INTERNATIONAL FINANCE CORPORATION Mobile Financial Services in Microfinance Institutions: Musoni in Kenya Vanessa Vizcarra, John Irungu Ngahu, and Minakshi Ramji Table of Contents Acknowledgements............................................................................................................................................v Chapter 1:  Introduction....................................................................................................................................1 Financial infrastructure................................................................................................................................................................................................... 1 Chapter 2:  Musoni BV........................................................................................................................................5 Musoni Overview............................................................................................................................................................................................................... 5 Overview of MFI & MFS operations......................................................................................................................................................................... 5 Partnership management............................................................................................................................................................................................. 8 Marketing and promotion..........................................................................................................................................................................................10 Risk management............................................................................................................................................................................................................12 IT platform............................................................................................................................................................................................................................13 How the system works......................................................................................................................................................................................13 Staff training.........................................................................................................................................................................................................14 MFI operations and M-Money.................................................................................................................................................................................14 Loan application process................................................................................................................................................................................15 Group meetings..................................................................................................................................................................................................16 Operational details............................................................................................................................................................................................18 Financial and performance analysis.....................................................................................................................................................................18 Cost and development roadmap................................................................................................................................................................18 Benefits of the Musoni model..................................................................................................................................................................................20 Lessons learned.................................................................................................................................................................................................................22 Technology-related............................................................................................................................................................................................22 Client-related........................................................................................................................................................................................................22 Product-related...................................................................................................................................................................................................22 Partnership-related............................................................................................................................................................................................22 Regulation-related.............................................................................................................................................................................................22 ANNEXE:  Musoni Product Information.................................................................................................... 23 iv MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: MUSONI IN KENYA List of Tables Table 1:  Musoni Parameters Over Time..................................................................................................................................................................... 6 Table 2:  M-PESA Tariffs........................................................................................................................................................................................................10 Table 3:  Comparison between Musoni Groups and Traditional Groups............................................................................................17 List of Figures Figure 1:  Financial Access Strands by Year............................................................................................................................................................... 2 Money Transfer Before and After M-PESA........................................................................................................................................... 2 Figure 2:  Figure 3:  Client Survey via Tablets................................................................................................................................................................................ 7 Figure 4:  M-PESA Kiosk........................................................................................................................................................................................................ 7 Figure 5:  Number of Transactions by Type ............................................................................................................................................................. 9 Figure 6:  Value of Transactions by Type..................................................................................................................................................................... 9 Figure 7:  Musoni Marketing Material........................................................................................................................................................................10 Figure 8:  Musoni Wealth Creation Officers............................................................................................................................................................12 Figure 9:  Musoni tablet application for WCOs....................................................................................................................................................14 Figure 10:  Number of Borrowers Per WCO (Avg) Per Branch.....................................................................................................................15 Figure 11:  Musoni Group Meeting.............................................................................................................................................................................16 Figure 12:  MFS Expenses as a part of Operating Costs..................................................................................................................................18 Figure 13:  Relative Costs of M-PESA Network, and Physical Branches................................................................................................19 Figure 14:  Operational Expenses for Cashless branches and M-PESA Network............................................................................19 Figure 15:  Musoni branches and M-PESA Agents............................................................................................................................................20 Figure 16:  Number and Value of Musoni Transactions..................................................................................................................................20 Figure 17:  Musoni Client Feedback............................................................................................................................................................................21 Figure 18:  Musoni Client...................................................................................................................................................................................................21 Acknowledgements