Ibm Microfinance Sept 09

GLOBAL BUSINESS SERVICES IBM Microfinance Overview Lee Tenny IBM Microfinance September 2009 © Copyright IBM Corporation 2009

IBM MICROFINANCE Agenda 1. Intro – IBM global microfinance program 2. Global opportunity for microfinance 3. Current constraints to industry growth 4. IBM Microfinance Processing Hub  Solution design  Current & future projects  Other workstreams 5. Case studies / fun examples 2 © Copyright IBM Corporation 2009

IBM MICROFINANCE In 2006, the CEO of IBM commissioned a global microfinance team to incubate new business opportunities for IBM in this emerging segment Mandate Enable entirely new business models to allow financial institutions to profitably provide basic banking services to “underbanked” populations in emerging markets. 1) Research global 2) Analyze operating model 3) Develop market entry microfinance industry and technology needs strategy & implement Market size & opportunity Operating model analysis Develop Processing Hub ‘toolkit’ Regional comparison Current technology limitations Establish industry relationships Vendor evaluations Engage regional IBM teams Product set definition 3 © Copyright IBM Corporation 2009

IBM MICROFINANCE The microfinance industry evolved to serve a part of the market largely avoided by traditional financial institutions > $25 Customer < $10 income (per day) What looks like Loans, savings, remittances, Products Loans, savings, remittances, basic success.. insurance, assets / investments, types of insurance mortgage, student borrowing Alleviate poverty $1,000+ Size of loans $10 - $500 Traditional Micro Banking 6 months to 30 years Time duration of Intra-day to 6 months finance loans Scoring / credit analysis Credit metrics Intuition / peer & social pressure Do it profitably - Cost per loaned 40-50X greater effort than dollar traditional banking* Extensive electronic core banking Technology Paper, Excel, “home grown” solutions software Source: Economist, Nov 2006 5 © Copyright IBM Corporation 2009

IBM MICROFINANCE Over 3 billion people live on less than two dollars a day and only 17% of them have access to formal financial services Households with at least one bank account Supply and demand of Microfinance 2007 Number of accounts, millions 700 Demand 600 500 72% (475+ Million) Number of accounts Accounts 400 Unserved 83% (500+ Million) 300 Accounts Unserved 200 100 Supply < 20% 60-80% 0 20-40% > 80% 2004 2005 2006 2007 2008 2009 2010 40-60% Population in need of Microfinance services (# accounts) 1 Population with access to Microfinance services (# accounts) 2 Source: Demirguc-Kunt, Beck and Honohan, 2007, Policy Research Report on Access to Finance, World Bank Notes: 1Based on CGAP data and population growth rates from the UN Population Division 2Current and forecasted numbers based on Microcredit Summit Campaign data, 2005 Assumption that 1 Account = 1 Family = 5 People 6 © Copyright IBM Corporation 2009

IBM MICROFINANCE The lack of formal banking services serving some poverty segments has given rise to informal and sometimes destructive financial services practices Limited access to • Local loan sharks charge up to 1000% APR and sometimes use violence credit to force repayment * • Drug lords in Afghanistan force farmers to grow poppies in exchange for access to capital * • Women in radical Muslim areas are excluded from the economy No safe place to • ‘Under the mattress’ savings can be stolen or destroyed by fire/flood store money • Rural poor often ‘store money’ by purchasing animals which can die or be stolen No efficient way • Remittance fees can be up to 34% of value * to transfers funds • $126 billion per year is transferred cross-border by immigrant workers *** Lack of insurance • Income often dependent on physical labor – injury or death can send to protect against entire family into poverty, forcing children to work instead of attend school financial shocks Informal financial • A study in India by the World Bank observed bribes to loan officers up to system 42% of loan value ** susceptible to corruption Sources: * Economist magazine, 9/2005; ** World Bank study / Economist; *** ‘Access for All’, by CGAP IBM analysis 7 © Copyright IBM Corporation 2009

