowing customers to repay loans or
transfer money on their cell phone
Microfinance Institutions
NGOs / Donors
Greater transparency from MFIs,
accurate & custom reports, and
electronic funds transfer
Smartcard / POS Vendors
ATM or debit cards, payment
terminals, and transaction routing
Data Analytics
10
Based on our previous projects in India and Latin America, IBM is currently
establishing Microfinance Processing Hubs in five regions around the world
Latin America
Working with multilateral
organizations and
associations of MFIs to
establish a 14 million account
processing hub to serve the
MF market of the region
Russia
Working with IBM Russia as
the Kremlin announced its
decision to use the countrys
post office network to deliver
financial services to Russias
unbanked
China
In conversations with global
and local banks to establish a
shared back office
infrastructure for the rural/low
income segment
Africa
Working with CARE
International to jointly
establish hub to serve 10+
countries in the Sub-Saharan
region
Indonesia
Signed an agreement with the
government agency promoting
the development of MF to
jointly establish a Microfinance
Processing Hub
11
CARE International and IBM have partnered together to build a Hub called the Africa
Financial Grid to help address poverty and promote development across Africa
A collaboration between CARE and IBM contains the needed elements of
technology, operational expertise, risk capital, local knowledge, as well as a
shared long term vision to help eradicate poverty through Microfinance
CARE International
CARE International
MFI relationships
Operational experience and
presence in Africa (21 offices)
Marketing and branding
Government and regulatory
insights and expertise
Risk capital
MFI capacity building & training
IBM
IBM
Solution design & software selection
Data center setup & operations mgmt
Experience & assets from running
Microfinance Hubs in other regions
Security, governance
Connectivity model
MFI onboarding
Regulatory compliance & reporting
12
IBM has also partnered with Grameen Foundation USA to help accelerate the
development of Mifos, their open source microfinance banking application
Basic branch workstation running
Mifos, with battery backup
Mifos single view of customer page
A crafts business funded
by Grameen Koota
Weekly payments meeting
for a large lending group
Objective
Provide MFIs with a world-class, scalable, easy-to-use MIS that is
low-cost but flexible enough to handle varying business requirements
Mifos Background
Mifos is an open source & free banking software application
sponsored by the Grameen Foundation USA. Mifos is installed in a
number of MFIs around the world, the largest being Grameen Koota
in India with over 100,000 clients
IBM Role
IBM is developing core pieces of functionality and improving the
architecture, security, and stability of the application
15 FTEs in Dublin, India, New York, and Spain engaged in the project

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IBM GLOBAL BUSINESS SERVICES

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