The authors acknowledge the contribution and input of the following staff of Musoni who provided relevant data and support required to conduct this study: Name Position 1 James Onyutta CEO 2 Cameron Goldie-Scot CEO of Musoni Services 3 Stanley Munyao Former Chief Operating Officer 4 James Owino Chief financial Officer 5 Helene Osore Business Development Officer 6 Charles Mutinda IT Officer 7 Judy Ndungu Chief HR Officer 8 Molcolm Odwa Branch Manager Kitengela branch 9 Ernest Mbidha Acting Chief Operating Officer CHAPTER 1 Introduction The technology is now available for microfinance institu- FINANCIAL INFRASTRUCTURE tions to leverage mobile phone coverage into a mobile financial service channel able to deliver services beyond The Central Bank of Kenya recognizes the role that finan- the reach of traditional branches. Some MFIs have already cial inclusion plays in fighting poverty, and desires to pro- tried to develop this opportunity, launching pilot projects mote the savings investment cycles that lead to economic and small-scale experiments across Asia, Africa, and Latin development. Thus the regulator has undertaken several America. But though these initiatives exist, there is as yet initiatives and reforms to boost financial inclusion through no clear indication of whether MFIs can realize a robust developing the appropriate financial infrastructure. This and sustainable business model in providing services includes the licensing of deposit-taking microfinance in- through the electronic/ mobile channel. What follows is stitutions (DTMs) and credit reference bureaus (CRBs); pro- a case study of one such MFI, Musoni in Kenya. It is part moting take up of mobile phone financial services and of a series of four aiming to shed light on specifically how the agency banking model. Already these initiatives and MFIs can implement MFS channels to deliver sustainable reforms have led to notable improvements in the levels, profits and growth. reach and depth of access to financial services, especially Musoni was selected for this study because it is the among the lower echelons of the population. In fact the first microfinance institution (MFI) in the world with op- erations, including transactions that are entirely mobile- based. As mobile networks become more common globally, other MFIs may find it easier to emulate Musoni’s Kenya by numbers example of starting as an all-mobile operation rather than Population: 42 million going through the often disruptive and difficult process of moving from manual to mobile methodology. Musoni Income level: Low income is based in Kenya and uses the M-PESA deposit and with- Unbanked population; ~ 40% drawal services to disburse loans and collect customer Mobile banking penetration: 67% repayments1. 1 Musoni’s website: http://www.musoni.eu/, accessed on September 10, 2013 and Sadana et al (2011). “Analysis of Financial Institutions Rid- ing the M-PESA Rails” MicroSave Research 2 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: MUSONI IN KENYA results, gauged by the numbers, are astounding: deposit to bring all payment service providers, including mobile accounts have grown tremendously. phone service providers offering money transfer services, Over the last two years, the central bank has issued within one regulatory framework. Going forward, the in- regular anti-money laundering and counter-terrorist fi- clusion of these mobile phone service providers within nancing guidelines to financial institutions to further sup- the supervisory and regulatory scope of CBK will no doubt port and enhance implementation of the Proceeds of enhance the country’s AML/CFT measures. Crime and Anti-Money Laundering Act, 2009 (POCAMLA). Kenya has a relatively well developed financial sec- On the microfinance front, the Microfinance Regulations tor which comprises 43 commercial banks, one mortgage and the Agency Guidelines require deposit-taking micro- finance company, seven deposit-taking microfinance finance institutions and their agents to implement AML/ companies, 3,500 active savings and credit cooperatives CFT measures. In November 2011, parliament enacted the (SACCOs), one postal savings bank (Kenya Post Office National Payments System Act. This legislation empowers Savings Bank), 125 foreign exchange bureaus, a host of CBK to oversee the national payments system. The goal is unlicensed lenders, and an association of microfinance institutions with 56 members. Despite the abundance of financial institutions, however, Kenya’s financial sector is highly concentrated. Four financial institutions, Equity FIGURE 1: Financial Access Strands by Year Bank, Cooperative Bank, Kenya Post Office Savings Bank 2006 15% 4% 8% 33% 39% and Kenya Commercial Bank, account for two-thirds of all bank accounts. These totaled 14 million by mid-2012. In 2009 22% 15% 4% 27% 31% the traditional microfinance sector, more than 70 percent of the market is made up of Kenya Women Finance, Faulu 2013 33% 33% 1% 8% 25% Kenya and Jamii Bora. There is also a high concentration of 0% 20% 40% 60% 80% 100% SACCOs, with 96 registered so far2. Deposit (savings) and Formal prudential Formal non-prudential credit (individual and group loan), insurance, money trans- Formal registered Informal Excluded fers, technical assistance and training make up the core Source: Financial Sector Deepening (Kenya, 2006, 2009, & 2013) set of products offered by MFIs. Some non-core products include insurance, pension, and bill payments. This latter function has become increasingly common with the ad- vent of mobile money. Money Transfer Before and After FIGURE 2:  It is estimated that up to 67 percent of Kenyans now M-PESA have access to formal financial services3. This has increased 50% 47% 45% from 41 percent in 2009. Commercial bank penetration 41% 40% stood at 5.17 per 100,000 adults in 20114. 35% 31% M-Pesa, the pioneering money transfer service, has 30% had a significant role to play in this changing financial 25% 20% 20% 18% 15% 13% 10% 9% 8% 7% 6% 5% 2  See, http://saccoskenya.blogspot.com/2012/03/saccos-in-kenya. 0 html, accessed on June 19,2014 M-PESA Hand Bus Post Direct Other 3  Financial Sector Deepening, Kenya (2013), accessed on June 19, o ce deposit 2006 2009 2014 4  See http://datatopics.worldbank.org/g20fidata/topic/branch-pen- Source: Financial Sector Deepening (Kenya, 2006 & 2009) etration Introduction 3 services landscape. The FinAccess data shows the extent indicate P2P money transfers. Importantly, M-PESA agents to which M-PESA transformed the way person to person far outnumber the number of bank branches, post office (P2P) transfers take place in the country. Prior to M-Pesa branches, and ATMs in Kenya5. informal transfer mechanisms, such as sending money through someone or through informal bus and matatu (taxi) companies, were the most popular methods. M- PESA’s ubiquitous agent network and its promise of secu- 5  Graphs are adapted from Mas, Ignacio and Daniel Radcliffe (2011), rity led to a large scale take-up of the service to the point “ Mobile Payments Go Viral: M-Pesa in Kenya”, accessed on Septem- that today, “M-PESA me” is a commonly used phrase to ber 10, 2013 CHAPTER 2 Musoni BV MUSONI OVERVIEW M-PESA, meanwhile, had made significant inroads in Kenya and was the obvious partner of choice for Musoni Musoni was founded in September 2009. By May 2010, due its ubiquitous presence and market up-take. More- Musoni Kenya had disbursed its first loan. It has four share- over, Musoni’s use of M-PESA may have contributed to holders: Musoni Netherlands (the technology service pro- their marketing growth. Initially, Musoni had been looking vider), Grameen Foundation, KFW Bank, and MicroVest to sign a partnership agreement with another well-known Capital Funds. Musoni defines itself as Hi-tech and Hi- MFI in Kenya. But the deal was dissolved when the MFI de- Touch, and provides enhanced efficiency with an empha- cided that the idea was disruptive for its business model. sis on customer satisfaction. The firm’s bold aim is to take In Musoni’s case, the team saw the opportunity to leverage microfinance to the next generation. new technologies available in the market in order to offer Musoni’s name is derived from “m-usoni”. The “m” accessible financial services to more people more rapidly. stands for mobile while “usoni” is the Swahili word for future. The organization uses the M-PESA deposit and withdrawal networks to make loan disbursements and to OVERVIEW OF MFI & MFS OPERATIONS collect repayments from customers6. Typically, MFIs begin operations manually and over time, try to incorporate the Musoni operates in and around Nairobi through nine mobile channel into their delivery methodology. What branches: Zimmerman, Gikomba, Thika, Naivasha, Muran- distinguishes, Musoni is that it commenced operations ga, Kariobangi, Kawangware, Kiambu, and Kitengela. The wholly built around the use of a mobile channel. bank also has service points called satellite offices or mini- The idea grew out of a desire to improve the quality branches (called ‘mashinani’) in Nakuru, Donholm and of financial services available to low-income households Rongai. These mini-branches support expansion into rural in Kenya. It was informed by the experience gained by areas while supporting the loan officer or wealth creation members of the team working in mobile banking and mi- officers’ (WCOs) work in allowing them to have a customer crofinance in East Africa. Musoni’s promoters found that service point and connectivity when necessary. This also many MFIs were spending over 8 hours per month per helps justify, Musoni’s decision-making as to whether to loan officer in order to collect loan