IBM MICROFINANCE Studies suggest that the availability of basic banking products and services can help alleviate poverty Access to banking services addresses factors that drive poverty and improves the quality of life of its participants Finance and income inequality Financial depth and poverty alleviation Case Study Growth in poverty headcount / GDP Change in Gini coefficient  Over 6.5 billion $US loaned to over 7 million borrowers  Borrowers of the Bank own 90% of its shares, while the remaining 10% is owned by the government Private credit / GDP Private credit / GDP Evidence shows that finance Countries with higher levels of financial  According to a World Bank report, 5% of new is pro-growth but that it development experienced faster Grameen borrowers move out of poverty each reduces income inequality reductions in the share of population year. living on less than $1 a day over the  Child mortality in families with Grameen Bank 1980s and 1990s loans has declined by 37%. Source: “Finance for All?” - World Bank Policy Report 8 © Copyright IBM Corporation 2009

IBM MICROFINANCE The traditional financial services business model faces several hurdles in serving the “unbanked” segment Challenges for Traditional Banks Description  Low customer profitability does not support cost of traditional banking channels Costs of  High costs of distributing the services to remote locations with low volume Distribution  The lack of formal credit history of individuals in these markets makes risk assessment Credit difficult; lenders must rely on more qualitative factors and often charge higher interest Uncertainty rates to offset this additional risk  Low literacy rates make traditional tools such as loan applications and bank statements less relevant Literacy  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 Physical certain markets. Successful MFIs business models have established partnerships with Security ‘safe’ distribution networks  Lack of transparency into operations of MFIs discourages established financial institutions from using them as distribution channels or limiting the amount of capital they Transparency commit to the MFIs 10 © Copyright IBM Corporation 2009

IBM MICROFINANCE In the past, the vast majority of microfinance institutions did not have access to appropriate back-office technology Use of Information Management Type of Information Systems by Region Management System 90% 77% Off-the-shelf 80% 76% 10% 70% 60% 54% Manual 11% Spreadsheet 50% 35% 40% 33% 36% 30% 20% 10% 0% In-house 19% 4) ) 5) 6) 3) 38 (4 (2 (2 (4 (1 a ica sia ia ric ts As er .A en Af Am SE nd /C n ra po pe tin ha Custom es ro La Sa lR Eu Outsourced b- Al E. Su 25% Source: CGAP 11 © Copyright IBM Corporation 2009

IBM MICROFINANCE Microfinance functionality requirements are very different from those of traditional banks Microfinance Functionality Traditional Retail Banking Functionality • Group lending & savings • Individual savings & • Securities • Brokerage • Basic life / funeral insurance lending • Mutual funds • Custody • Collection sheets • Configurable products • Trade finance • Market positions • Bulk entry of collection sheets • Flexible organization • Foreign exchange • Cash • Custom schedules for loan repayments management hierarchy • General ledger • Partner-agency model • Mortgages • Role-based user • 360 customer view & • Microfinance reports, surveys, and PPI cross sell • Order book admin • Back dating of transactions • Guarantees • Settlement • Loan rescheduling • Enable loan officers to “go to the workflows • Leasing • Product catalog customer” • Custom fees & • Syndicated loans • Capital markets • Joint liability rules & enforcement interest calculations • Bill pay • Money market • Offline capability • Contact log • Swaps • Simple customer communications • ATM / POS • Futures / options • Easy application maintenance via management console • Credit cards • Bonds • High-volume • Application transaction integration processing capability Our analysis indicates that leading core banking ISV solutions may not effectively address key functional and technical needs of the microfinance industry 12 © Copyright IBM Corporation 2009

IBM MICROFINANCE The IBM Microfinance Processing Hub is a shared, on-demand technology platform for microfinance institutions Microfinance Processing Hub Key points • The Hub is a shared, on-demand SaaS technology platform supporting microfinance banking operations • The Hub enables microfinance institutions and banks to reduce costs, scale rapidly, and become better integrated with the overall financial ecosystem • Billing is per-account, per-month by IBM to the MFIs 14 © Copyright IBM Corporation 2009

