Chapter 28 ICT Infrastructure Framework for Microfinance Institutions and Banks in Pakistan: An Optimized Approach

Sadiq Shahbaz Ali

Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Pakistan

M. N. A. Khan

Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Pakistan

ABSTRACT

Information and communication technology (ICT) can be termed as a reagent for the microfinance sector.

1. INTRODUCTION

The ICT infrastructure framework for microfi­nance institutions can be seen in two perspec- tives-global and local.

1.1. Global Perspective

ICT is an enabler and catalyst of economic and social development in the third-world nations

DOI: 10.4018∕978-1-4666-6268-1.ch028

(Dewan & Riggins, 2005). At the global level, United Nations (UN) and the World Bank are consorting with government and non-government institutions of the less resourceful and develop­ing countries to promote ICT with the target of bringing them up to a certain conventional level in technology by making the requisite grant funds available to promote economic development (Kauffman & Rigging, 2010). This objective is perceived in the United Nation’s commitment towards the global development. One of UN’s goals is to create a harmonized global platform for development (Kauffman & Rigging, 2010).

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Microfinance services have emerged as an effective and responsive mechanism for the eco­nomic development in the last couple of decades. Microfinance can be defined as “the availability of financial services to unbanked or poor or lower income clients or lesser privileged sector of the society” (Ledgerwood, 2000). Microfinance in­stitutions give small loans to such clients who are not being provided any services from conventional sector and are willing to opt it for setting up their own business. This sector provides the services like loans, savings mobilization, remittance, in­surance and capacity building for business setup. The Nobel peace prize laureate and the founder of Grameen Foundation brought the industry into limelight. There are about four billion unbanked people around the world which is more than two third of the population of low and middle income developing countries around the world (2010). Conventional financial institutions such as commercial bank are still unable to reach poor population, because of high cost for constructing and sustaining the branch network.

Microfinance Providers (MFPs) i.e., microfi­nance institutions (MFIs) and microfinance banks (MFBs) are considered as the best apparatus for alleviating poverty, as it helps reduce risk and in­crease income of the poor household. Several MFIs were converted into the full-fledged microfinance banks over a period of time. This transition has never been easy for such institutions to become a regulated b ank under the supervision of the regula­tory body of that country. The conventional banks are also looking into the feasibility to venture into this market as well. These types of conventional players are entering into the microfinance sector with diverse ICT background and facilities.

ICT is being stimulated as a technological instrument to help MFIs being placed at a better position in a modest environment.

1.2. Local Perspective (Pakistan)

The microfinance is a specific sector within the banking industry that functions through the provisions set out in the microfinance ordinance approved by the State Bank of Pakistan. The indus­try is focused to serve the specific impoverished segment of the society which is un-served by the commercial banking. This sector provides the services like loans, savings mobilization, remit­tance, insurance and capacity building of clients for business setup. The conventional banking has flourished quite a lot in Pakistan from the technological aspects covering core banking so­lutions, communication and infrastructure in the last decade or so. Usually, the conventional banks are provided with the deep pockets to make huge investments in the technology area, but this is not the case of the microfinance banks.

The concept of microfinance is relatively new and emerging in Pakistan. The State Bank of Pakistan states its mission in this regard as “Transformation of microfinance into a dynamic and integrated industry through the provision of services to unbanked population within a regu­latory and governance framework” (2011). The industry has its own challenges and issues, which are of varied nature and quite different from the conventional banking industry. The good aspect is that it is provided with certain platform/forums like Financial Inclusion Program (www.sbp.org. pk) and Pakistan Microfinance Network (http:// www.microfinanceconnect.info) to assist in the technological areas, so that it helps the industry in a better way. Those forums help the microfinance banks and institutions to build their capacity by sharing the mutual experiences in an organized manner. The innovation in a technological area with coordination to business addresses all these challenges in a better way.

Pakistan is the fifth largest country in terms of using mobile phone services. There are around 95 million mobile users, including the remote mountainous areas (like Gilgit, Baltistan) and there are 26 million banking accounts within the country which indicate inherent potential for mobile banking in Pakistan (2010). The prominent MFIs working in Pakistan are (Ahmed, 2006):

• Khushali Bank;

• Kashf Microfinance Bank;

• NRSP Microfinance Bank;

• Bank of Khyber;

• The First Microfinance Bank Ltd.;

• Orangi Pilot Project (OPP);

• Sungi development Foundation;

• Taraqee Foundation MFI;

• Thardeep MFI;

• Rozgar Microfinance Bank;

• Tameer Microfinance Bank;

• Asasa MFI;

• Pak Oman Microfinance Bank;

• Waseela Microfinance Bank.