repayments. Addition- ally, there was a lack of transparency in the information provided about loans, high real interest rates, plus extra Sadana et al (2011). “Analysis of Financial Institutions Riding the 6  repayment costs. M-PESA Rails” MicroSave Research 6 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: MUSONI IN KENYA TABLE 1: Musoni Parameters Over Time Parameter 2010 2011 2012 Dec 2013 Number of Branches 2 3 5 5 Loan Officers 20 49 44 67 Number of Loans 4,117 3,985 7,883 11,056 Total Amount of Loans KES 78,711,266 KES 87,213,433 KES 179,602,617 KES 240,064,887 US$ 899,044 US$ 996,156 US$ 2,051,429 US$ 2,781,426 Average Loan Size KES 19,119 KES 21,885 KES 22,784 KES 22,789 US$ 218 US$ 250 US$ 260 US$ 264 Number of Groups 823 1189 1229 1,582 Number of Active Clients 4,068 3,979 7,880 10,534 Number of Clients 8,159 12,033 12,455 14,519 Source: Musoni Internal Data. open a branch in those locations or not. The average cost clients, because doing so would allow it to expand quickly of opening a branch is approximately three million KES and reach a break-even point as soon as possible. More ($43,000). Branches are set up as a main point of contact recently, however, Musoni has moved on plans to ex- for clients and Musoni’s field personnel, but they do not pand into semi-rural/ underserved areas, where clients conduct any cash activity. All Musoni branches are already can access the benefits of Musoni’s much-needed finan- paperless. cial products using mobile payment technology. Musoni Musoni has 16,229 registered clients of whom12,059 primarily serves the commercial service sectors in urban (as of July 2014) are active. The majority (62 percent) of the centres (>80 percent of its clientele). total number of active clients are women. Beyond this, the Musoni plans included adding two more branches bank has a base of inactive clients (35 percent). The rea- by year end 2013. All Musoni clients have a mobile phone sons for this inactivity can be attributed to a few different and subscribe to the M-PESA service, which is a prerequi- factors: site for obtaining a loan. In 2013, Musoni’s business grew to 240 million KES (around $2.8 million), while its portfolio •• The limits for disbursements using the M-PESA plat- at risk stood at 3.0 percent8. form as approved by the central bank are 140,000 Ke- For regulatory reasons, as an MFI Musoni is only able nyan shillings / $1,647) to offer credit products. From the beginning, the bank has •• The limited number of loan products offered and the offered three loan products to their clients, with a fourth frequency of group meetings (weekly); launched in the second quarter of 2013. These are: •• A number of new clients are still in a countdown pe- riod7. If after three months a client does not pass to •• Nawiri Loan: The Nawiri loan is an entry level busi- the next level (converting into a Musoni client), they ness loan for small entrepreneurs. It is intended solely are qualified as a dormant client. Of a total of 4,004 for business purposes. All Musoni clients start with this inactive clients, 82 percent (3,283) are dormant. The loan and graduate to bigger loans over time based on balance is in the countdown period. 7  Countdown period: four weeks after client registration during Musoni targets entrepreneurs between the ages of which clients cannot obtain a loan 18 and 35 needing finance for their small businesses. In 8  Musoni quarterly report 2013 available at http://www.musoni.eu/ the beginning the MFI targeted urban and semi-urban index.php/24-april-2013-musoni-quarterly-report-1stquarter Musoni BV 7 their repayment history. With each succeeding year, FIGURE 3: Client Survey via Tablets the Nawiri customer gets a one percent interest rate reduction. Ninety-seven percent of loans in Musoni’s portfolio are Nawiri loans. •• Stawi Loan: This loan is on offer to those clients who have successfully completed a few loan cycles with Nawiri. Stawi customers get bigger loans at a slightly decreased interest rate. •• School fees loan: This loan was introduced in early 2013 to mitigate the risk that business loans would be diverted towards school fees. It can be structured in different ways to provide flexibility around when the fees need to be paid, whether once a term or annually. •• Wepesi loan: Wepesi makes provision for the emer- gency needs of customers, which can be business- Going forward, Musoni plans to launch several new related or otherwise. Although discussed at the time products to meet more varied client needs. As for credit the bank was launched, it was put on hold while products, Musoni is working to expand the number of Musoni consolidated a high quality portfolio and its these in introducing agricultural and individual loans. customers built up a credit history. This type of loan Three typical messages have emerged from the mar- can be approved on the same day as the application ket research Musoni has conducted thus far. Firstly, clients for it is made. value convenience and flexibility of access. In other words, they wish to access the product easily so that it fits with Detailed information about Musoni’s products can their work schedules and locations. They also understand- be found in Annex 1. ably want price transparency and reliability. Finally, they Musoni’s product design is based on continuous have expressed the desire to acquire greater financial lit- market research. Specifically, the principles underlying eracy in order to manage their money better. product design, services, and branch locations were de- rived from conversations with potential clients—urban and semi-urban micro-entrepreneurs. So far, this research FIGURE 4: M-PESA Kiosk has been qualitative and quantitative in nature, and is detailed. For example, Musoni notes that research par- ticipants were asked to rank product attributes, such as a quick and simple loan application process, pre-loan training, a low interest rate, a grace period, and other at- tributes, according to their preferences. The feedback mechanism included revealed strong demand for non-business related loans, for purposes such as payment of school fees, covering emergencies and other items. Ultimately, Musoni decided to launch these products because it was found that productive loans were being diverted towards non-productive uses; and that this proved beyond the organization’s control. 8 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: MUSONI IN KENYA This extant market research is directly complement- nature of clients’ financial lives as well as to gather other ed through the use of market research tools. Much em- developmental data which will enable Musoni to better phasis is placed on integrating WCOs in product design, respond to their needs. It will also make it possible to as- testing and launches. Due to their extensive interactions sess the developmental impact Musoni products and ser- with customers, they are best placed to define customer vices are having on these people’s lives. needs for new products and recommend enhancements When new products are launched, WCOs take re- to those presently on offer. The firm’s WCO’s have begun sponsibility for educating existing and new customers sharing this information with customers, both to seek alike of the features and prices. This happens during group their input and to prepare them to take advantage of new meetings and at specially organized workshops in the dif- services when they are launched. ferent zones. Such training involves reviewing product In addition to conducting market research, Musoni also features, as well as studying a step by step guide on ser- conducts regular client satisfaction surveys to understand vice operations. And pamphlets are provided as refresh- the reasons underlying retention rates, and client likes and ers. The (formal) learning process is continuous and takes dislikes. The bank proactively solicits this feedback from cli- place in the context of group meetings. Importantly, since ents on a regular basis. Moreover, in sync with the Musoni most of Musoni’s customers exist in groups, there’s a lot mobile concept, this feedback is obtained through ques- of peer-to-peer support and learning that continues long tionnaires sent via SMS. This survey method shows how mo- after the scheduled meetings; so users can also rely on fel- bile technologies can be leveraged to continuously engage low group members for assistance and if all else fails, they clients on product design, enhancements and evaluations. have direct access to their WCOs. This is not only affordable. It also ensures that they feel val- Musoni has shown strong growth over time. They have ued by their financial institution. The research data demon- successfully developed five branches and their client roster strates the bank’s ability to reach a large number of clients is increasing steadily. From the first to second quarters of for low cost research: Musoni’s expenditure for its client this year, average growth in this area has been around 9.5 satisfaction inquiries was $635 per survey, with an overall percent. The average loan size has also increased slightly, response of 700 client answers (from 1,000 clients solicited) indicating that Musoni has repeat clients who are able to with an average number of five questions per survey. avail of bigger loans. Critically, at an operational level, they Musoni is also in the process of developing a credit have been able to keep the time interval between loan scoring tool which will help wealth creation officers (also application and loan disbursement to a maximum of 72 known as loan officers) assess the repayment capacity of hours, which is much appreciated