30 Dollar Finance

We are launching 30 Dollar Finance on 26th Oct 2009. It is obligatory to write something very basic about 30DF. E.g. Origin of the idea? Why the name? ... etc. So, doing that....

The most fundamental way to find an effective solution is to find the cause of the problem. It is not difficult to understand that most of the ineffective initiatives targeted towards social change suffer from following two problems:

• Sustainability
• Lack of Impact
  

When 'Plebeian' team (yes, that is what we used to call ourselves.....but not anymore!! I will explain why later in this entry) was brainstorming the potential idea of creating an effective social enterprise, we filtered the choices(?) based on sustainability problems and impact-less-ness. We said big NO to 'donation' based ideas...there are no points in guessing that they cannot become self-sustainable. Idea of micro-credit was appealing because as it has proven in many developing countries, it can become sustainable and impact-ful if executed properly.

Unlike Kiva management, 30DF thought that the same will be welcomed in ultra-poor community of India who do not have access to formal banking. Following diagram will depict what 30df is trying to do:


The image above is very blurry. For better image, please click on the it

Why did we choose the name like we did? During Inception, we operated under the name - Plebeian. One of our team member - Darpan presented the then Plebeian to Dr. Emerson, a Professor at Carnegie Mellon. The first thing he advised us is to change the name from Plebeian to something simpler and that portrays what we are trying to do. 30D seems like an appropriate name - $30 states small (microcredit) amount and Finance states money.

Why would 30 Dollar Finance work?"

I have been asked this question repeatedly and I felt obligated to provide a simplistic answer to the question.

One should read Martin Fisher, founder of KickStart who explains how cash based economy can be a viable and sustainable solution to poverty. 30DF second that – we say, raising income is a solution to poverty :). 30DF is one such attempt to progress towards a cash based economy. Now the just question is why and how 30DF will become sustainable. This can be answered through two perspectives: one that revolves around the model itself and another involves stakeholders – the 30DF management team.

Concept: The ability of the idea to pool very small amount (e.g. $15) from social investors to create impact at the bottom of the pyramid is the selling point of 30DF. Unlike any other social enterprise 30DF will bring investor’s money back to him/her. We expect them to re-invest the returns. Imagine your one time social donation cum investment to create impact on more than one person/family over the period of time – good feeling, isn’t it? 30DF believes that there are people around the globe wanting to help but are skeptical of the fact that the money usually doesn’t reach the needy and get eaten away by parasites. 30DF provides the transparency about how your money is being used and it’s status report every month.

People: Results drives business, results will drive 30DF. The 30DF team is committed to produce ephemeral results once we engage our initial investors. The result shall comprise of – the repayment of the money, and successful execution of the entrepreneur’s informal business. In order to achieve this, we are constantly in touch with our field partners and addressing problems that we think are problems to our success (e.g. screening genuine entrepreneurs and, defining and constantly improving a process for the same).

Momentum

Tremendous momentum was never Plebeian's expectation, but the progress is quite close to being noteworthy.

The technical team have managed to set the infrastructure and start the implementation of the system. Few screen shots:







There have been more than one roadblocks in the registration process, but India team have managed to get around them and soon we will be official. The name decided is '30 dollar finance'.

Visit to Chaitanya (Gramin Mahila Swayamsidha Sangh), Rajguru Nagar (Khed), Pune

I drove to Khed from Pune city on the 4th afternoon. Khed is a small Taluka place and everybody seems to know everyone else. It wasn't difficult to spot the office (even though it is small) for how famous Chaitanya is.

First, I met with 2 members of technical staff - Tushar and Deepak. They seem to have a very good understanding of their operations and numbers, and answered all my questions without blinking. Later, the CEO, Ms. Kaushalya joined and I gave an informal presentation of Plebeian - the model and management team. She was more interested in the people who are going to run the show.

Ms. Kaushalya liked the idea, and showed interest to be a part of the Plebeian system. I look at thier williness for partnering with Plebeain as an important milestone. She had certain concerns though, including:
- How and who will collect the requirements
- Chainanya has around 16000 clients, do we want to have all of them in the system?
- How and why the Plebeian website will gain popularity
- How Plebeian itself will operate ;) because the Plebeian team is distributed.
..etc (mostly related to the business requirements and not questioning our presence or ability)


She expected us to extend a proposal that will include the responsibilities of both the parties in the partnership. Before that, she would like to know the whereabout of Plebeian (Team, registered office, nature of the org etc), because she candidly said that she never heard about it, and we cant blame her, can we!!! ;) She also expects to have some sort of interface which should be more than communicating over a telephone line - our analyst needs to go on site, learn their operations and collect requirements.

