- Indonesia’s MFIs lack capital and technology support
- Startup provides core-banking solutions for MFIs
WITH more than 60% of its adult population unbanked – and about 90% of its businesses falling under the micro and SME (small and medium enterprise) category – microfinance institutions (MFIs) are indispensable for financial inclusion in Indonesia.
The Financial Service Authority (OJK) predicts that there are about 600,000 bank and non-bank MFIs in Indonesia, including local and informal institutions. However, most are unregistered and unregulated.
To get more data on the industry, since January 2015, OJK has been trying to get all MFIs to register themselves. As of July this year, only 79 MFIs have done so.
In total, these MFIs have assets of Rp235.45 billion (US$18.02 million), deposits of Rp130.75 billion (US$10 million), and are financing loans of Rp154.71 (US$11.8 million).
Not only is data on MFIs very limited, their ability to grow and serve the country’s unbanked population is also hampered by limited support in terms of both capital and technology.
Aiming to help MFIs through technology, Steven and Stephanie Hodgson – Australian nationals who now live in Indonesia – established Kanopi, a microfinance technology startup that empowers MFIs to engage with and acquire more customers.
Via email, the husband-and-wife founding team tells Digital News Asia (DNA) that the impact of deploying even simple technology with MFIs is tremendous, especially in Indonesia, where such companies face challenges in managing cash and eliminating fraud.
“One of the most crucial obstacles standing between low-income Indonesians and financial inclusion is the technical capability of most MFIs. Many still rely on paper-based solutions or Microsoft Excel spreadsheets,” says Steven.
A telecommunications engineer with a background in finance, Steven and his wife Stephanie, a former physiotherapist, decided that Kanopi would focus on helping MFIs with their information systems management.
How Kanopi works
Kanopi provides both the front- and back-end technology to make it easy for MFIs to monitor accounts and transactions.
It uses the Mifos X open technology platform from US-based financial inclusion-focused non-profit organisation Mifos for its back-end system that manages client data, loans and savings portfolios, and also generates reports.
This back-end will be the core banking system for MFIs, and is available as a web-based resource.
Kanopi also built a mobile Android app for MFI field agents to register new customers and help them make cash deposits and withdrawals. The startup also provides the Android devices for these agents.
Basically, Kanopi’s technology connects an MFI’s back-end system with customer activity in real time.
“The MFIs’ field agents are responsible for accepting deposits and making withdrawals on behalf of customers,” says Steven.
“In-field transactions are then recorded immediately at branch offices – this is something rarely done by MFIs in Indonesia,” he adds.
To make sure the transaction process is secure, Kanopi also provides fingerprint sensors attached to its Android devices. Fingerprint scans conducted in the field verify the customer’s identity, which is necessary to complete any transaction.
The system will also immediately notify the customers, via short messaging service (SMS), of transactions to help them monitor their financial activity.
A central server registers all deposits and withdrawals in real time, which Kanopi says can help MFIs reduce and even prevent fraud.
“One big problem in microfinance is information asymmetry: Customers, field officers, and branch staff do not have direct access to the same data,” says Stephanie.
“Kanopi … removes this asymmetry by ensuring everyone has access to the same data at the same time – through SMS, mobile apps, and on the branch desktops,” she adds.
Kanopi charges a monthly fee for use of its core-banking system, ranging from Rp3.8 million (US$291.30) to Rp8.2 million (US$628.50) depending on the MFI’s size.
The financial inclusion push
Prior to building Kanopi, Steven was a business analyst for global management firm McKinsey & Co. Having gone to school in Jakarta before, he came back last year to explore the potential of MFIs in Indonesia.
“I found the whole banking world to be fascinating. At its core, it is an unbelievably simple industry with tremendous impact, and extending that impact to the people who need it most is an exciting challenge,” he says.
“I wish more people were doing it,” he adds.
Rather than becoming yet another MFI, Steven and Stephanie decided to build technology that could help the role of MFIs in the country. It took the team a year to build this technology.
“We spent time in low-income communities to understand their financial habits, and also met with executives from the World Bank, OJK, and various non-governmental organisations (NGOs) to make sure we designed the right product,” he says.
He says interest in savings products in Indonesia is high, but many banks’ products are not ‘friendly’ to the majority of the population.
“From our own research, including interviews with unbanked and underbanked people, we found that the biggest issues are the fees that are being charged – regular account-keeping fees and withdrawal fees,” says Steven.
“So a Rp5000 (US$0.38) monthly fee may be okay if you are depositing Rp1 million (US$76.6) a month, but it is a very steep fee for someone who is depositing Rp50,000 (US$3.80) a month,” he adds.
And yes, there are many people in Indonesia who can only to afford to save Rp50,000 (US$3.8) a month.
Another constraint are the complicated processes in opening new bank accounts, limited banking hours, and difficulty accessing funds when they are needed.
“For most people with a low income, cash is much easier to use than any other medium – it does not involve a transaction fee, is universally accepted and frictionless,” Steven says, adding however that Kanopi’s role is not to replace cash but to help people use their cash more effectively by saving it.
In the pipeline
Kanopi launched in May, and its technology has been deployed in two MFIs.
“We have been focusing on developing and improving the technology since mid-2015,” says Steven.
“Now that our technology is ready and running, we are going to focus on sales growth in the next half of the year,” he adds.
With six people in the team, Kanopi is targeting to deploy its back-end core banking system in 50 MFIs by the end of the year.
It also aims to find more MFIs that want to focus on micro-savings rather that micro-loans, as savings programmes can strengthen credit scoring, increase their customer base, and be a source of funds for lending.
“Our vision is for Kanopi to improve the technology of MFIs around Indonesia. We want every Indonesian adult to have equitable access to financial services, especially savings facilities,” says Stephanie.
“Practically, this means that within five years, we would like to work with over 1,000 institutions to provide world-class tools that would allow them to do their best work in their communities,” she adds.
Kanopi has been bootstrapping since its inception. “We have always felt it is important to prove our concept and build something before seeking funding,” says Stephanie, adding that the startup is at the stage where it can start to look for external funding to expand its reach.
Currently operating in Jakarta, Kanopi will also be rolling out its technology to other cities in Java, Sumatera, and Sulawesi.
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