by their clients. potential clients. The goal is to ensure a high quality portfo- lio, but likewise prevent clients taking on too heavy a debt burden. To help this effort, Musoni plans to partner with PARTNERSHIP MANAGEMENT the Association for Microfinance Institutions, the sector- wide body through which MFIs can exchange information Musoni partners with M-PESA in providing cashless opera- on clients. The plan is to develop a credit scoring system. tions to its clients, via M-PESA’s Pay Bill feature9. From the Results from regular social performance management beginning, this partnership has shaped up as a success audits are also vital inputs for Musoni’s decision- making story on both sides resulting from a shared vision of the fu- process. Specifically the organization aims to develop and ture. According to Musoni, at the time the agreement was implement a ‘Progress Out of Poverty’ Index (PPI) tool to originally struck, back in 2008, M-PESA was still early on in verify client poverty levels. Questionnaires to verify PPI scores are administered on tablets. Musoni’s goal is to col- Pay Bill feature allows merchants (such as Musoni) to accept pay- 9  lect and analyze data to get a better understanding of the ments from customers through M-PESA. Musoni BV 9 its growth process (with 2,329 agents); its team was young FIGURE 5: Number of Transactions by Type and eager to take new partners on board as a means to in- Disbursements, crease its revenue stream. Besides, the M-PESA service had 5% been founded with the idea of working cooperatively with microfinance institutions. As a result, Musoni was able to negotiate a deal with M-PESA which included the use of their network for payments-per-transaction. In other words, the advantage Musoni gained from M-PESA optimized the product proposition for all concerned, clients included. Credit payments, Over the years, M-PESA has proved to be one of the 95% more enduring examples of a sustainable mobile payment Source: Musoni Internal Data. service in the world. As of 2013, M-PESA serves about 63 percent of all Kenyan adults. It does this through its vast network of close to 80,000 agents10. These services enable customers to conduct an array of transactions includ- FIGURE 6: Value of Transactions by Type Disbursements, ing: deposits, withdrawals, bill payments, mobile airtime 50% purchases, and money transfers11. With this ubiquitous presence—and its popularity with customers—other institutions have seen the advantage of partnering with M-PESA in offering their service menus These partnering institutions are diverse, including banks, schools, petrol stations, utility companies, charities, and government Credit payments, agencies. What they have in common is using M-PESA. 50% For Musoni specifically, using the M-PESA platform Source: Musoni Internal Data. enables them to offer timely loan disbursements and re- payments, enhanced to include collateral payments as of July 2013. Overall transaction distribution (based on 2012 At the beginning of 2013, M-PESA increased its rates data) is as follows: by 35 percent. As a consequence, transactions in the lower M-PESA charges Musoni based on transaction vol- bands (equivalent to Musoni loan repayments amounts) umes. However, due to the low value of repayments that became significantly more expensive. When visiting client borrowers have to make, the cost of sending the money groups, an expressed concern about Musoni’s business using M-PESA can be expensive. For example, if a bor- model was related to transaction costs. An internal analysis rower wishes to make a payment of 120 KES ($1.4), they in February 2013 found about 88 percent of their clientele would pay a transaction fee of 27 KES or 30 cents, which is between the second and third tier (meaning making re- is about 23% of the payments. Musoni is presently evalu- payments between $1.18–11.75 and $11.76–29.40). Thus the ating these cost implications, particularly for the borrow- price impact on clients could be as much as 20 percent of ers, and has held discussions with M-PESA on providing the total amount of loan payment. Of note, clients in the cheaper (bulk) SMS prices. The risk of being perceived by the market as a very expensive solution for loan repay- 10  http://www.safaricom.co.ke/blog/2014/01/27/whats-given-sa- ments makes it difficult for them to market themselves as faricoms-m-pesa-the-midas-touch/, accessed on August 15, 2014 a low cost bank for the poor. Rates offered to Musoni and 11  Safaricom Ltd FY 2013 results presentation, accessed on July 7, its clients are as follows: 2013 10 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: MUSONI IN KENYA TABLE 2: M-PESA Tariffs Tx Volume (U$) Cost of Tx (U$) Tx Increase Min Max Client Musoni Client 0.59 1.16 0.12 1.18 11.75 0.24 0.32 11.76 29.40 0.24 0.12 29.41 58.81 0.24 0.35 Charge Band 58.82 117.64 0.24 0.65 35% tx 117.65 235.28 0.35 0.82 increase for client 235.29 411.75 0.35 1.41 411.76 588.22 0.47 1.65 588.24 823.53 0.59 1.76 Source: Musoni. second tier (35 percent of Musoni’s clients: about 2,845 in market challenge is promoting a brand that represents number) are usually the ones that prefer to make weekly an MFI that is 100 percent mobile. Doing this requires a payments in small amounts (a dollar per transaction inclu- different kind of messaging that convincingly shows how sive) instead of monthly payments. This aspect of the Muso- it works and how it benefits users. Considering that Mu- ni model is considered an advantage to the client. But with soni is a fairly small institution, the budget for large-scale transaction prices now making up about 30 percent of the above the line marketing is not readily available; and even total repayment, clients have been discouraged from mak- if it was, taking this approach would not be a prudent way ing weekly payments. As a knock-on effect of this pricing of using the firm’s limited marketing resources. Rather Mu- situation, instead of making individual payments, groups soni has focused its marketing effort on below the line have now thought about abandoning daily payments. activities and by spreading the word through their WCOs. A solution for Musoni may be to cover part of these Thus far this has had a fairly strong impact since it relies on new rates themselves. However, being still an institution existing peer-to-peer relationships and trust. early on in the growth process, they are very sensitive about absorbing additional costs. For the time being, Musoni only works in partnership with M-PESA, but plans are being de- FIGURE 7: Musoni Marketing Material veloped to bring other MNO partners on-stream. These new partnerships may offer solutions to the cost and network stability challenges that Musoni faces. Clients who are users of other mobile money services would then take advantage of Musoni’s offerings without having to shift to M-PESA. MARKETING AND PROMOTION Since M-PESA is well-known in the market, Musoni does not need to convince their target clientele about the chan- nel. However Musoni notes candidly that their biggest Musoni BV 11 More specifically, Musoni uses activities that offer di- and group members who need financing sporadical- rect, often personal communication, with the target audi- ly and in small amounts to fund their erratic cash flow. ence. Being an MFI powered by mobile technology, the use Businesses that Musoni funds include sellers of sec- of email, direct mail, events/exhibitions and telemarketing ond hand clothes, food kiosks, the retailing of fresh form the basis of these marketing activities. And ancillary farm foods, and tailoring, to name just a few. to them are preliminary marketing efforts such as market •• Transparency: Since Musoni is not a deposit taking research and segmentation, and public relations. In fact, a institution, its revenue is wholly derived from lending. blend of these two streams has driven Musoni’s sales and Interaction with their customers is solely based on branding campaigns from the beginning. This is a way that borrowing and repayments. This simple relationship other MFIs, and especially those relying on technology to has enabled Musoni develop an elaborate pricing deliver their service, can learn from Musoni. With the high plan that is easy to explain to their clients so that they cost of mass media advertising and the increasing use of are well aware of the cost of the loan and, underlying email, internet and digital communications, below the line transactions fees (using the M-PESA platform). This marketing is becoming a proven stand-alone approach for creates a comfort zone for them and makes them less B2P and B2B sales and marketing. hesitant to borrow from Musoni. As well, all historical Musoni’s marketing strategy is based on: transactions are made available to customers via their cell phones, enabling them to track their transactions •• Convenience: Customer registration, loan applica- and related costs (M-PESA charges and loan interest). tions, processing and disbursements are made over the mobile phone. The stated turnaround time be- Musoni’s marketing objectives are driven by the de- tween application and disbursement is 72 hours, but sire to: in practice 90 percent of loans are processed and ap- proved within 24 hours. •• Create awareness: The goal is to raise awareness •• This level of efficiency has been the prime focus of about Musoni as a mobile MFI with no branches. Tak- their marketing thrust. The rationale is that, on aver- ing this approach amounts to a departure from the age, other lenders can only offer turnaround times more usual focus on the technicalities, emphasizing of between 3–14 days. The impact of the