IBM sees money in microfinancing

Bridget van Kralingen, London-based GM for Northeast Europe, Middle East and Africa at IBM Global Business Services, says the initiative came out of an IBM "innovation jam" which all staff members could collaborate on what areas IBM could invest in to make a difference in the world.

One of the issues that came up in the finance and commerce stream was how to take financial services to the unbanked, of whom there are an estimated four billion worldwide. These people, who live mainly in developing countries, usually keep their money in cash form or in livestock or housing, because either they don`t trust banks in terms of security, or banking services are unaffordable. Because of the costs involved, banks themselves find it hard to scale to provide services to this sector.

"They have incredible difficulty getting credit, where you have various loan organisations, etc. that sometimes charge over 100% interest, so it becomes absolutely impoverishing to go and seek credit," Van Kralingen says.

She says microfinance not only meets this need, but it has had the additional effect of lifting people above the poverty line, mainly because 80% of recipients of microloans are women who use the funding to start small businesses.

Van Kralingen says there were no standardised products ready-made for microfinance organisations. "There are a couple of custom-built, home-built ones that microfinance organisations are running around the world, there are a couple of packages that were kind of tweaked out of core banking systems. But the needs of microfinance are different from the needs of core banking," she says.

The Grameen Foundation had started to build an open source microfinance software platform, called Mifos, which could be accessed free on the Internet. "We went into strategic partnership with them at the beginning of last year and we invested about $3 million last year in helping them make this product robust," Van Kralingen says. IBM continues to work with the foundation to make the product able to be used by multiple clients simultaneously in a hub.

Coupled with this, the group has been working to address the microfinance institutions` inability to grow because of lack of information. They do not have the infrastructure to be able to build a client history or engage in portfolio management, for example. Also, as the organisations increasingly need to use the services of banks, there is a need for transparency, security and a good set of books.

To deal with this, IBM has been creating a hub with all the technology and support that allows the microfinance organisations to effectively run a back office. "Nothing exists like that at the moment, so what we have been doing over the past year, as well as this investment in the Mifos product, is putting the basics for the hub together."

The first wave of the rollout of these hubs will be in Indonesia, Latin America and Africa. She says Africa, especially SA, has been the toughest challenge because there is a relatively low penetration of microfinance organisations. In SA, IBM, together with Care, will fund and build a hub. The group has begun due diligence work with microfinance organisations and has started to reach out to the regulator.

"The investment will be quite large, which will be very good for SA, I hope. I can tell you that IBM this year will put about $5 million into it - not all of it into SA, but into banking the unbanked."

She admits that the project is not only about altruism, as it has also had to make business sense for IBM in the long run. The group believes that if microfinance institutions grow, they will potentially become clients. As they become more sophisticated, they will need analytics, software and services, and customer relationship management tools, for example. She says IBM is also committed to these countries, and the initiative will also help the group with its standing in the countries.