How significant are standards when it comes to technology and microfinance?
by Lauren Braniff: Wednesday, December 9, 2009
Scott Gaul is the Product Development Manager at MIX. He joined MIX in early 2006, working as analyst for Eastern Europe and Central Asia and East Asia and the Pacific. Prior to joining MIX, Scott worked on interest rate risk management and asset/liability management issues for banks and other financial institutions, and he also has experience at a leading microfinance institution in Kyrgyzstan.
Andrew (Drew) Tulchin is Managing Partner of the Social Enterprise Associates, a managing consulting firm specializing in the ‘triple bottom line’ for development issues, particularly microfinance. Drew has consulted in more than 30 countries, including three visits to Afghanistan. He leads the MFI Reporting Standards Initiative, an industry wide effort, facilitated by the SEEP Network.
Sometimes important aspects of the world around us are so obvious they go unnoticed. We buy a light bulb and know it will fit the light socket even though the bulb and socket are made by different companies that know nothing of one another. We send an email and the message passes through several software applications all by different authors, but nonetheless arrives intact.
What makes all this possible? In short, it is standards: formal rules and guidelines to which manufacturers subscribe that make their respective products more useful to a larger number of people. Standards play a large role in many industries including both technology and finance. In both fields, standards provide foundations making it possible for computer applications, as well as people, to exchange information efficiently and reliably.
How are standards helpful in microfinance? Financial information is used throughout the sector: by donors and investors, governments and regulators, vendors and associations and the MFIs themselves. Standards increase transparency, foster greater investment, and better enable comparisons, benchmarking and analysis. With good standards, reporting becomes easier and faster, saving operational time and improving the information available for managers (and other stakeholders) to make decisions. Standards also provide a mechanism to address new information requirements, such as IFRS – international financial reporting standards – an emerging requirement in the financial sector. Wider adoption of standards in microfinance would improve the ability of technology vendors to create, implement, and maintain quality solutions for MFIs, and make it easier for MFIs to identify off-the-shelf software products which meet their business requirements.
Where is the microfinance industry today? The SEEP Network is leading the industry wide MFI Reporting Standards Initiative (www.mfireportingstandards.org) to establish a process and methodology for standards setting, along with core financial reporting standards through the FRAMEWORK. These are not yet universal. With MIX, there is an effort to encode paper standards, like IFRS and the FRAMEWORK, in technology standards that support the electronic exchange of financial data. The use of technology like XBRL – eXtensible Business Reporting Language – can make data handling easier and reporting faster. Social performance, impact assessment, and poverty measurement efforts are also facing similar questions (with thanks to stakeholders including SPM, Imp-Act, IRIS, Ford Foundation and many others’ contributions).
But standards aren’t really standards unless and until they are widely adhered to. There is the difficulty. Do you agree that adoption of standards would positively impact the microfinance industry? What does drive standards adoption? And, what would accelerate standards usage in microfinance? What is most needed from an information and technology perspective? What incentives do consumers and providers of information about microfinance need to encourage standards? What would make it easier for vendors to support accepted standards for communication and sharing of key performance data? How can stakeholders use standards to help national level players with their regulatory efforts? How can the MFI industry better connect to established standard-setting bodies, such as IASB?
CGAP and the Grameen Foundation, with support from the Mastercard Foundation, recently co-organized a workshop to discuss what needs to happen to make appropriate back-office systems (including people and processes as well as technology) more broadly adopted by MFIs.
Dec. 8 and 9 we’re convening a virtual conference here on the CGAP Technology Blog to discuss four themes which emerged from the recent workshop. We’re joined by several industry experts who will each introduce a theme and moderate a discussion. The objective is to discuss how the theme relates to the broader question at hand, and what each stakeholder group can do to support MFIs. The conference happens here on the blog, no registration is required. Just post your comments using the “Leave a reply” option at the bottom of the thread.
11 Comments
December 9th, 2009 at 10:15 am, Drew Tulchin ()
Colleagues,
How do we ensure standards are complied with/followed in the MFI industry? What are appropriate carrots and/or sticks? They are more likely to be used when of value for MFIs and other stakeholders. For example, what would it take to have one reporting process to donors, instead of an MFI having to take staff time to tailor separate reports? This is a question requiring participation of many of us – donors, MIS vendors, MFIs themselves, and association.
December 9th, 2009 at 10:35 am, Normand Arsenault, Consultant ()
I see four levels of standards:
1. Prudential Reports (Regulating Authorities): Prudential Norms
2. Management Reports (Management Reporting System): CAMEL (ACCION), CGAP (Waterfield 1998), IADB, MBB, MIX, MBP, PEARLS (WOCCU), SEEP (Frame), etc.
3. Financial Reports (Accounting System): GAAP, IASB, Local IAS, IFRS, CGAP Disclosure Guidelines
4. Loan Tracking Reports (Loan Tracking System): No standards
What standards do you refer to?
December 9th, 2009 at 10:51 am, Lauren Braniff ()
The simple answer is…all of them! Most importantly, we’re interested in discussing whether broader adoption of standards - be they business processes or the various reports required of MFIs - would make it easier for MFIs to optimize their use of technology. What do you think? Is this a major obstacle to the use of technology at MFIs?
