Around 45% of existing microfinance institutions still track and record their operations and accounting in excel sheets or even completely manually.  This costs a massive amount of time and resources, leaves room for error, prevents them from growing quickly, and undermines their ability to manage risk. Especially for smaller institutions the relative investment and maintenance cost is enormous compared to their size and operations.

How about completely outsourcing information systems (IS) to an external technology provider, so that the MFI can focus on its main business: handling client relationships and providing financial services?  

Here now, an exciting development. IBM has developed a “microfinance processing hub,” i.e., a shared infrastructure and software platform that provides groups of MFIs with a centralized core banking system, data center, operations management, and transaction processing. “When we started to work on the Microfinance initiative of IBM, we found that gaining access to appropriate back-office technology was the single most important obstacle for the growth of small institutions and the microfinance industry in general,” says Alberto Jimenez, Global Business Advisor for the Financial Services Sector of IBM.

In Africa, IBM has partnered with CARE to develop an “African Financial Grid.” The Grid is a “shared services and infrastructure model designed to help MFIs reduce operating costs, streamline lending processes, scale rapidly, and integrate with other resources such as credit bureaus, financial institutions and international payment networks.” Initially the plan is to cover 11 countries and is open to all kinds of financial institutions.

IBM acquired some valuable knowledge on what it takes to establish and operate a processing hub for microfinance institutions, which some also refer to as a core banking application service provider (ASP) solution. One of the main challenges to do this is not even a technical one, but lies in the concern of MFIs to outsource client information to a third party.  However, according to Alexander Bloch, who leads IBM’s Global Microfinance Initiative, “these concerns can be effectively addressed through a rigorous governance  associated with the management of client information, which IBM implements for MFIs”. Connected institutions will have to slightly standardize their business processes and product features. Since MFIs access their new outsourced IS over the Internet, some rural institutions may run into connectivity problems, which is one of the problems IBM is also working on.

But these challenges seem worthwhile when looking at the long list of benefits:

• MFIs act in a group permitting them to negotiate prices with different service providers; 
• Investment fixed costs are turned into variable costs (e.g., cost per client per year, or by transaction);
• To open a branch, one only needs an internet connection, no installation of hardware or software is needed;
• New products can be added without difficult adjustments to the system;
• Portfolio, accounting, and client information is readily available for internal and external purposes; improving the overall transparency of the industry.
• Local banks feel more comfortable funding MFIs since reporting is transparent and readily available;
• Connecting with additional distribution channels like ATM networks, retail agent chains, etc. is a “plug and play” issue.

Download a presentation.