MICROCAPITAL.ORG STORY: International Banking Systems Online Journal Publishes Supplement On The Role of Technology In Microfinance And Highlights Importance Of Risk Management Systems

The International Banking Systems publication (IBS), an online journal that provides information on banking systems and operations, have produced a detailed supplement on the role of technological systems in microfinance [1]. An article within the supplement entitled ‘Technology for Microfinance – Trends driving the technology’ [2], the authors discuss the growing importance of risk management systems in MFIs. These systems are significant as they allow MFIs to address critical issues such as over-indebtedness, a problem which has become acute for some MFIs in the current financial turmoil, and report to their investors promptly.

Mr Fernando Sánchez, general manager of Latin American microfinance fund Locfund [3], was quoted as stating the need for ‘asset and liability management, to manage liquidity and maturity mismatches, especially as expected funding sources may disappear’. He added that the increased sophistication and diversity of funding techniques for MFIs, plus the increasingly commercial nature of investors, is ‘making treasury management a more mainstream aspect of microfinance, not just for MFIs, but for the investors supporting multiple institutions’. Finca International (‘Finca’) [4], an established MFI that focuses on village banking techniques, was cited as an example of an institution that is fast developing sophisticated and standardised systems across its network. Mr Darcy Williamson, Finca’s head of financial planning and analysis, describes the MFI’s asset-liability committees which are tasked ‘to draw up and monitor cash flow forecasts, funding plans, and foreign exchange exposure and credit risk’. Finca needs to aggregate this information and manage it on a regional and global basis to perform scenario planning. A recent interview of Dr John Hatch, Board Secretary at Finca, is available on the Microcapital.Org [5] website.

On the issue of managing foreign exchange risk, the article cited Mr Brian Cox, executive director of MFX Solutions [6], a company focused on managing microfinance currency risk, who highlighted the need for MFIs to deal with currency exposures and risks, particularly in the current climate where it is not uncommon for emerging market currencies to devalue against hard currencies (which are typically the currencies in which cross-border loans are denominated). Previous Microcapital.Org publications on foreign currency risk in microfinance can be found in the Bibliography section below [7], [8], [9], including an interview of Mr Cox [10]. The use of systems and technology can be usefully employed to monitor fluctuations in foreign currencies and address currency exposures promptly.

The article goes on to discuss the role of ratings in improving transparency and facilitating investment analysis in the microfinance sector. The trend towards social ratings or performance indicators as opposed to conventional credit ratings was also highlighted. The need to measure social impact is likely to have systems implications ‘as MFIs will either choose, or be required, to gather and store a wider set of information on their clients’. Triple Jump was quoted as having developed a social performance management tool together with Oxfam Novib [11], the charity’s Dutch affiliate, to help MFIs incorporate social data in the information systems. In addition, many MFIs have started to realise that the use of technology can help them to ‘stay focused on the poorest segments with socially and politically acceptable interest rates’. Through ‘automation, efficient credit scoring tools, and low-cost channels such as branchless banking via mobile telephony’, technology can be efficiently deployed to contain costs. In conclusion, the article notes that the microfinance industry is working hard to avoid the pitfalls of poor risk management and that ‘the systems industry will have an important part to play in providing the solutions’.

Some Microcapital.Org publications on the issues raised here are referenced in the Bibliography section below [12] – [17].

By Chinq Yee Chong, Research Assistant

Bibliography

[1] IBSJ Technology for Microfinance October 2009 Supplement: http://www.ibsintelligence.com/index.php?option=com_content&view=category&layout=blog&id=204&Itemid=27

[2] IBSJ article entitled ‘Technology for Microfinance – Trends driving the technology’: http://www.ibsintelligence.com/index.php?option=com_content&view=article&id=13492:market-overview-technology-for-microfinance-trends-driving-the-technology-&catid=204:technology-for-microfinance&Itemid=27

[3] LocFund: www.locfund.com/

[4] Finca International: www.villagebanking.org/

[5] PIONEERS IN MICROFINANCE: Village Banking Innovator Dr. John Hatch of FINCA (Foundation for International Community Assistance)

[6] MFX Solutions: www.mfxsolutions.com/

[7] MICROCAPITAL STORY: Reducing Foreign Currency Risk In Microfinance Transactions – Observations by MFX Solutions At A Hanson Wade Conference On Microfinance Investments

[8] MICROCAPITAL STORY: Muhammad Yunus Warns of the Dangers of Foreign Currency at Sa-Dahn Microfinance Conference

[9] MICROCAPITAL STORY: New Microfinance Foreign Exchange Risk Management Group, Cygma, Believes Credit Crunch Provides Business Opportunity