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IBM GLOBAL BUSINESS SERVICES (c) Copyright IBM Corporation 2008 June 2008 DISCUSSION DOCUMENT IBM Global Microfinance Initiatives Lee Tenny, IBM Global Microfinance initiatives. 80% of the world's population lives on less than two dollars a day and only 17% of them have access to formal financial services.
IBM GLOBAL BUSINESS SERVICES (c) Copyright IBM Corporation 2008 June 2008 DISCUSSION DOCUMENT IBM Global Microfinance Initiatives Lee Tenny, IBM Global Microfinance initiatives. 80% of the world's population lives on less than two dollars a day and only 17% of them have access to formal financial services.
IBM GLOBAL BUSINESS SERVICES (c) Copyright IBM Corporation 2008 June 2008 DISCUSSION DOCUMENT IBM Global Microfinance Initiatives Lee Tenny, IBM Global Microfinance initiatives. 80% of the world's population lives on less than two dollars a day and only 17% of them have access to formal financial services.
June 2008 DISCUSSION DOCUMENT IBM Microfinance Initiatives Lee Tenny, IBM Global Microfinance 2 IBM GLOBAL BUSINESS SERVICES Copyright IBM Corporation 2008 0 100 200 300 400 500 600 700 2004 2005 2006 2007 2008 2009 2010 Source: Demirguc-Kunt, Beck and Honohan, 2007, Policy Research Report on Access to Finance, World Bank Households with at least one bank account 2007 N u m b e r
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a c c o u n t s Supply and demand of Microfinance Number of accounts, millions Population in need of Microfinance services (# accounts) 1 Population with access to Microfinance services (# accounts) 2 83% (500+ Million) Accounts Unserved 72% (475+ Million) Accounts Unserved Supply Demand Over 3 billion people live on less than two dollars a day and only 17% of them have access to formal financial services 20-40% 40-60% 60-80% < 20% > 80% Notes: 1 Based on CGAP data and population growth rates from the UN Population Division 2 Current and forecasted numbers based on Microcredit Summit Campaign data, 2005 Assumption that 1 Account = 1 Family = 5 People 3 IBM GLOBAL BUSINESS SERVICES Copyright IBM Corporation 2008 Description Low customer profitability does not support cost of traditional banking channels High costs of distributing the services to remote locations with low volume The lack of formal credit history of individuals in these markets makes risk assessment difficult; lenders must rely on more qualitative factors and often charge higher interest rates to offset this additional risk Low literacy rates make traditional tools such as loan applications and bank statements less relevant There is a higher burden at the point-of-sale to educate consumers verbally on the various banking products Remote cash terminals (ATMs, microbranches, etc.) are subject to security issues in certain markets. Successful MFIs business models have established partnerships with safe distribution networks Costs of Distribution Credit Uncertainty Literacy Physical Security Transparency Lack of transparency into operations of MFIs discourages established financial institutions from using them as distribution channels or limiting the amount of capital they commit to the MFIs The traditional financial services business model face several hurdles in serving the unbanked segment Challenges for Traditional Banks 4 IBM GLOBAL BUSINESS SERVICES Copyright IBM Corporation 2008 Traditional retail banking models are often inappropriate for efficient microfinance operations Daily Income* Personalized, high touch Low touch US$ 500 US$ 1 Unbanked Segments Traditional Banking ~ 2 Billion People ~ 4 Billion People Private Banking Type of Service vs. Daily Income Global Banking Pyramid * Log Scale Service includes origination, management and collection Current model in traditional banking Microfinance innovation + technology required to lower the cost of this high-touch model Inappropriate microfinance distribution model US$ 10 Type of Service 5 IBM GLOBAL BUSINESS SERVICES Copyright IBM Corporation 2008 In the past, the vast majority of microfinance institutions did not have access to appropriate back-office technology 77% 76% 33% 36% 54% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% E .
