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Micro finance and IT
 Risks & benefits Why computerise?


Efficiency. Micro banks and other micro finance institutions (generically referred to here as MFIs) are businesses which service high volumes of "low value" accounts. As important niche players in the banking world their business is based on an intimate knowledge of their customer's requirements, behavior and needs. Successful micro banks tailor their product and service delivery mix to meet customer needs and still remain profitable.

To maintain profitability, however, it is becoming increasingly apparent they must computerise. A successful computerisation strategy provides the micro bank with a system that removes the burden of administration without compromising delivery of the many unique products and services that set these institutions apart from conventional banks. The IT solution must allow the MFI to focus on customer and not on system administration or software development.

What do you need?
Small Micro Lenders can get away with simple systems such as low cost loan tracking software, MS Access level databases and spreadsheets.

However, as MFIs grow in size, they grow in complexity. A Micro bank or established MFI needs a fully integrated savings and loan solution that offers security and flexibility. The technology must not be an onerous overhead in time or skills and set up, and configuration needs to be straightforward. Reme- mber, a MFI and a full-scale commercial bank are only as viable as their information systems. Without a stable and mature system the MFI is exposed to risk that jeopardises the viability of the institution.

Develop or buy a Package
Industry experts will all now advise any prospective MFI to buy a package rather than attempt to develop.

While developing a custom-made IT system is often tempting, there are a host of pitfalls. There are also certain caveats when a ready-made software package is being considered. The purpose of this article is to provide assistance in finding the right IT solution.

What are the risks in developing a custom-made IT solution:

n The skills factor: can you develop and retain the skills maintain and grow your own product over time? There is a global IT skills shortage of more than 2m people. Can you be sure that your company will not become a victim of this skills shortage?

n life cycle of the development project. With a sufficient investment of financial and human resources it is possible to customise a system or develop for specific present day requirements, if you get it right. But, say the experts, such investment often detracts from the core business, to its detriment.

n Project costs: it is very difficult to know and contain project costs and to assess the cost of ownership over time. The containment of cost in development depends on how well the detailed specification is defined; and assumes that the user will not revise the expectation, as is almost always the case. Development can become a perpetual spending exercise and can up in a dispute over deliverables, leaving nothing to show for the cost and effort. In assessing costs, the opportunity cost of MFI management and staff time must be factored in ; this demand on the MFI for specification, testing and implementation time usually exceeds the actual development time and effort.

n Support and maintenance: customised software places the burden of support and maintenance on the MFI. The risk is becoming dependent upon one or two individuals who "know the system". Documentation, source code management, quality assurance testing and industry disciplines must be maintained. The loss of one or two people, or a catastrophic technical failure could bankrupt an unprepared MFI overnight.

n New system instability: expect problems. No matter how carefully tested, a new development will be inherently unstable and require close attention for months. Core changes in new systems will also introduce new instability; a developer that does not have a solid track record and an established technology will introduce significant risk to the MFI.

n Isolation from mainstream development: in any development the customer is isolated from a wider installed base and does not benefit from upgrades. All innovations and changes are customer defined and funded. The product will be an orphan from the rest of the industry and its life will depend on the MFI's ability to continue to develop and enhance.

n Detracting from core business: developing a solution implies starting and managing a small IT company. This will defocus the organisation and command the attention of staff and management on IT problems, and away from customer service. MFI's are not IT companies and should not attempt to be. MFIs should focus on being good at what they do and not attempt to go into the IT business; which is effectively what a development project implies.

Needless to say a MFI that gambles its future on IT development will find it very easy to end up in a blind alley and have to start over again, and face the very costly exercise of writing off the investment and purchasing a package later.

The ready-made IT solution
Assuming that we heed the warnings of the experts on the pitfalls of customising an IT solution, then what are the potential problems with purchasing a ready-made package? What if a package is not be available, or affordable? Or the vendor is not suitable? The answer for your MFI will lie in your access to a package solution that you are confident will provide value for money over time, with an acceptable level of commercial risk.

Questions to ask when purchasing a package

Supplier risk
How stable is the company?

What happens to you if the supplier becomes insolvent? Many small companies end up in liquidation in their first few years of operation. Your support and development dies with the supplier. Even access to source code will probably not save you if you do not have the skills, and if the vendor has not done a professional job of version control, source code management and documentation.

The functional fit
Does the package meet most of your requirements? A package solution should meet at least 80% to 90% of your present and anticipated requirement. Customisation should be minimal, if required at all. Ensure that any customisation not accommodated within the parameters of the package is included in the next release of the software. An MFI cannot afford the prospect of costly and perhaps unattainable upgrades. Investigate the supplier's upgra- de and release management strategy and ensure your investment is pr- otected. You sh- ould have access to periodic up- grades as part of your maintenance agreement.

Assess value
What is the cost going to be?

It should not be difficult with a reputable supplier to establish in advance the costs and benefits of the package. The MFI needs to know the costs of the user license and the method of calculating costs. Concurrent user pricing per module is the most common method.

Add to this factors such as implementation and conversion The project should be priced and limited to a very clearly defined scope of work. Maintenance and on-site support costs should also be laid out clearly in the contract. Transparency in agreements and definite quantity contracts are possible with package solution providers and be sure that this is what you get.

How much support will be provided?
The supplier must be able to provide in-country or reasonably accessible support in the local language at an affordable price for it to be worthwhile and effective. While standard business practice dictates that one-off small projects cannot justify the maintenance of a support agreement; and an MFI in this position must be realistic; the supplier must be questioned about how it will meet the support obligation, and to what extent. Remote telephone, Internet and fax support does not work; unless the MFI can afford the rates and costs of flying consultants in from distant locations to train, retrain and make changes and fixes to the software.

How stable is the system?
Package solutions take time to mature. Source code level development must be very rigorously managed. The core technology must be established and demonstrated to be stable and "bug free" over time. New packages are inherently unstable as are major upgrades that involve changes to the core technology. Look for a provider that can demonstrate a stable core product over time.

What is the supplier's planned upgrade path?
A well-managed IT solution comes with a comprehensive R&D plan, and a mechanism to grow the product in line with the growing experience of a wide customer base. Best practices and customer-defined innovations should find their way into periodic releases and be available to all users under the annual maintenance agreement. Buying a package should imply buying the experience of an industry and not the best ideas of a few people.

How much time will it take for us to administer the system?

A package should require minimal administration and management. The purpose of the IT strategy is to free the intellectual and management capacity of the organisation to innovate in customer service. The banking software package should liberate people from administration and create an environment focused 100% on the core business.

Who else has bought this package?
Design is entirely the commercial risk of the suppler. The market decides if the package has the functional capacity and architecture suited to the business environment. Many IT companies get this wrong and are short lived in the market place. The IT providers that get their design strategy and technology right become the dominant players in the market.

Social investment in IT systems for micro finance institutions will provide the framework for greater economic prosperity...

There are few decisions as critical as selecting a technology partner. The IT system is the heart of any financial institution. MFIs are no more than the information they represent and the computerisation strategy will determine success or failure over time. It is better in some instances to limit the scale of the business until an appropriate strategy can be identified, and a business relationship can be established with the right partner.

Investing in IT infrastructure is one area where social investors, donors, the World Bank and other such champions of micro finance can make a meaningful capital contribution to a MFI. The IT is the core infrastructure of a financial institution. If the business can sustain the commercial maintenance of the partnership with the supplier, the investment is secure. As a dam or a bridge is considered to be core infrastructure in the physical "real" sector, the IT investment in a MFI is its core, and provides the essential framework to sustain and grow the business.

Murray Gardiner
Managing Director
Global Technology Ltd




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