Musoni instead the benefits to customers, which helps new approach was confirmed in group meetings where users (and especially those in rural areas) to assign most Musoni clients, impressed by the loan applica- value to the way Musoni delivers its services. The fact tion turnaround time, and have shared their experi- that M-PESA is the main transaction channel creates ences with friends and relatives. The finding is that confidence that the service is aligned to a well-known at one point or another these people tend to try the brand in the market. service out. Moreover, the cost of borrowing and re- •• Promote visibility: Musoni branding is very similar ceiving the funds is greatly reduced by the borrower to that of M-PESA. This is no coincidence given that not being required to visit a branch, instead simply the latter are the transaction channel providers and applying over the phone and receiving loan proceeds distributors (through agents). Musoni’s logo is very through the same channel. visible and inviting, and this applies to the clothes (t- •• Efficiency: Musoni provides loans as low as 5,000 shirts and caps) worn by their WCOs during field visits. KES ($62.5). They are able to do this because of the Most of the WCOs interviewed confirm that many of efficiency of their loan processing procedures. This, their new customers first approached them thinking coupled with the speed of loan processing, adds up they were Safaricom/M-PESA staff. Branch officers are to a very attractive value proposition for small traders also well located along busy streets and markets and 12 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: MUSONI IN KENYA potential customers is established and then pursued on a FIGURE 8: Musoni Wealth Creation Officers consistent basis, which helps to build trust; eventually this leads to an uptake of the service offering. The challenge in taking this approach is that it is labor intensive, time con- suming and limited in coverage. RISK MANAGEMENT Musoni is still in the process of building its risk management practices. Nevertheless, some mandatory procedures have been defined in order to prevent any potentially damag- ing situation developing. Know Your Customer (KYC) re- quirements are very simple and are an integral part of the client registration process. Potential clients must provide their names backed by proof of ID with a photo and his or her M-PESA number. To confirm this information, WCOs register a potential client’s phone number in the Musoni application. After registration, the client sends a 1 KES transaction to Musoni’s pay bill number. This transaction is automatically rejected. But it displays the initiator’s iden- tity, allowing Musoni to confirm the identity of the mobile phone owner against their records. This KYC procedure is done twice (once with M-PESA and again with Musoni). branded with the same captivating color scheme. For Only clients with verified identities can receive loans. Musoni, this visibility is critical. In order to meet all of the regulatory requirements, •• Grow: Musoni has a very clear and ambitious plan Musoni recently formed a risk committee charged with as- in place to increase their customer base from around sessing all compliance issues on a regular basis. eight to seventeen thousand over a year. These tar- As for operational risks specifically, when the M-PESA gets have been shared proportionately among the platform is down, the risk of non-payments rises. How- branches. ever, M-PESA’s platform has proven to be very stable, with down time limited to one percent of the time. A review of their progress in realizing this ambitious The other risk issue is related to personnel; in 2012 plan’s aims was very positive with most branches show- Musoni experienced turnover of 25 percent. Of the total ing that they are on or above target. To further drive this number, six percent were released due to issues related to growth, Musoni has launched a regular road campaign integrity. These included personnel diverting funds invest- on which interns and wealth creation officers comb the ed by clients as collateral. This process itself was manual streets and markets speaking to business owners and in- and involved payments being deposited into SACCO ac- dividuals about their financial needs and how Musoni can counts. WCOs accepted funds to deposit on behalf of bor- help in meeting them. This method is economical and has rowers and then diverted some portion of these to other significant impact because it involves face to face inter- uses. To eliminate this problem, Musoni stopped all man- action with the market in a localized area. Contact with ual collections of collateral deposits by WCOs and instead Musoni BV 13 asked their clients to deposit the funds using M-PESA or it takes one to two weeks to process a loan. In Musoni’s through direct deposits with no WCO involvement. case, however, a big part of the value proposition is the guarantee that disbursement will occur within 48 hours of approval; and the funds usually hit the borrower’s M-PESA IT PLATFORM account within 24 hours. Musoni’s platform was purpose-built for their operations How the system works and until January 2013, Musoni owned the I.P. related to this system. It is holistic and covers all MFI operational For Musoni’s WCOs, their office is in the field, and they functions. This IT platform is a composite suite of in-house work only using an Android tablet. The screenshot shown developed and off-the-shelf products brought together in Figure 7 is the home page of the profile that they use. to provide the MFI with a comprehensive solution for their The application components are: entire core-banking needs. The system components include: •• Client registration—used to register new custom- ers in the field. A series of information (Know Your •• Platform A12—used for data entry and group creation Customer) data is entered including business/residen- •• Platform B—provides reports-related data entered tial data. A photograph of the client is also taken and through Focus attached to the registration. This information is then •• Platform C—extracts files from Focus and converts transferred to the Musoni’s core database via GPRS or data to M-PESA/Jasper readable format through the WLAN when the loan officer returns to •• Platform D —used for remote data entry, for exam- the office. ple portfolio management, suspense handling, credit •• Group registration—this function is used by the committee information WCO to register a new group in the field. The en- try fields are different from the above and capture The M-PESA middleware part of the platform was group-specific details including name, location and Musoni Services, based out of Amsterdam, who are also members. When registering a new client, they must responsible for the hosting of the system and providing be linked to a group. In other words, group registra- support. The IT system assembly has been dynamic and tion is mandatory. has continued to evolve seamlessly in meeting the institu- •• Loan application—Musoni uses a group lending tion’s ongoing needs. For example, an Android applica- methodology. Loans are guaranteed by members. A tion was developed in 2011 (in partnership with Bityarn13, loan application can be initiated in the field by the a Kenyan app development company) to meet the need WCO and once all the data has been entered and for a paperless office. In fact, the paperless concept was submitted, the credit committee receives the file for rolled out first in two branches, then extended to include approval consideration. Committee members can re- all of the others before the end of 2013. view loan applications from their offices and approve The integration with M-PESA is very neat, allowing for communication between the two platforms which 12  By Musoni request, the platform name is not disclosed in this has enabled the use of mobile payments for all transac- report. 13  Bityarn is a Kenyan registered technology firm designed to tions. This system has provided streamlined and efficient provide locally sensitive solutions for Kenya, East Africa and the data handling, which in turn has translated into huge sav- wider African community through development of innovative and ings for back office operations. These make up a consid- capacity-building applications. For more information visit—www. erable part of MFI costs. For example, working manually bityarn.com 14 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: MUSONI IN KENYA process is very simple. Most of the users, WCOs and cus- FIGURE 9: Musoni tablet application for WCOs tomer relationship officers located in the branch offices, are able to grasp the system’s functionality in little more than a day of test driving the application. The system has a simple graphic user interface and features a logical dis- tribution of functions, so each user can easily access and manipulate the information they require with ease. MFI OPERATIONS AND M-MONEY Musoni Kenya currently employs roughly 120 staff, the majority of whom are women. A large proportion of Source: Information and picture from Musoni. these are wealth creation officers who are located in the 9 branches. Each branch has approximately 15 people on or decline accordingly. Credit committee members staff complemented by an average of ten wealth creation are not required to have a physical meeting to review officers. The main roles of the officers include: applications as this can prove to be time consuming. The automation of this function shortens wait times •• Area market analysis—identifying, mapping and and allows Musoni to deliver on its guarantee of a pursuing business