Currently, they are not using any MIS for accounting purpose but a plain MS excel. I wonder how they manage to put 16K clients information into such a volatile storage utility.

Vikram Akula's Presentation at 'The silicon valley microfinance network' meeting

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A hosted solution: FINO for MFIs

Indian startup Financial Information, Network, and Operations Ltd (FINO) has recently become the first company in the world to offer a complete end to end technology solution to microfinance institutions. While back end data management software designed for microfinance operations has been available on the market for years, FINO is the first to link a back end software system with a front end based on biometric smartcards for customers, and field devices for credit officers, to offer a complete, integrated solution.

The basics of the FINO product are simple. FINO is targeted at Business Correspondents, governments, MFIs and in fact, at any organization that intends to reach the unbanked sector. Customers of the organization are given biometric enabled smartcards which store the customers' fingerprints, account details, a unique identification number, and photo. Transactions are recorded using a field device equipped with a smartcard reader, fingerprint reader, and small printer and then automatically uploaded from the field device to the back end FINO software via a phone line. At the back end, all data is stored and maintained by FINO itself and accessed by the organization via web browsers. In addition to the full solution described above, FINO also allows organizations to purchase just the front or back end portions of the system. (So far, several MFIs have opted to adopt the back end only.)

A key application of FINO would be to enable the Business Correspondent model. The BC model can work only if there is quick and accurate flow of information between the BC and the bank. The bank needs to be able to monitor and control the services offered by the BC to the end customer. FINO provides offline-mode capability and detailed report-generation systems, thus making it feasible and safe to adopt the BC model.

Another obvious application of the FINO product is to streamline the existing operations of MFIs. By replacing rote paperwork with automatic data transfer, FINO allows MFIs to reduce labour costs, lessen the chance of fraud, create reports more quickly, and gain better overall insight into the performance of their portfolio. In addition to cutting costs, FINO also benefits MFIs and their customers by allowing MFIs to offer new products such as remittances and flexible savings accounts to their customers. Without the enhanced security, data management capacity, and connection to the existing financial system which FINO allows, these products would be nearly impossible for an MFI to offer.

The FINO product holds potential for increasing financial inclusion in India and elsewhere in other ways as well. In addition to MFIs, banks may also use the FINO platform to directly engage in microfinance activities. Similarly, governments may use the FINO platform to deliver wages and other benefits to the public more efficiently and with less leakage. Finally, FINO may benefit the microfinance sector as a whole by serving as a platform for the development of a credit bureau for the sector. Because FINO collects the fingerprints of all customers it gives smartcards to, and stores this information in a central location, FINO could easily be
used to track and share the credit histories of customers as they move from MFI to MFI. FINO has already begun work on a credit model to predict customer credit profile. A credit bureau would allow MFIs to cut down on the cost of screening clients, reduce overall defaults, and allow customers to more easily move from MFI to MFI, or to graduate from microfinance lending to bank lending. It can also enable the MFI to offer individual loan products instead of group-based products.

Whether these potential benefits are realized depends greatly on how much FINO is able to bring down the costs of the system for the MFI as well as the amount of support commercial banks give FINO. Up until now, many MFIs have been reluctant to adopt the FINO system due to the high initial investment and yearly fees. For more MFIs to be convinced that adopting FINO is a smart move, these costs will have to be brought down. FINO could see easier acceptance in the Business Correspondent sector, since the initial investments would be borne/subsidized by banks.

Despite a slow start, FINO is gaining steam. The company has signed up about 15 MFIs for its solution and a few of them have already gone live. It has carried out about 3 lakh enrolments, and has issued 1.5 lakh cards. The AP government is already using the FINO platform to deliver government benefits to recipients as a pilot, and it intends to replicate it in the entire state. In addition, Corporation Bank, ICICI, Indian Bank, and Union Bank of India have all made major investments in the company. Having these banks on board will do much to help ensure the success of the company. But FINO will need to sign up far more MFIs and gain the support of several more players, including governments. For FINO to be truly successful, it will also have to reduce costs by delivering multiple services through the same cards.

Role of Technology in Microfinance

It is believed in microfinance industry that innovative use of ICT has potential to achieve objective of microfinance through cost reduction and geographic expansion.

There is no doubt that the innovative use of existing technologies, such as, automated teller machines (ATMs), smart cards, Personal Digital Assistants (PDAs), mobile phone technologies, simputers and remote transaction services can significantly expand the customer reach, improve quality of service and customer satisfaction, increase data collection and analysis, and reduce transactions costs. It is also believed that the widespread use of Information and Communication Technology (ICT) will increase when it becomes easier, more convenient, cost effective, reliable, and secure for the consumers. Though each delivery technology provides significant benefits, banks and MFIs (or any other entity in this domain) need to undertake in–depth cost benefit analysis and study of availability of supportive infrastructure and the technology familiarity, language preferences and literacy of the clients before choosing a technological solution for applying in rural areas.