To expand financial system access and usage, the innovation in the institutional processes and technology is a requisite program to opt for. To reduce the capital expenditure cost, the microfi­nance institutions are moving towards the adoption of latest technologies like virtualization, cloud computing, outsourcing model and managed services, as this approach requires less upfront investment for them.

2. LITERATURE REVIEW

Ahmed (2006) discussed the importance of ICT for microfinance institutions and highlighted the difficulties in getting the right technology because of certain issues like human-resource skills, suit­able core banking application, business process diversity, geographical outreach, vendor capacity and higher cost of solutions. The author presented a strategy comprising a) strong IT department, b) short term Core Microfinance Application, and c) long term Core Microfinance Application to address all the areas of business, including the alternate delivery channels. The research focus in this area is on the importance of the Core Mi­crofinance Application which is a backbone of any institution for all kinds of transactional flow. The right selection of the solution by keeping in mind the future vision of the organization and cost-benefit analysis could place an organization in a better position to go on with the market pace.

Robert et al. (2010) identify the challenges faced by the microfinance institutions as: ef­ficiency in operations, risk mitigation, financial sustainability and growth.

Malia et al. (2011) examine factors that positively influence users to adopt latest bank­ing services, which are technology-driven, i.e., Internet banking, phone banking and auto-teller machine (ATM). Such an approach necessitates a technology acceptance model to support the usage of these services by the customers due to factors like trust, perceived ease of usage, reliable con­nectivity and best service quality. These services are provided with better quality, and customers can rely on them based on their own convenience. The technology has particular leverage to the banking sector for swift and reliable execution of all types of transactions.

Nobert et al. (2011) provide the ICT roadmap for the future based on; user access, availability of ICT services, user expectations and future projects. The roadmap basically guides the development of such applications and services which can serve the current needs as well as the forthcoming expecta­tions to some extent. However, the applications should be developed keeping in view of the scal­ability, usability and flexibility aspects in mind. Contrary to that, such applications would not be able to keep up the pace of business opportunities and development.

Victor etal. (2012) recommend a service-based Mobile Collection System in order to establish a better system with no redundancy, lower error probability and lesser fraud rate. The system shows that not all of dependable attributes are satisfied to the same degree. Reliability, confidentiality and safety have the highest degree level; availability and integrity share the medium degree level; and maintainability has the lowest degree level. So, using the mobile technology could add a value to it and provide a convenience to the customer to avoid the commuting time and cost required to physically visit the bank branch.

Parikh (2006) discusses three important aspects faced by the rural microfinance service providers, which are: remote clients data exchange, data pro­cessing for the institutional and the payment system to distant rural areas. The abovementioned three challenges can be amicably addressed to a great extent through adopting the following procedures:

• The usage of handheld technologies/device to collect the data;

• Provision of a strong microfinance bank­ing application for centralized and quick processing;

• Introducing the electronic banking, i.e., ATM for collection and delivery.

The benefits achieved from the introduction of these services are far-reaching and can bring long-term sustainability to the sector.

Vikas etal. (2011) observe that mobile penetra­tion, the ease of usage of voice interface and reason­able acceptability of mobile related technologies, all bring us to the convergence of mobility and innovative collaboration technologies that can help in crafting a system for the masses. A system is proposed that uses voice as medium to reach the larger population and crosses the thick layer of illiteracy and establishes an effective interaction with the MFI. This reduces the cost to a consider­able extent without compromising any informa­tion and also enforces the active participation of the illiterate sector of the unbanked population, which in itself is a remarkable achievement. The voice medium is the best medium to approach that segment of the society as a certain kind of transactions can be carried out through it.

Nabila et al. (2010) provided an account of the influence of IT-related technologies over the work efficiency, risk management and customer relationship, which proved to be quite positive. By the efficacious implementation of ICT based ser­vices, the work efficiency along with the customer experience can be enhanced notably. In order to make it more effective, the user awareness level should also be improved.

Eduardo et al. (2008) discussed a particular model of correspondent banking, which created an ICT based business edifice for banks to downscale financial services out ofthe conventional branches such as small retail shops, supermarkets, mobile franchises, drugstores, post offices, and so on. This concept is known as the branchless banking which has revolutionized the banking sector in general and microfinance sector in particular. The upfront cost for the MFI/MFB to set up a branch premise has reduced to a considerable extent and using the other mediums benefited a lot. The writer has also focused upon the use of point of sale machines, ATMs and other handheld devices to do the microfinance-related transaction in the correspondence banking model.

