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Ibm Microfinance Sept 09
- 2. 2
IBM MICROFINANCE
© Copyright IBM Corporation 2009
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
- 3. 3
IBM MICROFINANCE
© Copyright IBM Corporation 2009
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
microfinance industry
Market size & opportunity
Regional comparison
Operating model analysis
2) Analyze operating model
and technology needs
Product set definition
Current technology limitations
3) Develop market entry
strategy & implement
Vendor evaluations
Develop Processing Hub ‘toolkit’
Engage regional IBM teams
Establish industry relationships
- 4. 4
IBM MICROFINANCE
© Copyright IBM Corporation 2009
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
- 5. 5
IBM MICROFINANCE
© Copyright IBM Corporation 2009
> $25
Loans, savings, remittances,
insurance, assets / investments,
mortgage, student borrowing
$1,000+
6 months to 30 years
Scoring / credit analysis
-
Extensive electronic core banking
solutions
< $10
Loans, savings, remittances, basic
types of insurance
$10 - $500
Intra-day to 6 months
Intuition / peer & social pressure
40-50X greater effort than
traditional banking*
Paper, Excel, “home grown”
software
Customer
income (per day)
Products
Size of loans
Time duration of
loans
Credit metrics
Cost per loaned
dollar
Technology
Source: Economist, Nov 2006
The microfinance industry evolved to serve a part of the market largely
avoided by traditional financial institutions
Micro
finance
Traditional
Banking
Alleviate
poverty
Do it
profitably
What looks
like
success..
- 6. 6
IBM MICROFINANCE
© Copyright IBM Corporation 2009
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
Numberofaccounts
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
- 7. 7
IBM MICROFINANCE
© Copyright IBM Corporation 2009
The lack of formal banking services serving some poverty segments has
given rise to informal and sometimes destructive financial services practices
Sources: * Economist magazine, 9/2005; ** World Bank study / Economist; *** ‘Access for All’, by CGAP IBM analysis
• A study in India by the World Bank observed bribes to loan officers up to
42% of loan value **
Informal financial
system
susceptible to
corruption
• Income often dependent on physical labor – injury or death can send
entire family into poverty, forcing children to work instead of attend school
Lack of insurance
to protect against
financial shocks
• Remittance fees can be up to 34% of value *
• $126 billion per year is transferred cross-border by immigrant workers ***
No efficient way
to transfers funds
• ‘Under the mattress’ savings can be stolen or destroyed by fire/flood
• Rural poor often ‘store money’ by purchasing animals which can die or
be stolen
No safe place to
store money
• Local loan sharks charge up to 1000% APR and sometimes use violence
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
Limited access to
credit
- 8. 8
IBM MICROFINANCE
© Copyright IBM Corporation 2009
Access to banking services addresses
factors that drive poverty and improves the
quality of life of its participants
Studies suggest that the availability of basic banking products and services
can help alleviate poverty
Private credit / GDP
Growthinpovertyheadcount/GDP
Countries with higher levels of financial
development experienced faster
reductions in the share of population
living on less than $1 a day over the
1980s and 1990s
Evidence shows that finance
is pro-growth but that it
reduces income inequality
Private credit / GDP
ChangeinGinicoefficient
Finance and income inequality Financial depth and poverty alleviation Case Study
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
According to a World Bank report, 5% of new
Grameen borrowers move out of poverty each
year.
Child mortality in families with Grameen Bank
loans has declined by 37%.
