Ibm Microfinance Sept 09

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Ibm Microfinance Sept 09

  1. 1. GLOBAL BUSINESS SERVICES © Copyright IBM Corporation 2009 Lee Tenny IBM Microfinance September 2009 IBM Microfinance Overview
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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