opportunities in their areas of short turnaround from application to disbursement. operation •• Site visit—Wealth creation officers must visit the cli- •• Registering new groups and clients and managing ents’ premises to verify the existence of a business (if those already in hand this is stated in the application), home address and •• Loan processing and default-related follow-ups any collateral that may be attached in case of a loan •• Providing ongoing business support to group mem- default. The WCO takes photographic evidence of the bers and supporting group activities, including business and home for the bank’s records. They also meetings use this feature to verify Musoni’s impact on borrow- ers by making before/after comparisons of the client’s Most WCO administrative activities, such as orga- quality of life (purchase of additional home equip- nizing their day or printing reports, which were formerly ment—TV, fridge and so on). The method is not scien- completed in the branches, are now minimized, since tific but it nevertheless helps documenting positive most of the tools they require to carry out their day to changes in clients’ life circumstances. day activities are available on the tablet. Thus they spend very little time in the office and instead focus on business Staff training development in the field. One branch reports that WCOs spend up to 85 percent of their time in the field. The system is highly interactive and very easy to use. In a In Kenya today, a portfolio of 300 clients per loan of- country where mobile money penetration is the highest ficer is the market average. At present Musoni manages in the world, and internet penetration—mostly accessed around 200 clients but expectations were for this to grow through handsets and Android devices—is equally high, to a portfolio of 400 clients per WCO by the end of 2014. it’s easy to identify and train tech-savvy wealth creation Loan disbursement and repayments are not channeled officers. However, the system is so user-friendly that WCOs through the WCO, but they are able to track transactions are not required to be proficient in IT since the training on a daily basis, monitoring which groups’/clients’ loans Musoni BV 15 FIGURE 10: Number of Borrowers Per WCO (Avg) Per Branch Number of borrows per WCO (AVG) per branch 250 200 150 100 50 0 Jan-2012 Mar-2012 May-2012 Jul-2012 Sep-2012 Nov-2012 Jan-2013 Mar-2013 May-2013 Jul-2013 Zimmerman Thika Naivasha Kitengela Gikomba Source: Musoni Internal Data. are in default. The group reports are also made available receive notification that there are applications await- to group treasurers to inform them of the status of their ing approval. To view them, they simply click on each loan accounts. application, review, and approve or decline with com- There are several reasons for the higher level of cli- ments for each—if applicable. ents per WCO and these are shown in the lines below. The •• This approval is received by Finance, which processes ramp-up is not yet there, but is expected over the coming the payment by crediting the utility account (which months. An overall increase of WCO productivity levels for then moves funds to and from the individual M-PESA 2012 was pegged at 93 percent; as of July 2013 this has accounts) to the recipient. increased by an average of 14 percent. The graph below shows WCO productivity trends in terms of number of cli- The loan application process is very simple. The An- ents managed per WCO and per branch. droid tool has contributed greatly to the productivity in- crease by eliminating many manual processes related to Loan application process loan application, processing and disbursement. During the team’s field visits, WCOs make instant confirmations Musoni has two types of loans: group and individual. The where it previously took about five minutes to fill out each latter is only made available for a select number of cus- of the forms presented (client registration, loan applica- tomers who have a longstanding relationship with the or- tion and so on); with this tool the time needed has de- ganization, have additional business requirements and are creased to about one minute. This means, in aggregate, not members of any group. In either case, the procedures that they now have much more time to focus on growing are the same: the number of clients in their portfolios. From the clients’ perspective, this change helps •• Loan application: The WCO receives loan details from them save time when dealing with the registration pro- the borrower (individual or group) and keys them into cess. With the traditional process, the time demands were the tablet. All background information on the bor- much more onerous. They needed to present a photo- rower already exists for reference (KYC, collateral et al). copy of their ID plus a picture, which in turn meant the •• Loan approval: The finished application is sent to effort needed to make these photocopies, get pictures credit committee members via the system. They taken and then travel some distance to get to the closest 16 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: MUSONI IN KENYA related to the loan application, then immediately send it FIGURE 11: Musoni Group Meeting online to the credit committee to approve/decline. All loans are disbursed through M-PESA. Repayments are received through the same system. Borrowers have to deposit money with an M-PESA agent to get e-money, which they then use to pay Musoni using their bill pay number. In no instance does the WCO handle cash on be- half of clients. M-PESA is the only way that Musoni transac- tions can happen. Group meetings During this research, the team was able to participate in two group meetings in different locations—one rural and the other urban. Despite the varying dynamics pertaining to the two groups, the meeting structure was similar. The main activities were verifying loan repayments, discussing The Kayole Victors group had 11 members, defaults and filling transaction log books and the treasur- seven of which were women. The loan officer in er ledger. Group members have specific locations identified charge of that group recognized the benefits of for meetings. Normally, these locations are in central a using a tablet instead of manual information. areas which provide easy access for group members. John Wamathai explained how this alternative Each group member must appear in person or inform simplified his work and the importance of having the chairperson of their absence in advance. Failure to do so incurs a fine, which varies per group. The funds raised reports in real time. Even when he was offline, for in this way are used to pay for the meeting venue rent example, because of failures in connectivity, he and any defaults left by members who have abandoned could enter information offline and synchronize or been deregistered from the group. A typical meeting it once he got to the office or any GPRS zone. He lasts one hour, making it as convenient as possible for the members, who are mostly self-employed micro-entrepre- perceives this as a real benefit since he does not neurs. Before the meeting, the WCO provides the group need to come to the office to organize his daily with statements of their accounts for verification against activities. “I can start my first group meeting the member’s individual transaction records. Each mem- on Mondays at 7:30am without going to the ber has a small record book to record all transactions. In most cases, the treasurer maintains and retains the books office” he noted. on behalf of the members. Once the transaction verification is complete, the WCO raises any issues—for example information on new branch. Now these steps have been eliminated with Mu- products, defaults and so on. In some cases, if training soni carrying out complete KYC when registering new were on the agenda, it would be delivered during these clients. All that the WCO now needs to do is “call up” the meetings. As well, the members can raise any issues re- customer’s information and key in additional information lated to Musoni products and services with the WCO. At Musoni BV 17 TABLE 3: Comparison between Musoni Groups and Traditional Groups Traditional Groups Musoni’s Groups Activities Time Activities Time 1 Make payments 45 mins 2 Verify payments 20 mins Verify Payments 10 mins 3 Talk about default-related issues 15 mins Talk about default-related issues 15 mins 64% time effective 4 Fill client and treasurer passbooks 30 mins Fill treasurer passbooks 15 mins 5 Training (Repayment) 20 mins Total Average Time per group 110 mins Total Average Time per group 40 mins Activities Time Activities Time 17% more productive 6 Fill loan applications (if any) 10 mins 7 Other issues/Training 10 mins Other issues/ training 10 mins 8 Average Time per group 10 mins Average Time per group 20 mins Total Average Time per Group 120 mins Total Average Time per Group 60 mins Overall 50% time reduction Source: Observation of Musoni Group and Estimates from Traditional Microfinance Group Meetings. one meeting, for example, issues raised included some normally held on a weekly basis, and plans are now be- members wanting to access individual loans and the high ing implemented to organize them on a bi-weekly basis. cost of using M-PESA to repay loans (transaction fees). The So far, Musoni has 60 percent of its group meetings on a option of repaying loans monthly rather than weekly was bi-weekly basis and 10 percent of them take place once also a cross cutting issue in both meetings. Some mem- per month. This idea is based on the premise that these bers wanted more products targeting small businesses, meetings