CreditSMS: The Future of Microfinance (www.creditsms.org)
The Challenge
In 2005, the World Bank estimated that less than 5% of world demand for microfinance was being met. Compounded with the fact that only 26% of the global population is connected to formal banking institutions, this makes for both a tremendous market failure and opportunity. Microfinance today is a multi-billion dollar institution, providing upward mobility for 'bottom of the pyramid' (BOP) entrepreneurs in addition to creating market access where it otherwise would not exist. One of the main obstacles to the expansion of microfinance, however, is the high interest rate microfinance institutions (MFIs) charge on loans: In 2006, CGAP estimated the average interest rate to be 28%, with standard rates varying from 25% to 100%. Although MFI interest rates are a function of four primary costs (i.e. cost of money, cost of loan default, administrative cost, and profit), Gonzalez Rosenberg of CGAP concludes that: "Administrative costs are the single highest contributor to interest rates." Transactions costs - the costs of getting loans to and regular repayments from individuals and loan groups - comprise the great majority of administrative costs and grow increasingly prohibitive in more rural and disconnected markets.
CreditSMS - A Simple and Low-Cost Solution
CreditSMS converges SMS-aggregating software and mobile commerce systems to provide an efficient and accessible platform for MFIs to deliver and track loans via Short Message Service (SMS). Since CreditSMS utilizes the GSM telephone network, implementing MFIs need neither an Internet connection nor a permanent office to conduct business. Further, MFIs that utilize alternative power sources such as solar panels will be able to operate 'off the grid' and thus gain a comparative advantage in rural and underserved areas.
By allowing microloan officers to receive weekly loan repayments via SMS instead of spending time and money to travel to group meetings, MFIs will spend significantly less on fuel and have more time to pursue and manage a larger loan portfolio. Taken together, these dual increases in revenue will allow MFIs to lower their interest rates commensurate with the amount of money saved, thereby creating a more competitive loan environment and encouraging greater entry from rural populations.
The hardware necessary to run CreditSMS includes a laptop computer, one cell phone for every microloan officer and recipient, and one solar panel for each cell phone. With low-energy LINUX-based netbooks available for less than US$400.00, used cell phones available for US$10.00, and reliable solar panels available for as little as US$6.50, it is feasible for a small MFI to buy all the inputs necessary to become self-sufficient for approximately US$1,000.00. CreditSMS software patches are being developed to run on both the FrontlineSMS and RapidSMS platforms, which are free, open-source, and accessible for all implementers. In order for CreditSMS to operate successfully, it must be implemented in areas in which mobile money transfer systems and networks of cash-in/cash-out agents already exist (e.g. GCASH in the Philippines, M-PESA in Kenya, Mobile Money in Uganda, PayMate in India, etc.).
In December 2009, CreditSMS will launch several pilots throughout Uganda and the Democratic Republic of Congo (DRC). Additional pilot requests have been submitted for Kenya, Sudan, and Sierra Leone. Uganda and DRC have 87% and 66% rural populations respectively, constituting a nascent market of as many as 76 million potential clients and consumers. By enabling MFIs to reach and meet the demands of this market, CreditSMS will facilitate a form of 'bubble up' development whereby the income of microloan recipients will increase and the price of newly-available goods and services will trend toward market equilibrium. All pilot results will be made free and accessible via CreditSMS.org as they become available.
Major Features of CreditSMS Software
CreditSMS will provide all the services necessary for an MFI to provide both financial and social intermediation to its members. These shall include:
Credit Distribution & Tracking -- CreditSMS will track whatever form of transaction the implementing MFI chooses, further allowing MFIs to create and integrate programs with unique parameters. The CreditSMS database will automatically update incoming SMS information to the profile of the client in question. The database will track client name, contact information, loan history, loan type, date of issuance, interest rate, repayment schedule, savings, type of insurance, insurance premium, insurance payout, etc.
Insurance Services -- MFIs will have the option to integrate unique insurance programs into the CreditSMS database. A separate tab will delineate Insurance from Credit and Savings.
Savings Deposits & Withdrawals -- If a client overpays or wishes to hold their savings with the MFI in question, the balance will be automatically credited to that member's profile. MFIs wishing to pay interest on savings will have the option to do so at a rate of their choosing. Current savings will be shown in a simple box under the client's name on the main profile page, with the option to expand into a more detailed history of deposits, withdrawals, and interest paid.
CreditSMS Board of Advisers
Ken Banks, Founder of Kiwanja.net and FrontlineSMS
Josh Nesbit, Co-Founder and Executive Director of FrontlineSMS: Medic
Contact: Benjamin Lyon, Executive Director CreditSMS@gmail.com
paconmiller said 7 months ago
Great, well thought out and planned project. Excellent use of appropriate technology to meet an important need. This is the best idea I've seen on the site so far.
