Automating MFIs: How Far Should We Go?

Automating MFIs: How Far Should We Go?

Saleh Khan (ASA International, Nigeria)
Copyright: © 2011 |Pages: 18
DOI: 10.4018/978-1-61520-993-4.ch004
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Abstract

Over the last few decades Microfinance has emerged from being an experiment in poverty reduction to a proven mechanism for providing access to sustainable financing to those who have none. With increasing attention given to Microfinance Institutions (MFIs) by global thought leaders and policy makers alike, the entire sector stands under increasing scrutiny and demands for transparency. This increasing attention coupled with the intrinsic need for MFIs to be efficient in their operations, leads to more and more MFIs adopting Information Technology (IT) tools to automate and streamline their operations. Whilst automating their operations, MFIs need to be careful in keeping some of the basic tenets of sustainable microfinance operations intact – including human contact that is important in ensuring timely repayments. This chapter examines some basic business processes followed by MFIs in their lending operations and evaluates the possible impacts and implications of automating these processes. The chapter also discusses the extent to which automation is feasible for a MFI and its implications on the sustainability of the organization.
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Introduction

Over the last few decades, Microfinance has emerged from being an experiment in poverty reduction to a proven mechanism for providing access to sustainable financing to those who have none. In the context of national development, there is rarely a gathering of professionals where the concepts and ideas of microfinance are not discussed and debated.

There are those who believe that microfinance should be cornerstone for a poverty reduction strategy in any corner of the world and then there are those who think it is a mechanism for exploiting the poor. Whatever personal convictions may be the global proliferation of MFIs stand as testament to the robustness of its basic concept and its ability to address the needs of the poor.

While the basic tenet of microfinance remains the same, service delivery mechanisms, lending methodologies and products offered vary widely between Microfinance Institutions (MFIs). These changes are made to differentiate themselves from the competition and serve their client’s needs better.

Increasingly, MFIs find that they have the potential to reach more clients than they have the capacity to lend to – mostly due to a shortage of capital required to reach these people. Government funds and donor funds do not have the volumes required by these MFIs and therefore the private sector has stepped in to provide them with access to capital markets and the funding they require. Accessing funding from these formal financial institutions, however, comes with multiple pre-conditions – one of which is the need for information transparency.

A project proposal by the Asian Development Bank (ADB, 2007) which aims at providing financing to MFIs and small business banks states that although small business banks are frequently more transparent from the standpoint of operations and transparency than MFIs, they are often equipped with substandard information technology and management information systems, which have difficulty producing the sophistication of reporting on issues like portfolio-at-risk and liquidity management, which would give confidence to foreign investors.

This aptly summarizes the position of investors to the microfinance sector as a whole where the lack of information transparency, especially in small and medium MFIs, can be deal breakers. One of the most efficient ways of having any level of information transparency is through the use of robust Information Technology (IT) systems.

MFIs are therefore encouraged to adapt Information Technology (IT) tools for the purpose of enhancing transparency, streamlining recordkeeping, ensuring financial compliance, improving lending efficiencies and improve managerial planning, among others. It is at this juncture that MFIs are faced with the need for changing their traditional manual process to IT based systems. Adopting these IT tools often calls for changes in their business processes which inevitably lead to these MFIs grappling with technical and change management challenges that they are neither prepared for nor equipped to take on.

This chapter explores the emerging trends in automating MFIs, including m-Banking, and matches it against the core lending principles followed by Bangladeshi MFIs. The chapter also examines benefits that MFIs can gain from automating and the extent to which automation could be viable. Finally it provides some key recommendations on the extent to which MFIs should be automated and some basic steps that need to be followed to ensure that automation is successful.

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