IGI Global would like to thank Dr. Arvind Ashta, Groupe ESC Dijon-Bourgogne, for contributing this guest editorial post. Dr. Ashta would like to thank Kevin Day, President of Riskebiz, for providing the information for this article and verifying its content.
It is often recognized that the vicious circle of poverty requires exogenous capital to break the circle. Nobody gives the poor the first dollar, says Muhammad Yunus, the Nobel peace prize winner. Part of the reason lies in their lack of human capital and the inability to use technology, part of the reason lies in asymmetric information keeping banks from lending to them, and part of the reason lies in the small transactions leading to high transaction costs.
Yunus foresaw that the poor could get together in groups, and that this allows MFIs (microfinance institutions) to overcome asymmetric information without actually getting the information (the poor know who amongst them are bad risks and therefore do not include them in groups). Similarly, technology companies are realizing that if the poor can use telephones, then that is sufficient for them to get into the field and provide them microservices which make it possible to lower transactions costs in dealing with them.
The boom of microfinance and its high profits as attested by
Compartamos in Mexico and
SKS in India has indeed raised investor interest in this sector. A host of funds are coming up to invest in this sector. The questions to be addressed are
- In which fund to invest?
- In which MFIs will this fund invest?
- How will this MFI scale its business and profits?
Evidently, in this age of dynamic interconnectivity, any business offer becomes competitive if it uses the strengths of a large number of complimentary actors to get together to provide a rich experience to the final consumer or to the business manager. In this case, a group of organizations need to come together to ensure that investor's money is going to the right MFIs and that the MFI would get the necessary advice to scale.
The selection of MFIs requires partnering with a firm which already knows the microfinance sector well and can direct the funds to well governed MFIs. This already lowers the risk of the investment fund.
Increasing the profits of the MFI requires better management, new delivery channels and new products. The single most important technology for scaling is considered to be good MIS. The single most important delivery channel for the poor is using mobile telephones for payments. The new products for microfinance are microinsurance and micro-transfers of money. Any investment fund manager who wants to invest in this sector needs the capacity to bring together a team of technical advisors to simultaneously provide these different inputs to the MFI and transform it from a 10,000 client single-product company to a 100,000 client, multiple product, multiple channel company.
One fund who understand all this is
Riskebiz which just launched its fundraising. Before this launch, it brought together a team of players who have the technology and the interest to develop the market for the poor. The figure below shows how the team of players will co-create value for the poor, for the MFIs and, eventually, for the investors.
Riskebiz has partnered with
Planis, who is now merging with
ResponsAbility, and who knows the microfinance sector very well, being associated with the
PlaNet finance group, who are probably the second largest private multi-service provider to the microfinance sector. PlaNis will help Riskebiz select the right institutions.
To help the MFI scale up, MIS (Management Information Systems) will be provided on a Software-as-a-Service (SaaS) model hosted in the clouds and charged to MFIs on a pay-as-you-go basis by
Mambu.
The use of mobile payments delivery channel will be facilitated by
Kopo Kopo who will provide the software link between MFIs and the telephone operator, also on a SaaS basis.
A microinsurance product is being developed by
Avana which will be offered to MFIs to offer to the poor. To make this microinsurance less risky, the health of the poor will be checked and monitored by advanced technology developed by
Fio. The constant checks may help raise health consciousness and increase the productivity of these micro-entrepreneurs and reduce the risk of the MFI.
Thus, a multi-pronged strategy will lead to co-creation of value by combining finance and technology to enable the poor to get out of poverty. “It’s about lowering risk and increasing business,” says Kevin Day, the president of Riskebiz.
For comments and discussion on this post, please use the form below or email Dr. Ashta at Arvind.Ashta@escdijon.eu or Mr. Day at kevin.day@riskebiz.com. You can also visit the Riskebiz website at http://www.riskebiz.com. Dr. Arvind Ashta is a professor holding the Microfinance Chair at the Burgundy School of Business (Groupe ESC Dijon Bourgogne, France). He would like to thank Banque Populaire Bourgogne Franche-Comté for financing the Microfinance Chair. Dr. Ashta’s research interests are primarily in the institutional and technological environment in which the MFI operates. He offers courses in Introduction and Development of Microfinance, Financing and Financial Analysis of MFIs, and Technology and Microfinance at the Burgundy School of Business. He is also Associated professor at the Université Libre de Bruxelles and is an associated researcher at CEREN and CERMi. His new book, “Advanced Technologies for Microfinance: Solutions and Challenges” was recently published by IGI Global. For more information on this book please visit http://www.igi-global.com/Bookstore/TitleDetails.aspx?TitleId=41740. Mr. Day also served on the technical advisory board for this book.