What Works: Scaling Microfinance With the Remote Transaction System Uganda

Executive Summary

In 2002, Hewlett Packard formed a partnership with a number of microfinance networks (MFIs) and commercial partners working in related areas to explore how technology could be used effectively to help scale microfinance. It was apparent that the microfinance industry faced major issues, including the lack of industry-wide standardisation, high transaction costs, and the inability to reach out to rural areas. These challenges have limited the availability of microfinance services to about 70 million clients out of a potential market estimated at 500 million and an even larger “unbanked” population of more than a billion worldwide. The partnership—called the Micro development Finance Team (MFT)—was quite successful at mobilising resources from the United States Agency for International Development, leading academic institutions, and engaging a large management consulting firm. What emerged from the effort was a combination of technology and business processes, the Remote Transaction System (RTS), that supports both group and individual lending, online and batch offline processing, and back office synchronisation.

This solution was intended to become an industry standard, help MFI reach isolated clients cost effectively, and enable microfinance to reach a new stage of development. The RTS is based on the use of sturdy hand-held devices that can communicate over GSM cellular networks. Combined with the use of smart cards given out to clients and microfinance agents, the system allows MFI agents to collect crucial financial data in the field and subsequently to transfer the data directly into the MFIs’ computerised financial management systems. The RTS eliminates the need to prepare, transport, and enter hand-written reports, reducing costs for rural operations. In addition, electronic collection of data raises client confidence in MFIs, as well as reducing fraud. Finally, the system, if used by the industry as a whole, might allow MFIs to take full advantage of latent synergies that exist among geographically and financially diverse institutions.

With prototype technology, the MFT implemented a pilot of the system in Uganda in partnership with three MFIs active in this country. The three MFIs were Uganda Microfinance Union (UMU), a cooperating partner of ACCION; the Foundation for International Community Assistance (FINCA), and the Foundation for Credit Community Assistance (FOCCAS), a collaborating partner of Freedom from Hunger. The difference in size and modus operandi for each MFI has allowed the MFT to assess the value of RTS against a range of practices currently in use in the microfinance industry, including group, branch, and individual clients. This assessment showed that the most commercially-oriented of the three MFIs gained the most value from the technology, in large part because they were most willing to re-engineer their business model to take advantage of the RTS. The advantages of the system as implemented included automation of transactions, reduced client time and travel, more frequent payments, reduced cash management risk, and avoidance of costs for “brick and mortar” branches.

The MFT is experimenting with improved MFI business models in Uganda. In addition, the MFT has handed over its intellectual property rights to the RTS to a new organisation, Sevak Solutions, whose task will be to evolve licensing procedures and a broader business strategy for disseminating the RTS platform to microfinance institutions both in Uganda and throughout the developing world.

Because the RTS Uganda pilot was of a relatively short duration and rolled out to only hundreds of clients, it was not able to definitively prove the value of the technology at scale. Financial analysis provides evidence of benefit to loan clients, especially in rural areas that would otherwise go unserved. However, the solution was only tested with existing clients and did not include previously unserved customers. The analysis also provided evidence of high value to the agents and MFIs under some business models. Intangible benefits were also perceived, but difficult to measure. In addition, the MFT demonstrated the advantages of non-traditional partnerships among non-governmental organisations, for- profit groups, and development agencies. If the potential for enabling remote transactions, expanding services into rural areas, and altering business practices can be achieved, then the RTS could potentially have very significant developmental impact.

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