MFIs typically provide loans to those who cannot easily obtain them from mainstream banks and often do not require collaterals, while operational costs per loan are high. For political, economic and social considerations, their strategies differ from the lending policies of banks. In many countries, MFIs make group loans with joint liability, and it is peer pressure and mutual insurance among group members that tend to ensure repayment. The challenge that presents itself to MFIs everywhere is how to improve their operational efficiency.
The key lies in automating the origination process, and employing credit information as well as relevant scoring models. Retail banks have long moved from manual processing to sophisticated loan origination systems as well as the use of credit bureau and other information, achieving significant economies of scale along with improved portfolio quality.
In various countries, MFIs, but also other small lenders such as credit unions, or development banks with a mission to support certain economic sectors via on-lending programs through non-bank financial institutions, are offered the possibility of using various kinds of instant decisioning solutions in an outsourced environment, with connectivity to credit bureaus and other data sources. Streamlining operations, standardizing processes, reducing paperwork and speeding up the approval process to increase the number of loans issued, while managing credit risk and improving portfolio quality, all are benefits of such outsourced decision solutions.
Using an outsourced decisioning solution is a highly effective approach to application processing. The solution is designed to evaluate credit applications with a high degree of automation and efficiency. It enables the MFI that uses it to transform its decision process from one that is done manually today to one that is automated and represents the best practices in lending. Thus, the MFI learns to make better credit decisions, improve the quality of its portfolio and grow its portfolio with a higher repayment rate.
Recognizing that MFIs have limited resources and are not in a position to invest in sophisticated banking technologies that are typically installed in the lender’s premises and tailored to the specific needs of the bank, some providers of decisioning services are offering standardized solutions in outsourcing for just a small transaction fee. Equipped only with a PC and access to the internet, without the requirement to make any investment, the MFI can use such a service and pay purely for usage.
It should be noted that instant decisioning solutions are not the exclusive domain of microfinance institutions and developmental banks. Numerous larger lenders in advanced markets have discovered the convenience and cost effectiveness of such systems and are using them successfully.
HOW DOES OUTSOURCING WORK?
Outsourced services are increasingly becoming a viable solution for businesses that want to improve their operations, without the need to invest in expensive IT systems and hiring new staff. The solution is hosted by a technical provider in a secure environment. It is standardized for all users, but can be customized for individual users, if necessary. The solution provider analyzes the guidelines for microfinance lending, for instance provided by the National Bank or other applicable institution in a given country, and embeds these into the standardized solution. In countries where no official published guidelines exist, the provider can analyze the lending practices of a sample among the participating MFIs, and in consultation with the industry group or relevant support organization determine the best-practices lending policies to which the member MFIs should adhere.
The participating MFI accesses the instant decisioning solution through a user interface on a web portal. The loan officer fills in the required data into the screens and then sends a request to the system for processing in order to receive a decision on whether to issue a loan. On the hoster’s side, the data passes through a decision engine equipped with the agreed-upon reject, business and other rules, to arrive at a conclusion. The response usually is a yes, a no, or a referral for additional consideration.
In this context, it is important to evaluate the legal environment regarding personal data. In a world free of regulation, the MFI would simply send the data via internet to the provider, and the provider would return the appropriate decision. In many countries, including Russia and countries in Eastern Europe, this is not so simple. For example, Russian law is very specific about the processing of data, both by the original owner of the data, and by a third party, requiring, in most cases, the consent of the individual for the processing of his or her personal data.
To deal with this complication, the solutions provider can offer different schemas. For example, if the MFI prefers not to send personal data (i.e, no name or date of birth), but rather anonymous other application information, it sends only such application data to the provider and still receives the same decision back. The only drawback of this solution is that it requires the MFI to invest in its own equipment in which to store the personal data of their clients. Nevertheless, for MFIs opting to access credit reports from credit bureau providers, something which is best done on their own behalf, such a solution is by far the simplest option.
