Microfinance and MIS – standardization is a good start
by Guest Blogger : Thursday, April 8, 2010
Bryan Barnett is an independent technology business consultant. Previously he was a business manager at Microsoft Corporation, an analyst with investment firm Vulcan Northwest, and a founder and Vice-President of ApexLearning, a pioneering online learning company. In previous careers he was a university teacher and an attorney with the Colorado General Assembly. He holds a Ph.D. from Rutgers University and a J.D. from the University of Colorado.
Many years on, technology for back-office systems is still a barrier to the growth of microfinance. At a recent series of workshops organized by CGAP and Grameen Foundation, standardization of software requirements was often mentioned as key to lowering costs and thereby encouraging wider use of technology among MFIs. But is this possible, or merely a vain hope for a fragmented industry?
Software is expensive to develop. Vendors cannot build custom products for individual customers, so they try to build a single product that is sufficiently flexible (i.e. configurable) to accommodate the broadest range of customer requirements. Today there is extremely wide variation in the way MFIs operate. Accordingly, each wants software tailored to its own particular business practices. This limits the market for standardized applications, drives up development costs and leads many MFIs to invest in custom applications that cannot scale, are inflexible, and have no long-term support.
More uniform requirements for software to support MFI operations necessarily implies more uniform business operations. MFIs would surely resist this if it meant limits on their ability to innovate to meet evolving customer needs and competitive threats. Any effort to achieve consensus around business practices and software requirements must recognize this.
But there are common requirements that a wide variety of MFIs could accept precisely because they don’t limit the ability to differentiate products and services. For example, there is wide variety in the ways that interest rates are calculated or payment terms are set and there is constant innovation along these lines as new products are developed. Any standards that constrained product innovation would undermine an MFI’s ability to be successful, so maximum flexibility is essential. On the other hand, processes for enrolling new clients and authorizing new loans are generally not critical differentiators in the marketplace. So MFIs would potentially benefit from standardization around best practices without limiting their ability to provide innovative products and services.
If useful operational standards are possible, they must be widely adopted to be effective. This is never certain. There are already efforts underway around financial reporting, social performance reporting, and electronic data interchange. Each suggests that achieving consensus on certain standards is possible (if not easy or quick). Yet none of these has yet achieved widespread adoption (though it’s still much too early to think it won’t happen).
Standards for reporting may be easier for MFIs to accept than operational standards that could simplify software requirements. Yet the value of an industry-wide participatory process is precisely the ability to expose hidden potential for compromise and consensus through focused dialog among stakeholders. There is a strong common interest between MFIs (who want lower costs) and software vendors (who want a larger market for their products). A broad consensus on even a limited set of common operational standards and corresponding software requirements would offer significant benefits to both, and for that reason would be worth the effort.
-Bryan Barnett
April 19th, 2010 at 10:49 pm, Drew Tulchin ()
@Pierre Pezziardi, Is it unreasonable to ask MFIs to change? Collaborative industry initiatives have yielded results in other sectors, and since microfinance is a relatively young industry it seems rational to expect that operational standards and accepted best practice will emerge in some areas while innovation in other areas will provide competitive advantages to leading MFIs. It is my belief that most MFIs would stand to benefit from some degree of increased standardization, especially voluntary standardization as it would be less likely to stifle innovation.
@All, Lack of standardization has long plagued MFIs and their stakeholders alike; the lack of MIS standardization is just one symptom of the problem. SEEP’s Microfinance Reporting Standards Initiative aims to solve one piece of the puzzle by working with microfinance practitioners, investors, and others to keep microfinance reporting standards current and relevant.
Currently, the Initiative in the process of introducing new ratios to take into account the changing microfinance landscape. Much like certain procedural changes you mention, the adoption of these standards does not fundamentally change the way an MFI operates; the new ratios are applicable to a variety of microfinance models.
One component of the Initiative’s work is to work with MIS vendors to ensure that standard reporting ratios are integrated into their software; this will make it easier for MFIs to adopt reporting best practices, as well as serving as a key selling point for the MIS vendors’ products. If you are interested in getting involved, regardless of whether you are an MIS vendor, MFI manager, or other MF stakeholder, please contact me at Drew@socialenterprise.net
3 Comments
April 10th, 2010 at 9:02 am, Pierre Pezziardi ()
At Octopus, we believe standardisation and innovation must be seen as a never ending process. What was new or unique or differentiative at some time will eventually become mainstream after years, Darwin selecting among best practices/features. The question is more how vendors optimize this process, how they keep up with innovation pace while maintaining their core features clean. This actually require strong software engeneering techniques, like automated testing and agile development. Don’t ask the MFIs to change, ask the vendors to change !