IBM MICROFINANCE The Hub also enables microfinance institutions to link with other key players from across the financial industry Banks & Microfinance Institutions Int’l Payment Networks Established Banks IBM can negotiate cost-effective IBM Microfinance Processing Hub deals with payment or ATM 1. Lend funds to MFIs at Applications Infrastructure Management commercial rates. MFI networks, giving MFIs global performance reports Cross industry Accounting Data Center payments capabilities Infrastructure Customer Management Storage available thru the Hub. Payroll Business Recovery Services Regulators Collections and Recoveries Performance Monitoring 2. Sell products through the DB Management Hub, leveraging MFIs as FS Applications The Hub delivers automated, Risk Management accurate, and transparent Liquidity Management Firewalls distribution networks Security regulatory reporting & compliance Agent/reseller operations Redundancy Core Banking Connectivity 3. Banks can also use online banking software Smartcard / POS Vendors of the Hub to expand into ATM or debit cards, payment MF activities themselves terminals, and transaction routing Credit Bureaus Telcos NGOs / Donors The Hub can read from, and provide data The Hub can integrate with one or Greater transparency from MFIs, back to, credit bureaus. This helps end more telcos offering mobile banking, accurate & custom reports, and customers establish an identity and get allowing customers to repay loans or electronic funds transfer larger and cheaper loans over time transfer money on their cell phone 15 © Copyright IBM Corporation 2009

IBM MICROFINANCE “Connected” microfinance ecosystem with IBM Hub DELIVERY CHANNELS ATM / Market stall / Mobile loan Mobile phone Central office Branch offices Kiosk shared space officer banking RESELLERS / AGENTS MOBILE OPERATORS DONORS / (Future) INVESTORS MFIs CORE THIRD IBM HUB VENDORS PARTY SERVICE Core banking PROVIDERS software Credit bureaus Point-of-sale devices / Cards Retail point-of-sale networks Back office hardware ATM networks Firewall & other Fraud monitors security assets 16 © Copyright IBM Corporation 2009

IBM MICROFINANCE KEY IBM microfinance product focus IBM phase 1 focus IBM phase 2 focus Not immediate focus Microfinance Products Non-finance Micro-credit Micro-saving Micro-payments Micro-insurance Remittances services  Individual loans  Voluntary  Point of sale  Life insurance  Wire transfer  SME training savings  Retail locations  Group loans  Funeral  Money order  Skills training (cash handling)  Grameen  Mandatory insurance savings (often  Mobile loan  Hand delivered  Financial  Village banking officer (tx  Agriculture cash education attached to  Self-help groups loans) capture) insurance  Health and  Joint liability  Mobile phone  Health sanitation  Cooperatives payments insurance  ROSCAs  Pension  Bill pay  Livestock payment  Housing loans insurance distribution  Teller model (Latin  Education loans America)  Family planning 17 © Copyright IBM Corporation 2009

IBM MICROFINANCE There are two hubs currently in implementation phase and three new markets that present an attractive future opportunities Mexico Eastern Europe Hub developed for Bansefi Exploring options for using the and has 3.5 million accounts country’s post office network today . to deliver financial services to Russia’s unbanked population. Latin America China Assist in the expansion of the Initial conversations with hub into new markets global and local banks to find including Colombia, Ecuador a partner for a China and Central America. processing hub. Broaden the capabilities of the hub by adding mobility and new products (e.g. Africa micro-insurance). Working with a large bank to Southeast Asia establish a Hub first in South Exploring equity investment Africa, then expanding to Sub- with IFC and other parties Saharan region. interested in developing the microfinance capabilities within the region. India Currently operating a Up and running processing hub for FINO. The hub expects to reach Implementation Phase millions of unbanked in rural India. Future opportunity 19 © Copyright IBM Corporation 2009

IBM MICROFINANCE FINO in India, with operations run by IBM, is using a flexible Microfinance front office with the capability to operate in an offline mode in rural areas Wireless Point-of-Transaction Device Customer Smartcard Receipt Generation Slot Fingerprint scanner Slot to insert Operator  Encrypted storage of or Customer card account & customer information Portable Enrollment Station  Web camera  Fingerprint scanner  Signature capture pad  High-capacity battery backup  Bar code reader for paper documents  Immediate card printing 20 © Copyright IBM Corporation 2009

IBM MICROFINANCE IBM also recently completed a pro-bono effort with the Grameen Foundation to help accelerate the development of the Mifos open source application Objective Provide small / medium MFIs an appropriate, easy-to-use MIS that is low-cost but flexible enough to handle most microfinance 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 developed core pieces of functionality and improved the architecture, security, and stability of the application Mifos ‘single view of customer’ page 15 IBM people in Dublin, India, New York, and Spain were engaged Basic branch workstation running Weekly payments meeting A crafts business funded Mifos, with battery backup for a large lending group by Grameen Koota 22 © Copyright IBM Corporation 2009

Ibm Microfinance Sept 09

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