On the other hand, small or start-up MFIs with limited resources and no immediate plan to use credit bureau information may choose to send personal data, with the written consent of the borrower, for processing to the provider of the solution and save themselves the expense of investing in servers within their small organization. The data will be stored by the provider of the solution and is available to the MFI at any time. The data is not accessible to any third party.
The solution typically features reject rules (such rules can include negative external information, the age of the applicant, or other factors), business rules (for instance, if the applicant is already a customer and has a fixed income, an otherwise negative evaluation may be overturned), and warning messages in addition to the final evaluation. The system displays online the information that is relevant for the decision so the user does not need to navigate within the information. The recommended decision comes out in real time. For larger MFIs, all elements of the Solution can be flexibly customized: the strategy itself, cut-offs, and application scoring models.
The solution typically features reject rules (such rules can include negative external information, the age of the applicant, or other factors), business rules (for instance, if the applicant is already a customer and has a fixed income, an otherwise negative evaluation may be overturned), and warning messages in addition to the final evaluation. The system displays online the information that is relevant for the decision so the user does not need to navigate within the information. The recommended decision comes out in real time. For larger MFIs, all elements of the Solution can be flexibly customized: the strategy itself, cut-offs, and application scoring models.
MFIs evaluating their options typically ask themselves what would best help them achieve their goals, and what they can afford.
Users of outsourced instant decisioning solutions find that this approach fundamentally changes the way of doing business. Without any further investment, with the help of just a PC and access to internet, they are able to enjoy instant, secure access to their database and the decisioning solution.
Users of outsourced instant decisioning solutions find that this approach fundamentally changes the way of doing business. Without any further investment, with the help of just a PC and access to internet, they are able to enjoy instant, secure access to their database and the decisioning solution.
HOW DO OUTSOURCED INSTANT DECISIONING SOLUTIONS BENEFIT THE MFIS?
The benefits of using solutions in an outsourced environment are numerous and compelling.
Instant decisioning solutions tend to be highly user-friendly and easy to understand. In the simplest case, the use of the solution requires only a PC, with connection to the internet. An MFI never needs to worry about maintaining any systems, as this is ensured by the technical provider. No IT specialists are needed to enable the MFI loan officers to approve loans. The solution is web-based and has a user-friendly interface.
Though simpler, such solutions allow the MFI to operate like sophisticated banks – with the only difference that there are no requirements to make a large upfront investment in such a technology.
Decisioning solutions typically reflect the lending guidelines for the microfinance sector in a given country and enable the MFIs to deal with each customer efficiently, in accordance with the requirements set forth in each category of clients and for each product. To help the MFI analyze the applicant in full, the solution can be configured to connect to public and other data sources available in the market (credit bureaus and other regional databases). It can also display details from each data source. The MFI can choose to access all data sources, or only one or two, depending on the needs in each single case. The solution will make a lending decision based on all available information and the criteria established by the MFI. Thus, a consistent decision process is applied to every application. Judgmental decisions are possible, but these can only be made by authorized users within the MFI, when it is necessary to override the standard process. It is evident that the use of standardized rules would benefit not only the smallest MFIs, but also large institutions with numerous branches across many regions in a large and diverse country such as Russia.
One of the most attractive “side effects” of using an outsourced solution is the fact that the MFI can effortlessly migrate from data storage on paper to electronic data storage. Not only does it reduce the need for office space where paper would be stored, and for staff to handle the paper documents; it also has the advantage that the data is instantaneously available, with the click of the mouse, when the MFI receives new applications from persons who already received loans in the past, or other persons connected to existing or previous customers in various possible ways, for instance as a guarantor.
Last but not least, there are other financial benefits derived from the use of an outsourced solution, not limited to the need for investment, and this includes data security, a key element in the operations of any bank and other lending institution. The fully hosted and managed solution includes secure remote access, data storage, application hosting, backups, antivirus system, intrusion detection, updates and certain other technical support. The hoster ensures that the system is safe from hackers, viruses, malware and spyware with the help of firewalls and other defense mechanisms, but the MFI does not need to invest in this technology on its own. There is no fixed cost associated with the use of the system, and the MFI pays only a transaction fee when a prospective borrower applies for a loan.
