Software Solutions for the Microfinance Industry

A Billion Dollar opportunity

According to a recent McKinsey & Company report, more than 2.5 billion or a third of the world’s population does not currently use banks or micro finance institutions (MFIs). India itself has over 850 million people living on less than $2 a day, representing a strong opportunity for domestic financial providers to offer an innovative range of high-quality, affordable microfinance products and services. In fact, the Microfinance industry globally is experiencing major growth, fuelled by recognition of the need for financial inclusion of larger population in most countries.

As with any financial services company, a large volume of paperwork is generated daily at most Microfinance Institutions, and a great challenge faced by MFIs is verifying the accuracy of this data, given the manual document creation and processing mechanisms. Manual checking of application forms also means lower employee productivity levels, leading to delays in responding to customer requirements. Similarly, information systems to record and track financial information are critical to stronger internal controls (over cash flow, financial reporting, portfolio quality, etc.) for MFIs, be it recording money given to clients for loan services or cash received from repayments. This information can then be available to management and the back office for accounting and compliance purposes. Thus, as an essential part of operations, MIS (Management Information System) is an important factor to the operational efficiency of MFIs, and it is expected that the spread of Microfinance businesses will be greatly assisted by adequate technology.

However, the lack of flexible and cost-effective MIS infrastructure is limiting the ability of MFIs to grow. In fact, a MIX/CGAP study on MIS in microfinance has revealed that 41% MFIs use a manual MIS — either Excel-spreadsheets or paper-based systems to track payments, methods that are time-consuming and vulnerable to data loss. Even of the 59% of MFIs who do utilise MIS software, only 17% use packaged software, mainly due to lack of choices in the market.

This clearly presents a lucrative opportunity for budding entrepreneurs to tap the Microfinance Software market, which has been estimated by experts to grow into a billion dollar industry within a few years. In fact, many new start-ups have recently come up in the field, and are already creating a buzz. A good example would be the Artoo Slate, a software solution designed for microfinance field staff that takes the entire process of data collection and loan disbursement online, which recently won TiE’s “Kaun Banega Entrepreneur” Contest. Mifos, an initiative of the Grameen Foundation, uses an open-source model, and is gaining popularity as well, providing key functionality for microfinance institutions: client management, portfolio management, loan repayment tracking, fee and savings transactions, and reporting.

The next stage in this arena is the Software-as-a-Service (SaaS) model, which has become popular in the mainstream software sector as well. SaaS is a model whereby a software provider provides an application to customers for use as a service on demand. SaaS software vendor usually hosts the application on his web servers which can be downloaded by the customer on his device or computer terminal, disabling it after use or after the on-demand contract expires. By enabling Real-time access to information, to provide further value addition, SaaS can help cut down on costs and time significantly, and is especially helpful for smaller MFIs that cannot invest on technical skills and infrastructure and would prefer solutions that are available on Pay as you Use Models.

Especially required are software solutions for data mining, particularly for monitoring member behaviour, portfolio analysis, risk assessment (in loan processing), unit level profitability, correlation study, trend analysis (for operational and financial data), instantaneous calculation of financial ratios (CXO dashboards), seamless drill down and roll ups of operational data, budget to actual comparisons, and proactive monitoring of key indicators on portfolio quality, profitability, growth, financial solvency, outreach and productivity.