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