were opportunities to make transactions pay- while others felt that the maximum loan value was too ments. But with these now being closely monitored by low. Typically, the WCO takes the issues raised and shares the WCOs in charge, with payments done automatically them with the product development team who, in turn, without the need to have group meetings, the former provide responses in subsequent meetings. Finally, the scheduling is no longer a priority for Musoni. This again members discuss business opportunities and shared chal- frees up about 50 percent more WCO time for more pro- lenges before closing with a word of prayer. ductive activity. Typically a WCO visits an average of four groups per The mobility concept is very encouraging. It dem- day, but has the possibility of visiting up to eight groups. onstrates how resources can be used more efficiently By comparison, other MFIs in the Kenyan market can only and supports the prioritization of activities. In the case of visit two to three groups during mornings to allow to group meetings, the elimination of activities that do not their members to have afternoon time available for mak- generate any value (such making payments) provides the ing loan payments. Each group can have an average of opportunity of using that time for filing additional loan ap- 10 to 12 members. Group meetings last one hour and plications (if any), adding a productivity factor. Also, more the percentage of women is higher. Group meetings are efficient management of meeting agendas benefits all. 18 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: MUSONI IN KENYA FIGURE 12: MFS Expenses as a part of Operating Costs OPEX vs MFS expenses 120% 100% 23.57% 23.44% 22.41% 27.45% 22.81% 23.81% 80% 0.62% 0.62% 0.59% 0.60% 0.63% 0.73% 2.54% 5.42% 8.05% 2.84% 71.24% 2.63% 60% 40% 20% 70.39% 67.89% 74.16% 69.20% 74.05% 71.24% 0% Zimmerman Gikomba Thika Naivasha Kitengela Total Branches operations MPESA payments SMS System royalty Source: MFS Expenses as part of Operating Costs: Musoni Internal Data. Operational details FINANCIAL AND PERFORMANCE ANALYSIS As Musoni grows, it faces new operational challenges. For The institution’s ultimate goal is to achieve profitability by instance, new positions are required to make sure that the a more efficient use of its resources to capture a bigger client is well served. The institution still lacks a customer segment of the market while introducing additional prod- service department; branch assistants still cover that as- ucts that better meet client needs. Depending on perfor- pect of the business. mance and other qualitative aspects, it may be possible to In general terms, the staff reaction to Musoni’s sys- establish whether the model is adequate and whether it tem has been very positive. When it was first implement- can be replicated profitably. ed, staff—especially wealth creation officers—had doubts The figure below provides a summary of costs for 5 about using the tool and the security of the tablets in the of Musoni’s branches. Looking at the Figure below, it is field. There were, however, no doubts about payment clear that Musoni’s biggest cost is the cashless branches. transactions using M-PESA. This is common practice in However, branches are a critical part of Musoni’s model. Kenya, but the adoption of a tablet to support day-to- They provide important support to WCOs and to branch day activities relying heavily on technology was a striking operations. Importantly, these branches would be much deviation from the norm. Tablets are sophisticated gad- greater in number were it not for Musoni’s innovative use gets that support very practical functions. Their design is of the mobile channel. very similar to a notebook so they are easy to camouflage, which is important for security in the field. Since these Cost and development roadmap tablets have been introduced, there has only been one in- cident where a tablet was stolen. This was later recovered For its IT platform, Musoni had a standing agreement thanks to the GPRS tracking feature they come with. with the developers that a fee for ongoing developments This efficiency improvement has also resulted in new to the system would be priced into license fees. But in metrics being added. The MFI has a daily dashboard that April 2013, Musoni relinquished the ownership/license captures, in detail, activities of individual branches and the for the system that included unlimited cost-free modifi- performance of WCOs. In this way, the institution is able to cations and instead negotiated more streamlined devel- closely monitor its growth. opment fees. These are presently charged as and when Musoni BV 19 Relative Costs of M-PESA FIGURE 13:  Operational Expenses for Cashless FIGURE 14:  Network, and Physical Branches branches and M-PESA Network $400,000 OPEX: Cashless Branches vs M-PESA network $873,530 US$ projected $215,000 $39,000 $100,648 Musoni platform M-PESA network Branches Branches cost M-PESA network Source: Musoni Internal Data. Source: Musoni Internal Data. a modification is requested. The change was designed The operational expenses for maintaining Musoni’s to reduce IT overheads. In January 2013, new license fees channels (branches and network of agents) are in Figure were negotiated between Musoni and the developers. As 11. The cost of branches compared to a network of agents a result, costs were reduced by 50 percent and stood at 34 are about 8:1. It must be noted, however, that each of these percent of operating costs as of April 2013. This fee is paid channels serve a different purpose and, in fact, comple- every quarter. Under this new arrangement, the develop- ment each other. Musoni has currently eight points of ser- ers can now re-sell the platform, with variations in func- vice / contact for the clients and, through M-PESA, about tion, to other financial institutions which intend to deploy 80,000 agents supporting its transactional activities. a similar business model (verify this). To enable integration Musoni is growing and this growth is reflected in the with M-PESA’s platform, Musoni had to pay a one-time fee number of transactions managed by the channels (net- for adjusting the system. work of agents). The number of transactions made via this M-PESA integration represents 8.8 percent of the to- channel increased more than 100 percent (in fact 110 per- tal IT cost. In terms of channel implementation, capital ex- cent) between 2012 and July 2013 as did the volume. penditure of the platform stands at about 72 percent less Furthermore, the Musoni model also functions as a than the investment in cashless branches. Nonetheless, it communications platform, strengthening the link to cus- is important to emphasize that in Musoni’s case, branches tomers by informing them of new products, loan re-pay- have a specific commercial function. The agent network is ment reminders, and confirmation of transactions such as merely mandated to offer better service to clients vis-à-vis repayments. Musoni has negotiated with Safaricom for a its transactional activities. bulk SMS profile that allows them to communicate with As for the hardware, the total cost including the tab- customers affordably via their mobile handsets. The cost let, insurance and cover is $477. Currently, Musoni has over of this SMS service amounts to only 0.63 percent of total 60 tablets already in the field supporting WCO activities. operational expenses. Musoni’s strengths are reflected in its operational ex- From a financial perspective, it is easy to observe that penses. M-PESA payments represent around 24 percent of Musoni took advantage of perceived new market oppor- Musoni’s total operational expenditures, or no more than tunities and dramatically increased its service offering to $5,000 per month. This means that the total cost of a mo- the client base in bringing a non-traditional channel into its bile transaction is $0.10. strategy. Musoni offered a convenience option to its clients 20 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: MUSONI IN KENYA Musoni branches and M-PESA FIGURE 15:   umber and Value of Musoni FIGURE 16: N Agents Transactions 10 100 800 250 8 197,600 8 80 200 600 Agents (in thousands) Number of Branches Value of txns ($ ‘000) # of txns (’000) 6 5 5 60 150 400 108,789 4 40 100 2 200 2 20 302,140 634,055 50 23,397 34,469 45,540 78,856 0 – 0 0 2010 2011 2012 2013 2012 2013 M-PESA agents Musoni branches # of transactions Value (US $) Source: Musoni Internal Data. Source: Musoni Internal Data. while working on its overall growth. Forging an agreement naturally see real value in not having to leave their busi- with a well-established network of agents (the outsourc- nesses, or being able to do so at a time most convenient ing model) supports institutional growth via sharpening its for them, from the comfort of their homes. Additionally, competitive edge in providing a less expensive alternative. the cashless aspect of Musoni’s operations provides great- er security for clients as well since they no longer have to carry large sums of money while traveling to the group BENEFITS OF THE MUSONI MODEL meeting or to the bank branch to repay their loans. Musoni claims that this has reduced delinquency by 10 percent. M-PESA has a strong existing network in Kenya. Some MFIs Customer adoption and uptake of such a channel is report that clients see the ability to pay via m-wallets as a a challenge for most institutions worldwide, but Musoni’s basic service which MFIs must provide14. In Musoni’s case, experience shows that partnering with a well-known however, by starting with a mobile focus the organization brand has actually spurred customer