Radhika et al. (2008) explain that the underly­ing principle behind ICT in gaining importance in developmental projects is that it contributes considerably to the accretion in human wellness by enabling economically and socially marginalized sections of the society to exercise their right of choice through enriched community participation. In this context, the authors present the concept of digital ecosystems for using ICT as a means of information delivery to the masses. A digital mechanism describes an ICT enabled network that displays associative and autopoietic proper­ties capable of self-sustenance and of expansion through heightened inclusion and growth.

Saket et al. (2006) explain that credit risk assessment system can be carried out using the mobile technology, and this can be done by send­ing officers into the field to get the approval for processing of micro loans. This approach can reduce the commuting time for the officer to execute such a process in the office.

Parikh (2005) presents a mechanism in which the cell phone camera is used to scan all the documents, which are subsequently transmitted to the central repository for further processing. This mechanism can be used in the developing world to support the existing manual document submission process. This can really benefit the microfinance industry as the loan office can fill the data while in the field and then submit it through the mobile which will be processed accordingly at the central site.

Adeel et al. (2010) elaborate that the tech­nological innovation can be attractive when it is combined with measures to support learning and community building. Outsourcing is one of the better aspects to be used by the MFI/MFB as making huge upfront technological investments are quite expensive. There is enough room to use the ICT for the empowerment and education of customers within the microfinance sector as it would help uplift the standard of life among the masses.

The financial inclusion (Olga et al., 2010) in numerous parts around the world has been made on the basis of technology enabled branchless banking services. This service is increasing the spectrum for the provision of microfinance banking services to the customers near to their doorstep. Not only, the customers are facilitated, but it also reduces the operational expense of the microfinance provider. The technology is instrumental in providing better and cheap access to the customers.

The technology has changed the face of the microfinance sector (Jaijit & Richa, 2007) espe­cially reaching out to the masses and enhancing the scalability and sustainability of it. Rao et al. (2010) examined the impact of a different frame­work on the use of the mobile services and felt the need of having uniformity across the board.

3. KEY FINDINGS

During the literature review, we observed a number of issues and challenges being faced by the micro­finance sector that encompasses both the global as well local perspective. The key challenges viz-a- viz the cited literatures are highlighted in Table 1.

To conduct this research, besides undergoing an extensive literature review, we visited central and regional offices of the different microfinance institutions and banks. From the practitioners’ angle, the participation from the key stakeholders is essential for undertaking any research study. Therefore, in this study, the practitioners were involved by interviewing representatives (through physical visits or over the voice) from Branch Operations, Business, Risk Management and IT departments. The challenges pinpointed by the practitioners help us to formulate an appropriate IT response to overcome these challenges.

The ICT solutions for some of the major areas viz-a-viz the challenges identified during the study are highlighted in Table 2. Table 2 also highlights the suggested tool, techniques and solutions for those challenges.

Table 1. Issues/challenges w.r.t. microfinance sector

Table 2. Solutions (ICT/non-ICT) against issues/challenges*

*(The institutions considered from the practitioners’ angle include: Khushali Bank, Kashf Microfinance Bank, Asasa MFI, The First Microfinance Bank Ltd, NRSP Microfinance Bank - Interviews were conducted either through physical visit or over the voice)

Some of the solutions discussed in Table 2 are being practiced by the microfinance banks and institutions and have been proven to be beneficial to the industry to a considerable extent as they can help make it a more viable, promising and financially sustainable sector.

3. GUIDING PRINCIPLES: PROPOSED ICT FRAMEWORK

The challenge is an opportunity in disguise, which provides a direction for growth, expan­sion, efficiency and sustainability. Based on the academic and practitioners’ angle and keeping in view the challenges and opportunities along with the availability of ICT solutions, we propose an ICT framework for microfinance institutions and banks. This is a logical framework as the components suggested are not only archetypes for a new microfinance operator, but it can also help enhance the overall functional efficiency of an experienced one as well. This will help the institutions to devise their ICT strategy keeping in view the past practices and the new techniques to be adopted. The institutions need not to re-invent the wheel as they can adopt the components in a phase-wise approach as per their own business strategy.

The proposed framework is divided into two major components: IT Management and IT Ser­vices. The “IT Management” component is linked to the management of the overall IT infrastructure covering all the relevant areas while “IT Services” is the area which will provide the specific services which are the need of the business. It will also serve as an enabler of business through the use of IT infrastructure.

