Technological Innovation for Credit Unions and Microfinance Institutions in Africa Page 1

Technological Innovation

for Credit Unions and

Microfinance Institutions

in Africa Empowering Credit Unions and MFIs in

Africa through Technological Innovation

Technological Innovation for Credit Unions and Microfinance Institutions in Africa Page 2

Africa hosts the 3rd highest number of Credit Unions

at 20,4221. With a membership of 18.8 million, loan

asset base of $6.4 billion and penetration of 7%,

Africa presents a great opportunity for banks to tap

into; especially for the likes of Credit Unions and

Microfinance Institutions2.

Known as the land of rise of disrupters in financial

services3, the continent of developing economies,

Africa has welcomed the change brought by

technology and innovation in the lives of their

people. A large portion of the banking market in

Africa is still untapped, fueling the way ahead for

various changes in the manner the financial

institutions do business there.

This paper throws light on how technological

innovation can empower the financial institutions in

Africa (majorly Credit Unions and Microfinance

Institutions) in reaching out to major section of

population and to stay relevant and competitive in

the market while growing their businesses.

1 WOCCU Statistical Report -

http://www.woccu.org/publications/statreport 2 Penetration rate is calculated by dividing the total number of

reported credit union members by the economically active

population of the region (age 15–64 years old). 3 The future shape of financial services in Africa,

PriceWaterCoopers, 2015

Avenues for potential growth for

Credit Unions and Microfinance

Institutions in Africa

Connectivity with customers

Being an unexplored market, Africa is a treasure

trove for financial institutions for getting a large

customer base. This is quite a challenge in itself as

the current penetration levels of financial

institutions, especially Credit Unions or Microfinance

Institutions are very low.

With respect to MFIs in Africa, current market

penetration among low income individuals is less

than 15% for savers and is even lower for

borrowers4. In case of Credit Unions, Kenya, which

continues to be the largest contributor with $4.3

billion in loans and 5.1 million members, has been

barely 20% penetrated through its SACCOs (Savings

and Credit Cooperatives)5.

Improve Operational efficiencies

Another major business challenge / opportunity

prevalent in African financial sector is operational in

nature. Various financial institutions, especially

Credit Unions and Microfinance Institutions have the

trouble of maintaining business operations that are

effective and efficient in nature.

Sub Saharan Africa continues to have by far the

highest expenses worldwide in Microfinance sector

due to operating expenses of 19%, compared to the

global levels of 14%6. In case of Credit Unions, taking

Kenya as an example (Credit Unions are referred

here as SACCOs, Savings and Credit Cooperatives),

the operating expenses were as high as 34.6% with

respect to the total income (as of 2013)7.

4 Microfinance Status Report 2014, Atikus 5 WOCCU Statistical Report -

http://www.woccu.org/publications/statreport 6 MIX Microfinance World: Sub-Saharan Africa Microfinance

Analysis and Benchmarking Report 2010 7 Sacco Supervision Annual Report 2013

With a membership of 18.8 million, loan asset

base of $6.4 billion and penetration of 7%, Africa presents a great opportunity for banks to tap into; especially for the likes of Credit

Unions and MFIs.

Technological Innovation for Credit Unions and Microfinance Institutions in Africa Page 3

These high operating expenses are due to high staff

expenses common in markets where skilled labour is

scarce, high transaction costs of reaching rural areas,

and high costs of managing savings. Additionally, the

consistently high and increasing risk may lead to high

operating costs as staff spend additional time

following up on outstanding loans.

Move from Legacy to Modern Systems

One more major business opportunity in African

financial sector is the usage of systems by the

financial institutions. Majority of the fund

misappropriation and inefficiencies in operations are

due to usage of manual processes and lack of

systems in financial institutions. Sometimes even the

existing systems need to be replaced as they are not

well-defined to address the business needs of the

financial institutions.

Even if the financial institutions are able to overcome

all of these obstacles and try to obtain a good

system, they lack the large budgets possessed by big

banks to buy one of these. There are a few financial

institutions (CFIs and MFIs of South Africa) that use

legacy systems8, which are facing challenges of

reporting, compliance, operational efficiency,

scalability and not much awareness on the

technological front.

Need for Technological Innovation The need of the hour for Financial Institutions in

Africa is to find a one-stop solution that can tackle all

these challenges and make financial services,

especially lending services, affordable and available

for the African market. This is where the need of

innovation in Technology plays a major role.

8 “The Microfinance Review 2013: From Microfinance to

Financial Inclusion” – a review of the South African

microfinance sector trends, successes, challenges and policy

issues, University of Pretoria.

Innovation through Mobile based banking

solutions

Mobile based banking solutions are able to address

majorly the challenge of connecting with customers.

With less infrastructure and associated costs, these

services are availed in the hands of the customers

easily.

Shining example is Kenya, where active bank

accounts have grown more than fourfold in a span of

5 years (2007 – 2012) with the aid of M-Pesa. M-

Pesa, a mobile banking service, changed the way

banking transactions worked, creating 17 million

mobile money accounts in the process and the

transactions through them exceeded $375 million

each month (in 2013) and accounted for up to 20%

of nation’s GDP9.

