MICROFINANCE BEST PRACTICES

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George Staicu

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WHO SHOULD FACILITATE THE IMPLEMENTATION OF INFORMATION TECHNOLOGY INTO THE MICRO FINANCE INSTITUTIONS

During my consulting assignments I was often asked the following question: who should facilitate the implementation of information technology (including MIS) into the Micro Finance Institutions. Though this blog I would like to share my answer/thoughts related to this important area that has direct implications to the normal operation of a MFI as well as to the achievement of its poverty alleviation social mission, financial/operational sustainability, and financial and risk management strategic objectives. operations

My opinion is that the founders/owners, as well as the donors/investors, the Board and the executive management (CEO, CFO, COO) of a Micro Finance Institution MUST BE THE FIRST FACILITATORS/SPONSORS of the Information Technology infrastructure (hardware, software, communication, etc.) investment process.

Only through the existence/implementation of a reliable, accurate and performant Information Technology infrastructure the founders / owners/ donors/ investors / Board members / executive management can be sure that the accounting (financial statements), loan tracking, budget execution, financial and risk management information / reports are correct and reflect the actual performance of a MFI (self-sustainable or not). Therefore all these DECISION MAKERS should set the Information Technology as an important STRATEGIC OBJECTIVE of the respective MFI’s business strategy.

Of course, this strategic objective MUST be related both to the respective MFI’ s development stage as well as to the other strategic objectives (loan portfolio growth, loan portfolio quality- PAR, etc/). It’s one thing if the respective MFI it’s at its early stage (one office and a few employees) where it can use 2-3 PCs with the accounting. micro-loan portfolio (and micro-insurance portfolio) that could be managed with the Microsoft Excel application, and it’s a different “ball game” if we are talking about a MFI with 2-4 years of activity, several offices and employees where the obvious need is for a vendor application providing an advanced solution for accounting, loan tracking, asset depreciation, payroll, management reporting for internal and external (owners /donors / investors / central bank supervision) purposes.

Then, the respective decision makers should identify the possible SOURCES OF FUNDING THE RESPECTIVE IT INVESTMENT. These could be represented by additional founders/owners capital, the MFI’s net profit, the equity provided by investors, the funds that can be obtained from international organizations focusing on microfinance development. Without such funding there can not be any facilitation of an IT development.

I should stress also that the respective DECISION MAKERS MUST ALSO HAVE THE NECESSARY IT KNOWLEDGE in order to be able to prepare the Terms of Reference (Request for Proposal) for the procurement of a software vendor solution. In other words the respective decision makers MUST know WHAT TO ASK (technical and functional requirements/specifications) to the software vendor so that the respective IT solution fully matches both the MFI’s current needs and future business development needs.

If the respective decision makers do not have the necessary IT knowledge /expertise then they can hire the services of a microfinance consultant that can, indeed, FACILITATE the introduction of Information Technology through the undertaking of an IT business needs analysis/assessment and of the resulting Terms of Reference (Request for Proposal). The respective consultant could also be hired for the whole timeframe related to the IT solution selection and implementation (that can act as a member of the IT tender selection committee, member of the IT implementation monitoring team, member of the team in charge with the final reception of the IT solution).

One important issue is the possible necessary customization of the selected IT solution. Here there are two approaches:

THE FIRST IT CUSTOMIZATION APPROACH

a) the vendors approach that intends to do as little customization as possible to its IT solution, insisting that the MFIs written policies and procedures (finance-accounting policy; loan portfolio management policy; risk management policy, etc.) to be customized/adjusted to the specifications of its own solution. A such approach could be acceptable if the vendor’s IT solution has a long track record and has been proved adequate and successful in the international microfinance market (i.e. their IT solution has been implemented in many MFIs around the world). Otherwise if the vendor and its IT solution has little or no track record in the microfinance market there is a major danger that changes to the MFI’s internal policies (that proved to be effective and successful before the implementation of the IT solution) may represent an important risk and distress to the respective MFI negatively affecting the normal and smooth development of its activities/operations.

THE SECOND CUSTOMIZATION APPROACH

b) the MFI approach that requires for the vendor’s IT solution to be customized according to its own policies and procedures as well as to the local country accounting, fiscal, and supervision reporting laws and regulations. This approach is especially recommended for those MFIs whose internal policies and procedures ensured both a normal running of their activities/operations (especially a good quality of the micro-loan portfolio – reduced PAR) , the compliance with the local country laws, regulations and standards as well as with the international best practices and

standards (IAS/IFRS, audit standards, etc.). As such the vendor MUST fully customize its solution both according to the MFI’s current and future strategic needs as well as to the MFI’s internal policies and procedures.

As a conclusion I would only add that the introduction/implementation of an IT project (selection of an IT consultant and of the IT solution: hardware – servers, PCs, micro-banking software, communication network, etc.) MUST be VERY CAREFULLY PLANNED, ORGANIZED AND MONITORED in order to ensure the full achievement of all the clauses (i.e. the MFI’s IT current and strategic needs) of the contract concluded between the MFI and the software vendor. My own experience in the banking and MFI industries as well as other consultant’s experience shows that many banks and even more MFIs have end up “facilitating” the introduction of worthless Information Technology, with negative impact on a financial institution institutional development.

Finally I have to stress/repeat again the fact that ONLY THROUGH THE EXISTENCE / IMPLEMENTATION OF A RELIABLE, ACCURATE AND PERFORMANT INFORMATION TECHNOLOGY INFRASTRUCTURE THE FOUNDERS / OWNERS/ DONORS/ INVESTORS CAN BE SURE THAT THE ACCOUNTING (FINANCIAL STATEMENTS), LOAN TRACKING, BUDGET EXECUTION, FINANCIAL AND RISK MANAGEMENT INFORMATION / REPORTS ARE CORRECT, REFLECTING ACCURATELY BOTH THE OBJECTIVE / REAL SITUATION / PERFORMANCE OF A MFI (SELF-SUSTAINABLE OR NOT) AS WELL AS THE FULFILMENT OF THE MFI’s VISION, MISSION AND STRATEGIC OBJECTIVES FOR WHICH THE RESPECTIVE FINANCIAL INSTITUTION WAS ESTABLISHED BY ITS FOUNDERS / OWNERS.