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CHAPTER 2: LITERATURE REVIEW1.1. Introduction

This chapter involves the systematic identification, locating and analysis of documents containing information related to the research problem being investigated. It also describes and discusses the technologies and techniques used in producing web-based microfinance management information system.

1.2.

Information System

An Information system can be explained as an assortment of components which are mainly used for collection, the processing, storing and the dispensing of the information in order to back up the important processes of decision making and commanding or controlling in any organisation. Adding to these functions, an information system also helps the managers of the business and other levels of individual in the workforce of an organisation to analyze problems envision complicated subjects and also help in the development of new ventures and projects. (Laudon & Laudon2004,p.8) There exist various types of information systems today, like:

1. Transaction Processing System 2. Management Information System 3. Decision Support System 4. Expert System.

Like all the systems of information, a computerised system too exists to provide service, assist and support the cause of people in the real world. (Checkland & Holwell, 1999). Information systems play a vital role in micronance institutions as according to (CGAP, 2005) Information systems (IS) technology helps Microfinance Institutions (MFIs) track, analyze and report on their operations. Small MFIs may manage with

manual ledgers or spreadsheets, but most MFIs eventually need custom-built or commercially available IS software to track financial transactions and create reports for management, donors and regulators. An information system (IS) or application landscape is any combination of information technology and people's activities that support operations, management, and decision making. In a very broad sense, the term information system is frequently used to refer to the interaction between people, processes, data, and technology. In this sense, the term is used to refer not only to the information and communication technology (ICT) an organization uses, but also to the way in which people interact with this technology in support of business processes (Watereld and Ramsing, 1998). As such, information systems inter-relate with data systems on the one hand and activity systems on the other. An information system is a form of communication system in which data represent and are processed as a form of social memory. An information system can also be considered a semi-formal language which supports human decision making and action.

1.3.

Management Information system in Microfinance

A Management information system is a well devised system of accumulating, processing, storing and dispersing or distributing the data available in the form information which is vital for carrying out the important functions of managing in an organisation. It can also be explained as a documented or a well arranged report of all the proceedings and activities which were devised at some point of time and then carried out. According to Kotler(2006), Management information system comprises of manpower, instruments, and processes to accumulate, classify, examine, assess, and then dispensed to the decision makers in an organisation in a timely and accurate manner. Management within micronance institution is very vital and will depend heavily on the management information systems in place. (Watereld and Ramsing, 1998) emphasize this when they say that Management which is also an important factor of micronance institutions relies heavily on information provided to it and having a

good MIS is important for these. (Watereld and Ramsing, 1998) also assert that an MIS is one of the most critical but least understood elements of a micronance institution. They further say that having a good Information system is essential for an institution to perform efficiently and effectively, the better its information, the better it can manage its resources.

Pant, S., Hsu, C., (1995) they also specify that an (MIS) provides information needed to manage organizations efficiently and effectively. Management information systems involve three primary resources: people, technology, and information. Management information systems are distinct from other information systems in that they are used to analyze operational activities in the organization. Academically, the term is commonly used to refer to the group of information management methods tied to the automation or support of human decision making, e.g. decision support systems, expert systems, and executive information systems. (Ferrand and Havers, 1999) add that managing an institution depends strongly on the flow of information to decision makers at various levels, the issue grows in both significant and complexity as the scale of the institution develops with increasing layers of management. They further say that Management information is commonly found to be an area of weakness in Micronance institutions. Timely and appropriate information is essential to the management function. (Watereld and Ramsing, 1998) defines a management information system as a series of processes and actions involved capturing raw data, processing the data into usable information, and disseminating the information to users in the form needed. (Mainhart, 1999) asserts that over the past 5 to 10 years, Micronance institutions (MFIs) have been paying increasing attention to information systems, particularly management information systems (MIS).As both practitioners and donors have become aware of the great need for formal and informal nancial institutions to manage large amounts of data, the drive to improve the manipulation and understanding of these data has grown. According to (Watereld and Ramsing, 1998) a management information system is one of the most critical but least understood elements of a successful Micronance