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( 1 3 8 ) Use of Information Management Systems by Region Type of Information Management System Source: CGAP Custom Outsourced 25% Spreadsheet 35% Off-the-shelf 10% Manual 11% In-house 19% 6 IBM GLOBAL BUSINESS SERVICES Copyright IBM Corporation 2008 One reason MFIs have had difficulty finding & using suitable banking software is that their functionality requirements are very different from those of traditional banks Microfinance Functionality Traditional Retail Banking Functionality Securities Mutual funds Trade finance Foreign exchange General ledger 360 customer view & cross sell Guarantees Leasing Syndicated loans Bill pay Contact log ATM / POS Credit cards High-volume transaction processing capability Brokerage Custody Market positions Cash management Mortgages Order book Settlement Product catalog Capital markets Money market Swaps Futures / options Bonds Application integration Individual savings & lending Configurable products Flexible organization hierarchy Role-based user admin Loan rescheduling workflows Custom fees & interest calculations Group lending & savings Basic life / funeral insurance Collection sheets Bulk entry of collection sheets Custom schedules for loan repayments Partner-agency model Microfinance reports, surveys, and PPI Back dating of transactions Enable loan officers to go to the customer Joint liability rules & enforcement Offline capability Simple customer communications Easy application maintenance via management console Our analysis indicates that leading core banking ISV solutions may not effectively address key functional and technical needs of the microfinance industry 7 IBM GLOBAL BUSINESS SERVICES Copyright IBM Corporation 2008 In summary, todays established banks often find it difficult to efficiently reach the poor, while MFIs often have challenges in scaling up and reducing costs with volume Established Banks Underbanked/Rural Segment Expensive network of branches, ATMs, and call centers Internet banking not easily used by the unbanked Cannot serve illiterate customers Inflexible and expensive IT systems Rigid credit management & collection philosophies dont leverage group / social lending practices Traditional scoring systems depend on quantitative credit history Established Banks Underbanked/Rural Segment Microfinance Institutions Innovative distribution including mobile branches and group lending Inflexible back office (45% of MFIs using paper or spreadsheets) Larger MFIs use traditional applications that are expensive and lack full support for key microfinance functionality Banking regulations very challenging 8 IBM GLOBAL BUSINESS SERVICES Copyright IBM Corporation 2008 The Microfinance Processing Hub provides a shared technology platform for MFIs that helps reduce costs, scale rapidly, and get access to reliable and secure banking software Servers, databases Loan officers Branch workstations Networking IT Staff MFIs with in-house or custom MIS 44% Software developers Loan officers MFIs with no MIS 46% Pen/paper or spreadsheet loan tracking Managers & analysts trying to manually calculate reports & performance data Loan officers Branch workstations Internet access to data center MFIs with off-the-shelf / package MIS 10% Local software shop Pay-per-use arrangement, with low startup costs and easy scale-up as MFI grows Easier reporting & compliance Robust technology and security Ready access to rich features and new products All banking functions are available via web browser on a basic PC Processing Hub data center (serves 100s of MFIs) Software developers IT staff $ for services used CURRENT SITUATION MICROFINANCE PROCESSING HUB Servers, databases Loan officers Branch workstations Networking IT Staff Software developers $ for license + maintenance Outsourced MIS Source: CGAP 9 IBM GLOBAL BUSINESS SERVICES Copyright IBM Corporation 2008 Finally, the Processing Hub helps MFIs electronically link with other key players from across the financial industry to drive a more efficient and vibrant economy Microfinance Processing Hub Governance R e g u l a t o r y
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C o m p l i a n c e MFI Onboarding Operations Mgmt Connectivity Model Microfinance Application Data Center & Security M o b i l e
I n t e r f a c e s Established Banks Intl Payment Networks Regulators Credit Bureaus Telcos 1. Lend funds to MFIs at commercial rates. MFI performance reports available thru the Hub. 2. Sell products through the Hub, leveraging MFIs as distribution networks 3. Banks can also use online banking software of the Hub to expand into MF activities themselves The Hub delivers automated, accurate, and transparent regulatory reporting & compliance IBM can negotiate cost-effective deals with payment or ATM networks, giving MFIs global payments capabilities The Hub can read from, and provide data back to, credit bureaus. This helps end customers establish an identity and get larger and cheaper loans over time The Hub can integrate with one or more telcos offering mobile banking, allowing customers to repay loans or transfer money on their cell phone Microfinance Institutions NGOs / Donors Greater transparency from MFIs, accurate & custom reports, and electronic funds transfer Smartcard / POS Vendors ATM or debit cards, payment terminals, and transaction routing Data Analytics 10 IBM GLOBAL BUSINESS SERVICES Copyright IBM Corporation 2008 Based on our previous projects in India and Latin America, IBM is currently establishing Microfinance Processing Hubs in five regions around the world Latin America Working with multilateral organizations and associations of MFIs to establish a 14 million account processing hub to serve the MF market of the region Russia Working with IBM Russia as the Kremlin announced its decision to use the countrys post office network to deliver financial services to Russias unbanked China In conversations with global and local banks to establish a shared back office infrastructure for the rural/low income segment Africa Working with CARE International to jointly establish hub to serve 10+ countries in the Sub-Saharan region Indonesia Signed an agreement with the government agency promoting the development of MF to jointly establish a Microfinance Processing Hub 11 IBM GLOBAL BUSINESS SERVICES Copyright IBM Corporation 2008 CARE International and IBM have partnered together to build a Hub called the Africa Financial Grid to help address poverty and promote development across Africa A collaboration between CARE and IBM contains the needed elements of technology, operational expertise, risk capital, local knowledge, as well as a shared long term vision to help eradicate poverty through Microfinance CARE International CARE International MFI relationships Operational experience and presence in Africa (21 offices) Marketing and branding Government and regulatory insights and expertise Risk capital MFI capacity building & training IBM IBM Solution design & software selection Data center setup & operations mgmt Experience & assets from running Microfinance Hubs in other regions Security, governance Connectivity model MFI onboarding Regulatory compliance & reporting 12 IBM GLOBAL BUSINESS SERVICES Copyright IBM Corporation 2008 IBM has also partnered with Grameen Foundation USA to help accelerate the development of Mifos, their open source microfinance banking application Basic branch workstation running Mifos, with battery backup Mifos single view of customer page A crafts business funded by Grameen Koota Weekly payments meeting for a large lending group Objective Provide MFIs with a world-class, scalable, easy-to-use MIS that is low-cost but flexible enough to handle varying business requirements Mifos Background Mifos is an open source & free banking software application sponsored by the Grameen Foundation USA. Mifos is installed in a number of MFIs around the world, the largest being Grameen Koota in India with over 100,000 clients IBM Role IBM is developing core pieces of functionality and improving the architecture, security, and stability of the application 15 FTEs in Dublin, India, New York, and Spain engaged in the project
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