Microfinance is facing a repayment crisis in a few emerging economies and the CGAP blog recently identified weak information systems play a major role in deteriorating microcredit portfolios. According to the post, Management Information Systems (MIS) were unable to keep up with the rapid growth of the microfinance sector (i.e. loan portfolios and its contribution to economic growth) in these countries (Morocco, Pakistan, Nicaragua, and Bosnia and Herzegovina) which resulted in a failure to check:

Lax credit policies and procedures that allowed loans to high-risk clients (a microfinance credit bureau may also help)

Unnecessary and high-priced microloan products (a dangerous trend in microfinance)

Poor internal control and audit procedures (e.g. to check trends in defaults and multiple borrowing status)

Poor delinquency/risk management (read about risks in mobile banking)

Most MFIs are semi-formal, such as NGOs or donor agencies, and they use manual book-keeping or go only so far as to use MS Excel. This puts them at greater risk because information asymmetry is detrimental in the microfinance sector.

2 reasons why MIS fail to perform adequately for microfinance institutions (MFIs)

• Poor design of MIS: Many software programmers fail to understand the unique needs, organizational structure (teamwork versus individual work), information flows and prospects of microfinance providers, and instead ‘focus on technical details’ of the MIS that make the system look impressive but limits its utility and potential.

• Irrelevant structure of MIS: Some microfinance providers operate in a centralized manner and need an information hub to process all information at one place. An example of this would be the application of an ASP model in microfinance (many MFIs collaborate with one mobile network operator to offer services to the masses). Other microfinance providers have a decentralized structure and need local processing capabilities of their MIS. An example is an MFI with several branches in dispersed and remote locations.

Choosing the right MIS for your microfinance institution

Several MFIs prefer to buy off-the-shelf MIS products, such as Mifo, Octopus, COBIS, eMerge, CUMIS Plus, Loan Performer, and SIEM. The alternative is to create in-house information systems that are highly customized, unlike ready-made systems. However, customization comes at a cost, and therefore new and small MFIs prefer to buy standardized products which are relatively less expensive.

Investment in information systems can lead to more funding opportunities, yet despite the significant benefits delivered by an MIS, many MFIs prefer to keep things simple because they don’t have the sufficient funds to buy high-priced information systems, or because they simply don’t feel the need to switch to an automated system. In either case, the lack of organized and timely information will hinder their growth, as well as the performance of their social and financial objectives.