institution. They further assert that as more and more micronance institutions scale up their activities, managers are becoming increasingly aware of the need to improve their information systems. (Ferrand and Havers, 1999) concur as they say Management Information is commonly found to be an area of weakness in MFIs .Timely and appropriate information is essential to the management function. Growth and transformation of operations in MFIs has underscored the need for better systems. (Watereld and Ramsing, 1998) say that as Micronance institutions grow to several thousand customers and beyond, they typically feel a need to improve their MISs. Managers of growing institutions gradually lose their ability to maintain personal contact with what is happening at the field level, and realize that they cannot adequately manage their portfolio and nancial operations without better information.

(Orr, 2000) Asserts that if there is a single key to survival in the 1990s and beyond, it is beingable to analyze, plan and react to changing business conditions in a much more rapid fashion. Todo this, top managers, analysts and knowledge workers in our enterprises need more and better information.

There is therefore a greater motivation towards building and improving what exists as (Watereldand Ramsing, 1998) explain that we find that many MFIs are strongly motivated to improvetheir MIS. Unfortunately, this seldom is easy to do .Although now available from a variety of sources, off-the-shelf software for micronance usually offers no quick x, in part because local technical support is not widely available. Most MFIs find that they must custom design a large part of their MIS. Information systems play a vital role in micronance institutions, according to (CGAP, 2005) Information systems (IS) technology helps MFIS track, analyze and report on their operations. Small MFIs may manage with manual ledgers or spreadsheets, but most MFIs eventually need custom-built or commercially available IS software to track nancial transactions and create reports for management, donors and regulators.

The challenge of being able to get the best out of information is existent since according to (Ferrand and Havers ,1999), poor information systems have an impact on

every aspect of an institutions performance, from operational effectiveness to strategic management. As (Watereld and Ramsing, 1998) explain, a good information system can revolutionalize the work of field staff by enabling them to better monitor their portfolio and serve clients ,all working with a growing number of clients .It can also enable supervisors to better monitor work under their responsibility ,provide better guidance to their staff ,and pinpoint the areas that most require their attention, and it can help executive managers to orchestrate the work of the entire organization by allowing them to monitor the institutions health through a set of well-chosen indicators and by informing critical operational and strategic decisions. Getting the right information systems is also not easy, (Watereld and Ramsing, 1998) assert that developing a solid MIS is one of the most important tasks facing micronance institutions, particularly those scaling up.

The successful MIS supports a business's long range plans, providing reports based upon performance analysis in areas critical to those plans, with feedback loops that allow for titivation of every aspect of the enterprise, including recruitment and training regimens. MIS not only indicate how things are going, but why and where performance is failing to meet the plan. These reports include near-real-time performance of cost centres and projects with detail sufficient for individual accountability

Advantages of MIS The following are some of the benefits that can be attained for different types of management information systems (Ali Ahmad, 2006).

The company is able to highlight their strength and weaknesses due to the presence of revenue reports, employee performance records etc. The identification of these aspects can help the company to improve their business processes and operations.

Giving an overall picture of the company and acting as a communication and planning tool.

The availability of the customer data and feedback can help the company to align their business processes according to the needs of the customers. The effective management of customer data can help the company to perform direct marketing and promotion activities.

Information is considered to be an important asset for any company in the modern competitive world. The consumer buying trends and behaviours can be predicted by the analysis of sales and revenue reports from each operating region of the company.

1.4.

Microfinance

Microfinance, according to Otero (1999, p.8) is the provision of financial services to low-income poor and very poor self-employed people. These financial services according to Ledgerwood (1999) generally include savings and credit but can also include other financial services such as insurance and payment services. Schreiner and Colombet (2001, p.339) define microfinance as the attempt to improve access to small deposits and small loans for poor households neglected by banks. Therefore, microfinance involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from the formal financial sector. In the literature, the terms microcredit and microfinance are often used interchangeably, but it is important to highlight the difference between them because both terms are often confused. Sinha (1998, p.2) states microcredit refers to small loans, whereas microfinance is appropriate where NGOs and MFIs supplement the loans with other financial services (savings, insurance, etc). Therefore microcredit is a component of microfinance in that it involves providing credit to the poor, but microfinance also involves additional non-credit financial services such as savings, insurance, pensions and payment services (Okiocredit, 2005).

