November 13, 2006

Microfinance and open source: natural partners

Author: Tina Gasperson

A Nobel Peace Prize-winning organization has sparked the creation of an open source project to help build technology infrastructures for non-profit microfinance institutions. In developing countries around the world, these institutions loan small amounts of money to women who want to start businesses and create a better life for themselves and their families. The Mifos Software Initiative debuts this week at the Global Micro-Credit Summit in Halifax.

Muhammad Yunus is the founder of the Grameen Bank, the original microfinance institution (MFI). Yunus wanted help the people of Bangladesh rise above the poverty created by famine there in 1974. What he found was that with a loan of just $27, a group of 42 families could make and sell small items in their village, profiting enough to repay the loan and sustain their new business endeavors. With that, the idea of microfinance was born. Today, the Grameen Bank has loaned $5 billion to five million people, mostly women, all over Bangladesh.

Because of the tireless efforts of Yunus and his colleagues, the Norwegian Nobel Committee awarded its 2006 Nobel Peace Prize jointly to Yunus and the Grameen Bank. "Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means," wrote the committee in a press release. "Across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development." Grameen works mostly with women because they typically find it even more difficult than men to be taken seriously by traditional financial institutions. Grameen Bank loans small amounts, usually $200 and under, to individuals in the group. But members hold each other accountable to pay back the loans because if one member defaults, no one in the group is eligible to receive any further loans.

Other MFIs have sprung up around the world, seeking to emulate Grameen's success in lifting up the poor "from below." In 1997, to help accelerate the growth of the microfinance industry, one of Yunus' protégés, Alex Counts, launched the Grameen Foundation, which partners with these MFIs, providing program support in the form of financing strategies, training, outreach initiatives, and IT resources. Most recently, the foundation launched the Mifos Software Initiative to tackle the problem of information management.

MFIs are not the same as traditional banks, says George Conard, Mifos' technical project lead. Banks get started with large amounts of capital, and they make big loans at high interest rates to companies with the wherewithal to repay easily. MFIs are small, with few resources to provide them with even the most basic technology needed to provide not just loan services, but savings accounts and insurance as well.

Because the Grameen Foundation believes that access to the latest technology is essential to the long-term sustainability of the microfinance industry, it opened a technology center in Seattle to take a look at what IT challenges MFIs worldwide were facing. It learned that only about half of the 52 institutions it partners with have the benefit of automated information systems. "We spent a lot of time working with MFIs in the field, in Uganda and Bolivia and Peru, and saw a real market failure in the way they were using technology," Conard says. "Only 10% of them are using commercial off-the-shelf software. Of the remaining 90%, they don't use anything at all, or in a lot of cases they've built their own systems with a local vendor or an exorbitantly priced consultant." Because the local variables make the requirements of each MFI unique, it has been difficult for individual institutions to make use of commercial software offerings. "The commercial software vendors end up being small shops in the Philippines or Guatemala," says Conard. "They can't provide support. They don't speak the language and they don't understand the local environment."

Grameen decided to help the MFIs by creating an open source management information system, called Mifos, to provide client, loan, and savings portfolio management, keep track of all transactions, and create reports. Browser-based Mifos is written in Java and its source code is freely available under the Apache open source license.

Conard says that one of the biggest benefits of Mifos is that local IT vendors can download the source code and modify it. Instead of creating an application from nothing, or attempting to make a commercial package work in the highly specialized environment of a local MFI, any software development company can customize Mifos. "We want to get to the point where as an industry we can share innovation," says Conard. "Most of the innovation that has happened is in a one-off way, difficult to replicate. No common platforms or standards."

The community surrounding the Mifos Software Initiative consists of end users, developers, and consultants who work together to enhance Mifos according to the needs of the growing industry. End users provide feedback, bug reports, and wish list items to the developers.

Grameen Koota's BSK branch in Bangalore has been testing Mifos since August, helping developers work out kinks before the official launch of the project this week in Halifax. Consultants act as support specialists, providing technical help in the field.

Developers, consultants, and MFIs interested in participating in the Mifos Software Initiative should visit the Mifos project page.

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