The approaches which are best suitable for the microfinance sector (to be adopted) have been mentioned against each component. The proposed approaches are basically the way for managing or monitoring the respective component. Three main approaches have been identified i.e., in-house management (management within the Institute), outsourcing (management by a service providing company) and third-party piggybacking (using the existing infrastructure of any other key player).

3.1. Outsourcing

In this case, the specific part of the IT infrastruc­ture is being taken care of or maintained by an outside specialized company or group having a service level agreement in place for the continued availability of that service for the client (MFI).

3.2. In-House Management

In this case, the specific section of the IT infrastruc­ture is being developed or serviced or maintained by the owner (MFI) itself.

3.3. Third-Party Piggy Backing

In this case, the specific part of the IT infrastruc­ture owned by a third-party company (who is specialized to do it) which is being used by the institution (MFI). In this case, the client needed not to place its own infrastructure instead using that of service providers at a certain cost on an agreed formula.

Table 3 shows the identified ICT domains having their respective components; and the ap­proaches to be adopted in the implementation of those components.

4. COMPONENTS AND ITS ASSOCIATED APPROACH

Table 4 provides a detailed overview about the component together with d its approach that should be adopted for its effective implementation.

A mix and match of these can be adopted for specific type of MFI as it varies from institution to institution. Nowadays, the availability of such vendors/service providers to offer the services are quite good for MFI’s who cannot make such huge upfront investments in the IT domain.

5. USAGE IN LOCAL ENVIRONMENT: A CASE STUDY-BASED DISCUSSION

Based on the above work, we carried out an exercise to check an important aspect of the above-mentioned components, i.e., application software for business operations, which is also called as the Core Microfinance Application. This usage clearly depicts that the local environ­ment is needs to follow the best practices and standard frameworks which are essential to stay

Table 3. ICT framework components with its preferred approaches

Table 4. Descriptive information against the components

competitive in the market. Table 5 highlights the core microfinance applications being used by the different MFIs/MFBs in Pakistan.

This is one of the validations carried out against one of the main components within the ICT framework which shows that the sector in local environment is moving in the right direction for the adoption of such trends, which are expected to produce numerous advantages.

The placement of centralized Core Microfi­nance Application is the backbone of the IT infra­structure as most of the other services can only be opted once they are placed on strong footings. As the institutions that have such components in place can move forward to provide for better services to their customers by using different distribution channels as technology is facilitating the busi­nesses to achieve their objectives.

Table 5. Usage of Core Microfinance Application and its advantages

The proposed ICT logical framework was developed on the basis of data obtained from academic and practitioner resources. The approach against each component is a real driver for those components as it can guide an institution to opt for it as evident from the research. The adoption of right approach is critical as all the remaining things really depend on it. The proposed approach could benefit the organizations in a number of ways as it is extracted from the aforementioned components from certain pertinent angles such as: a) Wider geographical access to customers, b) Low transactional cost, c) Less capital expenditure cost,

d) Better customer relationship and satisfaction,

e) Reduced administrative efforts, and f) Focused approach towards business.

7. CONCLUSION AND FUTURE WORK

This paper focuses on the influence of ICT on different areas of the microfinance sector. We have tried to include the practitioners’ angle from the local microfinance sector into the proposed framework. Thus, this research covers both the angles which are quite aligned with each other and indicate that the local industry in Pakistan is also on the footpath of international market to follow the ICT advancement and its benefits.

ICT has become an enabler to the business for the launch of innovative products and services for the under-served segments of the society. The components along with the specified approach can be taken as an ICT roadmap or guidance tool for the new or experienced microfinance players to give leverage to the business. We have validated one of the components from the local environment, which clearly indicates its direction towards the adoption of centralized microfinance application. Further, it is also suggested that the local market should take the benefit of the ICT practices and approaches being followed glob­ally. These practices are basically facilitating the functioning of these microfinance institutions and banks to enhance their performance in terms of efficiency and business goals.

Based on the above work, a new dimension is available for further work as well i.e., development of a consortium for getting the true benefit of that technological advancement. The need for that consortium is because of high cost technological facilities and resources which is a quite difficult ask for the banks/institutions in the microfinance sector.

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This work was previously published in International Journal of Online Marketing (IJOM), 3(2); edited by Hatem El-Gohary, pages 75-86, copyright 2013 by IGI Publishing (an imprint of IGI Global).

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