adoption. The mod- was able to avoid the disruptive effects that sometimes el itself guarantees 100 percent customer adoption when accompany trying to promote two delivery channels si- making repayments because the clients already know multaneously (both manual and electronic/mobile). This how to use M-PESA. was decidedly contrary to the way some Kenyan MFIs Musoni also confirms that the absence of cash in the thought a few years ago when the Musoni idea was first system has helped boost efficiency because of the re- put forward. duced time spent in group meetings. Weekly group meet- Musoni’s business model benefits its clients and the ings take about half the time they used to since there is no institution itself. One of the main reasons Musoni took up a cash collection. Thus in the firm’s client meetings, more mobile delivery channel for its services was the accessibili- time is spent on other activities, such as client training ty and convenience it offered to their clients. They can now needs, client feedback, and other issues. They report that repay their loan anywhere, anytime. Musoni points out group meetings which do not focus exclusively on cash that a majority of its repayments are made outside normal collection actually improve the relationship between the banking hours (42 percent), demonstrating the ‘any time’ convenience of mobile-enabled loan repayments. Clients Hanouch, Michael and Rotman, Sarah (2013). “Microfinance and 14  are not waiting in queues in branches to repay money and Mobile Banking: Blurring the Lines?” Musoni BV 21 FIGURE 17: Musoni Client Feedback FIGURE 18: Musoni Client Potential for new products: Ruth is an M-PESA agent and also a Musoni cli- ent. She applied for a loan to be able to be able to work as an agent (she executes more than a 100 M-PESA transactions per day). personnel productivity because they do not have an obligation to report to the office at all times; and wealth creation officers (WCOs)16 are free to use this discretion- ary time for other field activities such as prospecting new loan officer and the clients; and so between the institution clients. When meeting a client, a WCO spends less time and its clients. Clients, for their part, report that they want filling out forms (approximately 80 percent less time) be- other kinds of training during the group meeting time, cause these streamlining tools allow them to select infor- such as greater financial literacy training or business train- mation by simply clicking the menu displayed. ing, both of which will improve their incomes. Musoni’s mobile model also reduces fraud opportuni- Musoni also uses the mobile phone innovatively to ties among Musoni employees. Cash handling and collec- improve repayment rates15. PAR for Musoni is around three tion costs have been much reduced. Branches and wealth percent, confirming this claim. Clients receive reminders creation officers no longer need to be “stocked” with cash. via text messages when their loan installment is due, and This removes important risks while reducing costs. the clients appreciate the reminder, viewing it as an ex- Secondly, having an electronic trail of all transactions ample of high quality customer service. is valuable. Client financial histories can be used for credit Operationally, from Musoni’s perspective, the deci- scoring and facilitating future transactions. Using mobile sion to partner with M-PESA has eliminated the high cost technology enables Musoni to leapfrog the common bar- of setting up MFI branches for cash management with rier of weak infrastructure. The Musoni platform opens the their attendant need for specific infrastructure. Rather, gate to a broader range of information; it improves manage- Musoni’s flexibility allows the setting up of branches in the ment supervision capabilities, giving them the tech tools to most important areas as a point of contact for clients and better monitor and follow up on personnel activities. as a meeting place for staff. The mobile phone delivery channel also enables Mu- The M-PESA partnership carries with it additional op- soni to offer an optimal customer value proposition. Once portunities for Musoni, such as the possibility of allowing new clients to specifically request “working capital loans” 15  Smart Campaign (2012). “Appropriate Product Design and Deliv- for M-PESA agents. ery at Musoni” Smart Notes Number 13 The benefits of Musoni’s cashless/ cash-lite na- 16  Wealth Creation Officer (WCO): Musoni’s equivalent of a Loan ture don’t end there. They have the effect of increasing Officer 22 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: MUSONI IN KENYA loans are approved, it takes between 24 to 72 hours for either directly or through peers, by ‘tech savvy’ group mem- disbursement. In other words, a faster turnaround time for bers. However this is an ongoing challenge that can only be loans, which has a direct impact on the firm’s growth. resolved through regular use of the service. Product-related LESSONS LEARNED Musoni reports that its client base is eager to access ad- However, as their mobile model has evolved, a few lessons ditional products through its mobile channel, including have been learned that bear on the challenges Musoni savings products. However, from a regulatory perspec- faces. These are cited below: tive, Musoni cannot offer any products beyond credit. In response, the MFI has moved proactively in applying Technology-related for a license so that they can deliver what their clients are demanding. The Musoni system was not built to work outside the M- PESA system. Thus, it cannot process other forms of pay- Partnership-related ments, such as checks. Additionally, with this dependency on M-PESA, Musoni’s uptime is determined by M-PESA’s At present, Musoni has limited negotiating power. Mu- uptime. While researching this paper, the M-PESA plat- soni’s ability to negotiate with M-PESA, a well-established form was down for four hours on a particular day. This institution, is limited. Moreover, dealing with Musoni’s in- meant Musoni customers could not make or receive pay- coming needs can be challenging, as in the case of tariffs. ments for that period of time. Even if this amounts to mini- Because of the new pricing, Musoni had to explain in de- mal downtime, the M-PESA model is strictly dependent tail to its clients, to make sure they will be operationally on partner reliability. prepared to make one group payment instead of individ- Furthermore, WCO tablets depend on batteries. When ual loan payments. batteries die, WCOs can’t manage their activities. Musoni The risk of default will be always there when the M- is already at work finding solutions to improve battery PESA system is down. M-PESA clients can also be targets life—and making sure spare batteries are readily available. of fraud, always a real risk for an institution that receives Finally, since Musoni’s mobile model is technology- people’s money. based, improvements can always be made once tools are working in the field. Some applications are very useful but Regulation-related still have room for improvement. For example, GPS17 co- Technology-based solutions are innovative in many mar- ordinates take too much time to download. Overall, this kets, Kenya among them. Musoni clients sign their tablets means that guaranteeing efficiency is a non-stop job. electronically, in lieu of the traditional paper forms; and Client-related Musoni always faces the challenge of making sure that electronic signatures are legally approved by the regulator. As with all technology, there are users that struggle with As the MFI grows, repeat clients take larger loan functionality issues. Musoni finds that explaining the mobile amounts, by number and value. In order to be able to delivery channel to clients takes time. Many want assurances make larger disbursements, Musoni had to develop alter- of the new model’s reliability. Most of the issues arising from native solutions, such as disbursement by bank transfer. the system relate to users not fully understanding the basic features, such as loan repayment details/abbreviations. Mu- 17 GPS: Global positioning system, a space-based satellite naviga- soni, through its WCOs, continues to provide user support, tion system that delivers location and time information ANNEXE Musoni Product Information MUSONI LOAN PRODUCTS INFORMATION Nawiri loan Stwai loan School Fees loan Wepesi loan Overview Entry level, business loan Larger loan amounts for Meant for school fees Emergency loan for MSMEs repeat borrowers so that productive loans are not diverted for this purpose Prerequisites Must be a business loan Clients must have paid Clients who are in their Clients for six months/ or 80% their required third loan cycle or been completed one loan cycle repayments in full and on clients for nine months time over the past two and have repaid at least loan cycles two loans Principal (KES) 5,000–140,000 75,000–140,000 5,000–70,00 20% of current outstanding business loan Group Size 5–30 5–30 5–30 N/A Loan Tenure 3, 6, 9, and 12 months 3, 6, 9, and 12 months 3, 6, 9, and 12 months Upfront fees 3% 3% 3% Interest Rate (flat p.a) 22%–21%–20% 20% 22% Pre-requisites Group guarantee, Signed pledge, group 20% savings for total loans compulsory savings, guarantee, 30% cash held by the borrower, pledge collateral, “Group Security” group guarantee, on loans above KES compulsory savings, 100,000. pledged house-hold items to group members. Repayment Frequency Weekly Weekly Weekly Late Fees N/A 2% of scheduled N/A repayment Security Collateral 20% of outstanding credit 20% of outstanding credit 20% of outstanding credit Three guarantors required