The example of NMB mobile in Tanzania illustrates

the potential that mobile banking holds as a low-cost

distribution channel. Initiated in mid-2009, this

service has already been adopted by more than

400,000 of some 1.2 million account holders by early

2011, and has significantly reduced waiting times at

branches and ATMs. Based on the SMS-like USSD

technology that works on all mobile phones,

registration has been made as easy as possible for

9 ICTs for Financial Services in Africa, “eTransform Africa: The

Transformational Use of ICTs in Africa”, 2012

Technological Innovation for Credit Unions and Microfinance Institutions in Africa Page 4

clients, who can instantly sign-up via a short-code

text message.10

Innovation through Shared Services

Innovation through shared services could easily

address the challenge of enabling the financial

institutions to move to modern systems.

According to Deloitte, Shared Services operates as

an internal customer service business. It typically

charges the business units for services provided and

uses service level agreements as a contractual

arrangement which specifies cost, time and quality

performance measures. Business unit management

is, therefore, able to focus a greater portion of its

time on external customers and issues of strategic

importance11.

Sharing of CRM, Financial solutions or even IT

infrastructure instead of investing individually

reduces the costs and helps the financial institutions

in achieving their business needs.

12 Through these shared services, technological

innovation can be realized which leads to –

10 Delivering Financial Services in Sub-Saharan Africa, Roland

Berger, Strategy Consultants.

11 Shared Services Handbook – Hit the Road, Deloitte, 2011.

Increased Efficiency

Best process practices

Economies of scale

Lower labour costs

Maximum ROI from technology investment

Standardization

Increased Effectiveness

Enhance customer service focus through

SLAs and service costing.

Leveraging specialist skills

Financial institutions to focus on their

business priorities

Improved control environment

Easier data warehousing

Innovation through adopting Cloud

Cloud based solution model is one of the most

sought after and the game changers in the

information technology industry today. A modern

cloud based enterprise solution not only addresses

the operational inefficiency issues, but also takes

care of resolving the challenge of moving away from

legacy systems and adopting modern systems.

By adopting cloud based enterprise solutions, the

need of upfront investment in infrastructure

diminishes and brings out affordable and effective

systems within the reach of financial institutions

which have lesser paying capabilities.

According to ‘Cloud and Hosting: Trends, Priorities,

and Insights in Kenya 2013 Survey Results’ report by

IT market intelligence firm International Data

Corporation (IDC), one-third of the enterprises in

Kenya are looking forward to have cloud

implementations or cloud infrastructure expansions

12 IT Shared Services Center – IT SSC - A powerful organization

to achieve cost savings, process efficiency and even business

transformation, Capgemini Consulting

Technological Innovation for Credit Unions and Microfinance Institutions in Africa Page 5

as a key priority.13 Supporting this trend, a Nigerian

based consumer finance company has migrated to

cloud platform recently and has witnessed the shift

in customers towards digital banking. Also, newly

started financial service providers in Nigeria, Kenya

and Angola have adopted cloud banking solutions14

to launch their businesses, emphasizing that cloud is

here to stay.

Adopting technology – the way ahead

for Financial Institutions in Africa There is a need for technological adoption for

financial institutions like Credit Unions and

Microfinance Institutions. This need is stemmed out

of the fact that these institutions are facing major

challenges in the African market and are in search for

a solution that could resolve them. Mobility, Shared

Services and Cloud – these three key technological

means can help Credit Unions and Microfinance

Institutions to solve their objective.

Mobility has already proven its mettle in the market

through the M-Pesa revolution in Kenya and is here

to stay. Shared services and cloud business models

are the future proof mechanisms to deliver

continuous business agility for MFIs and Credit

Unions.

13 http://www.itnewsafrica.com/2014/04/cloud-a-priority-for-

kenyan-enterprises/

14 http://www.prnewswire.com/news-releases/three-african-

financial-startups-launch-on-mambu-259039621.html

Technological Innovation for Credit Unions and Microfinance Institutions in Africa Page 6

Contact Details

Arup Das Lending Product Head (P&L Management), Nucleus Software Arup is the Vice President and Lending Product Head (P&L Management) at

Nucleus Software where he is responsible to lead the flagship product to the

next level of global leadership. Before joining Nucleus, he has played various

roles in strategy and product management with leading companies like CISCO,

IPValue and Mphasis.

Author e-mail id: arup.das@nucleussoftware.com

Shivendu Shekhar Mishra Lending Product Manager, Nucleus Software

Shivendu is a Product Manager with Nucleus in Noida office. Shivendu is an

MBA from Great Lakes Institute of Management with dual majors in Marketing

and IT/Operations. His undergraduate degree is Bachelor’s in Computer

Engineering.

Before joining Nucleus, Shivendu worked in Product Development &

Management, Business Consulting roles with companies like Infosys, CSC and

ZS Associates. As Product Manager, Shivendu’s major focus is to understand

latest business needs and opportunities in Lending market. This is in line with

Nucleus’ philosophy of being driven by strong customer insights and

innovation.

Author e-mail id: shivendu.mishra@nucleussoftware.com

Josyula Krishna Lending Product Analyst, Nucleus Software

Krishna is a Product Analyst at Nucleus Software in the Product Management

Team of its Enterprise Lending Applications. Krishna is a PGDM holder from

IIM Rohtak with dual majors in Finance and Marketing. He pursued Bachelors

in Information Technology.

Prior to post graduation, he worked with Fiserv India Private Limited as a

Software Engineer in the Banking & Financial Services domain. As Product

Analyst, Krishna is currently responsible for Market research, Competitive

Analysis, Product Marketing and Product Requirement analysis to help Nucleus

develop new business and market models to drive next level of growth for its

Lending products.

Author e-mail id: josyula.krishna@nucleussoftware.com