December 9th, 2009 at 11:19 am, Edward Cable, Grameen Foundation ()
Adding to Norman’s list of levels of standards - I would add in social performance measurement standards using tools and industry-adopted frameworks like the Progress out of Poverty Index (PPI). In parallel to these efforts should be transparency on pricing data being advanced by organizations like Microfinance Transparency.
December 9th, 2009 at 12:07 pm, Scott Gaul ()
To expand on Normand’s point, is it also worth looking at how these levels of standards need to work with each other? For instance, management reporting indicators may be built accounting information or information from a loan tracking system. Regulators may want to have a view on risk data that originates in an MFI’s loan tracking system.
And further: if we want to build links between standards, do we approach this through paper standards and / or technology standards?
December 9th, 2009 at 12:54 pm, Eamon Scullin ()
When it comes to SUSTAINABLE PRACTICAL SOLUTIONS for MFIs, the difficulties highlighted in the first three topics in this online workshop, in my opinion, are all linked to the fourth, Standards.
1. Training
2. Business processes
3. MIS
4. STANDARDS
I believe that the only way forward for the majority of MFIs to achieve a higher level of professionalism, documented processes and compliance and investment in MIS which has a longer payback period is STANDARDISATION.
Firstly, if the MIS is standardised across many geographical areas and many types of MFI then high quality TRAINING can be delivered more easily and more cheaply - e.g. via the internet, or local systems houses learning the system with high spec teaching material and then can deliver the training locally in the local language in the same time zone - at local costs. The unit cost of producing training material is lower when the volume is higher. Because of continuous updates and staff changes, installation of MIS without regular training makes the original investment almost worthless.
Secondly, for BUSINESS PROCESSES - if there is a standard system then you can develop and maintain an online library of the most common pre-designed business processes to closely match that standard system. These standard processes can then be downloaded by any MFI that wants to customise them to suit their particular methods. In this way the MFI can be “nudged” towards best practice and transparency simply by using a system where those standards and business processes are built-in. Without expensive seminars or visiting consultants, best practice can be achieved through standardisation.
Thirdly, the burden of developing a standard solution which is easy to use and yet functional for many different types of MFI is always a juggling act: too easy may mean less functionality; too functional may mean too complicated and too difficult to operate with unskilled personnel. Getting the right balance takes time and experience but the rewards for the MFI are exponential.
STANDARDS are what it is all about as described above.
(For the MIX or for SEEP, it is not difficult to imagine how easy it would be to collect reliable, timely data from a standard system – especially if the rating agency worked closely with the vendor to highlight the required fields. The output format would also compatible with the system used by the rating agency. The same applies to more accurate collection of Social Performance data.)
December 9th, 2009 at 6:09 pm, lee Kironget ()
I hear the same question from all MFIs in every country, be it Kyrgyzstan or Nigeria: How do we know what to procure? The answer to that question would be in the definition of standardization. With standardization, MFIs will have a “point of reference” when making decisions and the solution providers will have a baseline to build upon. The Internet and Telcoms are examples of sectors whose growth over the decade majorly due to standardization.
December 9th, 2009 at 6:39 pm, Bryan Barnett ()
Where do standards come from? How do they come to be widely adopted? In industry it seems there are three ways. First, a government or other authority can mandate standards and punish those who don’t adhere. Second, an industry association or standards body can promulgate and promote standards that are voluntary but widely adopted because, once established, there are economic benefits to both vendors and consumers. Finally there are de facto standards that emerge because of the dominance of a single company or product. Government enforcement is not effective in a trans-national context. And there is no single vendor with enough market share to constitute a de facto standard. That leaves the standards bodies. The question for me, therefore, is are there new standards bodies needed and what can be done to increase the effectiveness of those that exist? Given the weight that donors and investors throw in the microfinance industry, is the real answer a working alliance between funders and standards bodies that can propel wider adoption of existing standards and seed the development of new ones that might be needed?
December 9th, 2009 at 7:06 pm, Scott Gaul ()
I think Eamon hits on a good point in his post: “the burden of developing a standard solution which is easy to use and yet functional for many different types of MFI” entails navigating many tradeoffs that have high short-term risks for technology providers and MFIs, and potentially unclear long-term benefits.
But to get to more seamlessly linked systems and standards, we need to convince the interested parties of those long-term benefits (assuming they do exist). Demonstrating success cases is one way of doing this. For MIX, we chose to adopt some technology standards (such as XBRL), after seeing success stories that we could relate to our work. The FDIC (a regulator) in the U.S. was one example that helped to convince us: http://www.xbrl.org/CaseStudies/FFEIC_XBRL_06.pdf
However, in this case, a regulator could enforce compliance with both a paper and a technology standard; the collective action problem was ’solved’ by fiat. With microfinance institutions in over 100 countries worldwide, is such a solution possible globally? Where do the incentives live to produce ’standards-compliant’ solutions - are these international or local? We can see in theory how standards can benefit microfinance, but it may be difficult to convince any one actor to take that first step.
December 16th, 2009 at 7:00 pm, #Mifimon: Microfinance and Technology « Opportunity International ()
[...] CGAP Article on Technology Standards [...]
June 7th, 2010 at 9:00 pm, Raph Manny Gregor Gasal ()
This is about the transparency of the organization to operate.It is through certain MFI institutions that make goals and objectives become transparent.If the institution is transparent,therefore it is realistic and feasible.
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