Paul
CreditSMS said 7 months ago
The CreditSMS team is currently writing a Five-Year Scope Paper. Once finished, we will release the paper as an addendum to this post.
Feel free to contact us directly at CreditSMS@gmail.com to offer comments, suggestions, challenges, etc. Thank you, and please vote for our idea!
CreditSMS said 7 months ago
Thanks to an idea proposed by Prince at The Foundation for Democracy in Africa, we will give implementing MFIs the option to use one cell phone per loan group instead of one cell phone for every loan recipient. Loan group leaders can keep regularly-audited books on location and send group loan repayments in one lump sum. This would reduce both the cost of purchasing cell phones and additional airtime.
Also, we are setting up a system to distribute and track airtime in addition to money. Doing so will allow CreditSMS to be implemented in places that do not have a mobile-to-mobile money transfer system. Loaning airtime will require a setup comparable to the Village Phone Operators system used by both Grameen Bank and MTN.
Ramona said 7 months ago
Great idea! Did you try already to get into contact with http://www.kiva.org? Sounds to me like your idea could be very helpful for them!
CreditSMS said 6 months ago
Below is an article written for ProjectDiaspora.org (also available via the CreditSMS blog):
"Increasing Revenue and Impact through Technology"
Aaron Ewedafe wakes up every morning at least one hour before the sun rises. Donning his satchel full of client records and repayment schedules, he hails the nearest okada driver and races into the surrounding countryside to begin a long day of loan group meetings. The trip from headquarters in Oshogbo to the village of Ojudo and back can take all day. Aaron rarely makes it home before nightfall. Altogether, Aaron spends 112 hours and 5,000 naira a week to manage 350 microloan recipients. His profit is negligible.
Although Aaron is fictional, his story is not: representatives of microfinance institutions (MFIs) spend countless hours and energies to reach loan recipients to collect their repayments. In the process, they lose valuable time and money, constraining their potential for portfolio growth and forcing them to pass costs on to clients in the form of interest. In 2006 CGAP estimated the average interest rate charged by MFIs to be 28%, with standard rates varying from 25% to 100%.
Transportation costs constitute the single greatest contributor to high interest. Where potential clients are scattered and infrastructure is weak, the costs of issuing credit are either exorbitant or prohibitive. But what if loan officers could cut transportation costs in half? What if they could simply receive scheduled loan repayments via text message?
They can with CreditSMS.
CreditSMS was developed to create a standard and accessible platform for MFIs to integrate mobile money and airtime transfer systems into their business models. By converging text message management software and local money and airtime transfer systems like M-PESA, Mobile Money, or Me2U, CreditSMS allows loan officers to distribute and manage credit over broad areas from their computer.
The benefits of integrating CreditSMS into the MFI business model are twofold. First, loan officers like Aaron will save hundreds of hours a year in travel time, allowing them to focus their energies on building and managing a larger client portfolio. In turn, MFIs will earn higher net revenues. Second, MFIs will be able to lower interest rates commensurate with saved transportation costs. Lower interest rates will reduce barriers to entry and thus encourage higher participation from bottom of the pyramid (BOP) entrepreneurs. More simply, CreditSMS enables MFIs to pull higher revenue while simultaneously pushing down the cost of credit.
To learn more about CreditSMS and our upcoming pilot programs across Africa, please visit our website (www.creditsms.org) or contact our office at info@creditsms.org. We are happy to accommodate international callers and are available via Skype (username: CreditSMS).
Michael J Starks said 6 months ago
Great idea! M-Pesa in Kenya is easy to use and affordable...and nearly every Kenyan, it seems, understands cell phone technology and sms! Will be interesting to see how/if this works in extremely rural communities and countries that don't support sms money transfers. Good luck.
thk2c said 6 months ago
Great project and great idea!!!!!!!!!
Hannbaykeeper said 6 months ago
Great idea..but we are talking about Africa where 85% of the population is rural and have no access to computers...The implementation of this project will be very difficult!
Cheers
Mensah said 5 months ago
Great Idea, but would it work Africa?
Maybe only in some parts of Africa........
sandyb said 5 months ago
I like the idea of reducing transaction costs. However, what education and support will be provided to loan recipients - especially first timers - with regard to business and money management practices? Often the group payment meetings provide this opportunity, which can reduce default rates. I would like to hear your approach.
FIONA said 5 months ago
great idea.
what you need to do is seriously market it especially for the rural communities. my impression is that they would rather line up in a bank than use for instance the atm facilities