Source: “Finance for All?” - World Bank Policy Report
- 9. 9
IBM MICROFINANCE
© Copyright IBM Corporation 2009
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
- 10. 10
IBM MICROFINANCE
© Copyright IBM Corporation 2009
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 faces several hurdles in
serving the “unbanked” segment
Challenges for
Traditional Banks
- 11. 11
IBM MICROFINANCE
© Copyright IBM Corporation 2009
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.Europe/C
.Asia
(26)
Latin
Am
erica
(25)
SE
Asia
(43)
Sub-Saharan
Africa
(44)
AllRespondents
(138)
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%
- 12. 12
IBM MICROFINANCE
© Copyright IBM Corporation 2009
Microfinance 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
- 13. 13
IBM MICROFINANCE
© Copyright IBM Corporation 2009
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
- 14. 14
IBM MICROFINANCE
© Copyright IBM Corporation 2009
The IBM Microfinance Processing Hub is a shared, on-demand technology
platform for microfinance institutions
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
Microfinance Processing Hub
- 15. 15
IBM MICROFINANCE
© Copyright IBM Corporation 2009
The Hub also enables microfinance institutions to link with other key
players from across the financial industry
IBM Microfinance Processing Hub
Established BanksInt’l 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
Banks & 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
Agent/reseller operations
Core Banking
FSApplications
Liquidity Management
Collections and Recoveries
Risk Management
Payroll
Crossindustry
Customer Management
Accounting
Applications Infrastructure Management
Performance Monitoring
Storage
Infrastructure
Business Recovery Services
Connectivity
DB Management
Data Center
Security
Firewalls
Redundancy
- 16. 16
IBM MICROFINANCE
© Copyright IBM Corporation 2009
“Connected” microfinance ecosystem with IBM Hub
Central office Branch offices
Mobile loan
officer
Mobile phone
banking
ATM /
Kiosk
DELIVERY CHANNELS
CORE THIRD
PARTY SERVICE
PROVIDERS
Credit bureaus
Retail point-of-sale
networks
Core banking
software
Point-of-sale
devices / Cards
Back office
hardware
Firewall & other
security assets
MFIs
Market stall /
shared space
RESELLERS / AGENTS
ATM networks
VENDORS
MOBILE
OPERATORS
(Future)
IBM HUB
DONORS /
INVESTORS
Fraud monitors
- 17. 17
IBM MICROFINANCE
© Copyright IBM Corporation 2009
IBM microfinance product focus
Microfinance Products
Micro-credit Micro-saving Micro-insuranceMicro-payments Remittances
Non-finance
services
Individual loans
Group loans
Grameen
Village banking
Self-help groups
Joint liability
Cooperatives
ROSCAs
Housing loans
Education loans
Voluntary
savings
Mandatory
savings (often
attached to
loans)
Point of sale
Retail locations
(cash handling)
Mobile loan
officer (tx
capture)
Mobile phone
payments
Bill pay
Teller model (Latin
America)
Life insurance
Funeral
insurance
Agriculture
insurance
Health
insurance
Livestock
insurance
Wire transfer
Money order
Hand delivered
cash
SME training
Skills training
Financial
education
Health and
sanitation
Pension
payment
distribution
Family planning
IBM phase 1 focus
IBM phase 2 focus
Not immediate focus
KEY
- 18. 18
IBM MICROFINANCE
© Copyright IBM Corporation 2009
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
- 19. 19
IBM MICROFINANCE
© Copyright IBM Corporation 2009
Implementation Phase
India
Currently operating a
processing hub for FINO.
The hub expects to reach
millions of unbanked in rural
India.
Mexico
Hub developed for Bansefi
and has 3.5 million accounts
today .
Up and running
There are two hubs currently in implementation phase and three new
markets that present an attractive future opportunities
Future opportunity
Eastern Europe
Exploring options for using the
country’s post office network
to deliver financial services to
Russia’s unbanked
population.
China
Initial conversations with
global and local banks to find
a partner for a China
processing hub.
Southeast Asia
Exploring equity investment
with IFC and other parties
interested in developing the
microfinance capabilities
within the region.
Latin America
Assist in the expansion of the
hub into new markets
including Colombia, Ecuador
and Central America.
Broaden the capabilities of
the hub by adding mobility
and new products (e.g.
micro-insurance).
Africa
Working with a large bank to
establish a Hub first in South
Africa, then expanding to Sub-
Saharan region.
- 20. 20
IBM MICROFINANCE
© Copyright IBM Corporation 2009
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
Web camera
Fingerprint scanner
Signature capture pad
High-capacity battery
backup
Bar code reader for
paper documents
Immediate card printing
Receipt Generation Slot
Fingerprint
scanner
Slot to insert Operator
or Customer card
Portable Enrollment Station
Wireless Point-of-Transaction Device Customer Smartcard
Encrypted storage of
account & customer
information
- 21. 21
IBM MICROFINANCE
© Copyright IBM Corporation 2009
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
- 22. 22
IBM MICROFINANCE
© Copyright IBM Corporation 2009
IBM also recently completed a pro-bono effort with the Grameen Foundation
to help accelerate the development of the Mifos open source 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 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
15 IBM people in Dublin, India, New York, and Spain were engaged