“The microfinance industry — bankers to the poor — faces a paradox of scale, growing large in some ways but remaining small in others,” says the New York Times.
Source: New York Times.
Original article available here.
NEW YORK, November 12 – There are more than 3,100 microfinance institutions worldwide, serving 113 million poor people. But even thriving microfinanciers are tiny by banking business standards. They typically make loans of USD 100 or so to entrepreneurs living on a dollar or two a day.
The scale of their operations makes these lenders a pretty unappealing market to the companies that supply the banking industry with software for tracking customer accounts, loans and repayments. But that is starting to change, and an announcement last month by I.B.M. that it will help develop software for the industry was a step toward remedying a troublesome technology gap.
That gap was proving a big headache two years ago for Suresh K. Krishna, the chief operating officer at Grameen Koota, a microfinance institution in Bangalore, India, that makes loans to poor women.
At the time, Grameen Koota had 14 branches and more than 25,000 borrowers, and its customer population was doubling each year. But record-keeping was done on paper or on isolated personal computers in the branches, with printouts and disks sent to the central office in Bangalore.
“We needed a system to handle all that data, quickly and reliably,” Mr. Krishna said. “And no one made software systems for microfinance.”
Solving that problem is the goal of the Mifos Initiative, a collaborative software project started two years ago by a nonprofit foundation. The initiative got a big lift in October when I.B.M. said it would commit the time of ten software engineers to work on the microfinance program.
Both good will and self-interest are behind the company’s move. “Our starting point is to help make this technology free, accessible and reliable,” explained Bridget Van Kralingen, the I.B.M. executive overseeing the microfinance work. “But we also believe that some of these lenders will grow into banks — and I.B.M. customers — someday.”
Viewed narrowly, the Mifos project is building a geeky, back-office tool. But it’s a tool that promises to help significantly broaden the reach of lending to the poor. Historically, the very poor were viewed as bad credit risks. Yet the experience of microfinance trailblazers led by Muhammad Yunus, founder of the Grameen Bank in Bangladesh and winner of the 2006 Nobel Peace Prize, has demonstrated that the poor can be bankable borrowers indeed.
The real stumbling block, experts say, has been inefficiency. The administration and servicing costs on a microfinance loan, they estimate, are five or six times the expense, proportionately, on a standard bank loan. One reason, to be sure, is that the loans are much smaller, but another is that microfinance institutions do much of their accounting by hand.
“Transaction cost, not risk, has long been the Achilles’ heel of microfinance,” said Elizabeth Littlefield, chief executive of the Consultative Group to Assist the Poor, a consortium of public and private development agencies.
The Mifos Initiative was begun by the Grameen Foundation, an outgrowth of the Grameen Bank. The foundation seeks to spread the use of technology and microfinance to combat poverty, and Mifos is led by George Conard, a former Microsoft manager with a long-standing interest in development issues. (He spent a year in Rwanda on a project to bring cellphone service to rural villages.)
The Mifos software is open source, meaning that the code is open to anyone to tinker with or debug. The best-known software developed under the open-source model is Linux, an operating system that is an alternative to Microsoft Windows.
The open-source approach means that microfinance institutions that use Mifos will not be dependent on software companies to make improvements and new versions. It can also be tailored to suit local needs. The software is Web-based, so that it can be tapped into using any computer with a browser or, potentially, a cellphone.
The software is being written by a handful of full-time developers employed by Mifos, contributors at companies like I.B.M. and part-time volunteers. “Open-source development is more participatory, getting a lot of people involved to solve problems,” Mr. Conard said. “It really seems the right approach for what we’re doing with microfinance.”
Software engineers working on the initiative earn more than a salary, said Van Mittal-Henkle, a former senior software engineer at Amazon who joined Mifos in September. “As a technologist,” he said, “it’s not often that you get to be in the right place at the right time and have an opportunity to make the world a little better place.”
While the project is still in its infancy, early results are encouraging. Five microfinance institutions are using the software, in Kenya, Tunisia, Honduras and India.
Grameen Koota is the leader, using the software in all its branches, now a total of 44, serving 110,000 borrowers. It expects to have one million customers by 2012.
The software is a vital part of the growth plan. The branches connect to Mifos using dial-up, broadband or wireless links, depending on what is available. “You don’t need anything other than a bare computer with a Web browser,” Mr. Krishna said. “And I can get centralized, up-to-the-minute reports.”
By Steve Lohr, New York Times
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