How do you link microfinance with mobile banking?

by Jim Rosenberg, CGAP: Thursday, July 16, 2009

Recently we caught up with Cameron Goldie-Scot, who is a mobile banking consultant with Triple Jump Advisory Services – East Africa Mobile Banking Team. Triple Jump delivers practical technical assistance to high potential microfinance institutions (MFIs). The team in East Africa, partnered with Mobile Microfinance Ltd, acts as a bridge between existing MFIs and mobile operators.

Tell us a bit about your group and whom you’re trying to serve.
Our aim is to enable microfinance clients to repay loans and deposit savings using their mobile phones. We assist our partner MFIs in developing the mobile payments business plan, developing the technology required, conducting staff and client training and assisting the management in rolling-out mobile payments. So far, the team has had a successful partnership with a large Kenyan MFI and is currently working with Tujijenge, a young MFI in Tanzania.

Rather than develop independent mobile banking products, we utilize those already in place, such as M-PESA, Zap and Zpesa. This enables the MFI to increase their competitiveness and lower the interest rates charged to clients, without incurring the cost of developing an independent mobile banking product. We are confident in the benefits of this approach and are keen to develop a set of best business practices that can be used by MFIs wishing to replicate the successes of our partners.

What do your clients need and how are you trying to reach them in a way that is new or innovative?
While there are numerous successful MFIs around the world, harnessing the power of mobile payment systems enables our clients to improve their efficiency, reduce fraud and extend their outreach. Using existing mobile banking services like M-PESA allows our partners to take advantage of Safaricom’s 6.2m clients, and simply present them with another use for a service they are already familiar with. This partnership has benefits for the MFI, their clients and the Mobile Network Operator (MNO).

Savings are realized across all departments in the MFI. For the team working with the Management Information System (MIS), the manual and time-consuming process of keying in thousands of repayment slips is replaced by a fully automated system that is much faster, safer and more efficient. From the loan officer’s perspective, meetings are considerably shorter and so more time can be spent on finding new clients or on spending more time with each of the existing clients, thus improving customer service.
Finally, the potential for fraud is reduced as mobile payments leave an easily viewable electronic trail for the internal auditors examine.

From the clients perspective, rather than carry bundles of cash to their weekly meetings on the notoriously dangerous local minibuses, clients can repay their loans before the meeting as easily as sending a text message. Feedback from clients in Kenya indicates that they consider this additional security the main benefit of M-payments. On top of this, weekly meetings are significantly shorter, allowing clients to spend more time focusing on developing their businesses or looking after their families. Clients can also repay their loans at any time during the week, allowing them to repay after a particularly successful day at their business and removing the need to safely store the cash until the day of their group meeting.

Describe some of the challenges your organization has had to face.
Over the past year or so we have had to face a number of challenges.

Microfinance institutions are generally cautious, which is a good thing when dealing with credit, but less so when dealing with new working methods. Change can be slow, and moving away from cash and paper based transactions requires a huge leap of faith for MFIs. The last two years have also been difficult years for business in Kenya because of the post-election violence. An environment of frequent power cuts, internet outages and unreliable IT systems only makes things harder.

Otherwise, the challenges we have encountered have been part and parcel of launching a new, innovative product. We have had persuade both the MNOs and the MFIs of the benefits of our approach, to develop the technology linking the MFI to the MNO, and design the training models for both MFI staff and clients. No doubt there is still a lot to learn, in particular on the advantages and disadvantages of different pricing structures. We also expect to encounter more challenges in the future. However, things are currently looking promising; both our partner MFIs and the respective MNOs are committed to the project and we hope to have our first clients using M-PESA to repay their loans in Tanzania in the next few weeks.

How is the current economic climate affecting your clients and your business?
Our technical assistance to MFIs has not been affected by the turmoil. However, the main sources of funding for MFIs, large western investment funds, are not increasing their funding to MFIs. Clients themselves have less savings to deposit due to the high food and fuel prices that have hit East Africa over the last year. The drop in tourism and exports as a result of the economic climate will also negatively effect the amount clients are able to save. MFIs are consequently finding themselves increasingly strapped for cash. Many will need to take a serious look at their business model and work out how to adapt to today’s more demanding markets. Perhaps mobile banking is the answer and if so they can hopefully benefit from those pioneering MFIs who have discovered and solved many of the difficulties for them.

What is the outlook going forward? Are you optimistic or not? Why?
We are very optimistic. The success of mobile money transfer systems in Africa has been phenomenal while at the same time the majority of East Africans still do not have access to formal financial services. The market is good. While mobile phones are becoming increasingly ubiquitous and a larger percentage of East Africans can be reached through mobile phones, road and landline infrastructure has remained poor. Mobile banking therefore offers an excellent means of reaching the rural areas. If implemented correctly, the partnership between MFIs and MNOs is not only mutually beneficial but also mutually profitable. The work we have been doing so far is only the beginning.