Currently in India, the use of following three cutting edge technologies has been observed to reduce the operating cost and increase outreach:

1. Management Information System (MIS)
2. Tailored Automatic Teller Machines (ATMs)
3. Smart phones/PDAs

I will discuss two cases (ICICI bank and SKS finance) later in another post to study the effectiveness of these technologies, and what we can learn!
SWOT Analysis

Here is the SWOT analysis for technology usage in microfinance industry:

Strength

* Technology is used for data analysis and persistence
* ICT is used for fast transfer of money
* ICT can significantly reduce paper work and increase efficiency
* Management and even the government has strong commitment to ICT enabled business processes
* The MFI staff are enthusiastic to use technology
* Access to remote communities because of the good networking of rural banks (Regional Rural Banks) in India
* Centralized databases adds flexibility and ability to add new features easily

Weakness

* High level of technical expertise are needed to support ICT use for business expansion
* Expensive (net connections, accounting software, hardware costs)
* Not everyone is ready to use new technology
* Lack of tailor-made software for local needs
* Lack of technical support for maintenance
* Microfinance institutions are not like big banks that can invest a lot of money in technology
* Insufficient Internet bandwidth in India
* Most borrowers are computer illiterate

Opportunity

* Chances to establish branchless banks
* Integrating various technology solutions such as MIS with PDAs
* Mobile banking initiatives
* ATM services for clients
* Low cost open source software for MFIs
* Distributed systems for MFIs
* Allowing platform for different MFIs (with common goal) to interact and learn from with each other

Threats

* Technology changes very fast
* The initial investment in technology is normally high
* Need for more professionals in software development
* Specializing in microfinance business.

People from both domains – technology and microfinance need to collaborate effectively to create a successful technology solution

Grassroot problems $30 finance trying to address

In India, almost 36% of the rural population do not have access to the formal banking services. Although, India has a good network and outreach of banks in the rural areas, but a small number of population has been served by these banks and specifically, low income generating clients have been left out. As a result, this 36% population has mainly relied on informal money lending sector for fast access to money whose exorbitant interest rate reinforces the indebtedness that ultimately results in life time poverty for the poor.

One of the main goals of UN’s Millennium Development Goals (MDGs) is “Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day.” Providing microfinance services to poor people is cited as one of the effective mechanism to alleviate poverty. There are evidences that corroborate this claim – notable example is Grameen bank which helped transform lives of more than 7 million disadvantaged and marginalized women in Bangladesh. It is apparent that Microfinance Institutions (MFIs) can play an important role in the social and economic development of poor communities. MFIs are the institutes that seek to provide credits to low income household and small informal businesses. Access to (micro) credit enables households to accumulate assets including wealth, which allow them to better cope with their economic and social vulnerabilities. In India, MFIs include non-governmental organizations (NGOs), not-for-profit bank financial intermediaries, and even a few commercial banks. Even though the there is a realization of the potential of microfinance in reducing poverty and empowering low income generating clients, replicating the success story of Grameen Bank is still far from reality. That said Indian government has taken some right steps to promote MFIs in the country. One of the steps is acknowledging the fact that Information and Communication Technologies (ICT) has an important role to play to leap frog the banking sector in the delivery of quality and timely financial services to the remotest areas with significant efficiencies.

As briefly touched upon in the previous section, the problem we are trying to address is the wide gap that exists in the availability of financial services to poor (rural or urban slum) population. It is important to address both demand and supply side of the problem. As far as demand side is concerned, following are the notable reasons for the exclusion of large number of rural population from the formal banking sector:
• Lack of collateral security
• Lack of banking habits and credit culture
• The loan amount is too small to catch the attention of profit oriented banks
• Due to small loan amount and high number of accounts, the transaction costs is high
• Lack of infrastructure and mechanisms to monitor and evaluate the cash flows
• Lack of credit history for the low income clients
• Presence of information asymmetry and lack of data base
• Physical constraints for reaching out to some of the remotest part of India
• Human resource related constraints in terms of lack of manpower and expertise

Further, the supply side reasons for this exclusion are as follows:
• High transaction costs at client (borrower) level such as travel costs, incidental expenses
• Lack of awareness mainly due to illiteracy
• Very small amounts – not encouraged by formal banks
• Efforts and resource involvement in documentation and procedures in the formal system for serving big number of clients
• Prior experience of rejection by the formal banks

The above mentioned reasons are very general and applicable to most of the rural parts in India. These reasons are also complemented by other factors influenced by local condition, caste structure etc.