1.5.

Microfinance Management Tool

Microfinance software is designed to handle financial systems that have very low value transactions. These systems are often aimed at people whose incomes or credit records make them unsuitable for mainstream financial services. Such systems are also used in geographic areas not served by mainstream finance. The main selling point of specialist microfinance software is that it greatly reduces administrative costs, particularly on a per-transaction basis.

There are two main situations where microfinance plays a role. One is for low-income people in developed countries. Because such people often struggle to get suitable services from major financial institutions, they may instead be served by specialist projects. These include community-based projects such as credit unions that offer loans at higher rates than in mainstream banking but considerably lower rates than socalled loan sharks. The second outlet for microfinance is in developing nations. In many cases, major banks will not spend money to set up service provision in such areas, as they do not consider the investment profitable. Another drawback for mainstream banks is that many people do not own property or land that can be offered as collateral. Technology can play a major role in keeping costs down. This is vital in two respects. First, it can mean lower interest rates, making credit facilities more affordable to customers. Second, it means there is a better chance of projects reaching the point where they are entirely self-funding and thus sustainable. While microfinance software is similar to mainstream financial software in many respects, there are some specialist features in many applications. These can include user interfaces written in multiple languages, removing the need to rely on automated translation services. Another is a scalable pricing system, meaning that organizers can gradually increase the number of accounts they handle without suddenly facing major price increases. It can also be important that even though the finance projects may be small-scale and relatively simple, the software still has the flexibility to deal with

situations such as writing off a loan or freezing interest and extending repayment periods without penalty. There are also forms of microfinance software that go beyond a single market or project. These include online lending schemes. These are web-based applications that bring together lenders and borrowers across the world, acting as an intermediary. The idea is that using the web increases the size of the market and thus makes it accessible even to people who want to lend or borrow small amounts of money.

1.6. Web based management technologyGilbert (1998) asserts that the web provides the greater degree of interactivity than other communication media. Quoting the previous studies which indicate that information on related services allows loyal customers to derive greater utility and be more satisfied. With more relevant information, customers make better decisions leading to higher satisfaction, thus enhancing loyalty to the service provider. (Nielsen, 1999). Peter (2004 citing Fisher et al (1992), supports Gilbert about interaction and Nielsen about satisfaction arguing that the web design, interactivity and depth of information at the website may impact on service encounters satisfaction. That a well designed interactive website could generate higher satisfaction by providing greater control to the customers to personalize the information search. The Microfinance Management Information system intends to derive high level of interactivity from the Web and satisfy the user by enabling efficient performance in management of loan system. (Anrie Nord, 2006) Web-Based Enterprise Management (WBEM) is a set of industry standards that an enterprise can use to manage its information operations in the distributed computing environment of the Internet. An important part of WBEM is the Common Information Model (CIM), a standard for defining device and application characteristics so that system and network administrators and management programs are able to control devices and applications from different manufacturers or sources in the same way. WBEM standards provide a Web-based approach for exchanging CIM data across different technologies and platforms.

Key features of WBEM technology include (Anrie Nord, 2006):

Remote management of applications Management of several instances of an application as a single unit Standard interface for remote application management across different applications

Decoupling of application management from the client "Publishing" of key information about an application to other applications

1.7.

Benefits of Web based Applications

(Anne Gill, 2008)Here are some of the benefits of web application development: 1. Convenience: The most important benefit of the web based application is that it is most convenient for use. One can use these applications any time from any location around the globe either by making use of the computer or the phone to access the required data as the whole database is available all the time. 2. No Installation or Maintenance: Web applications run on the web servers, so there is no need to install them unlike the desktop applications. The frustration of maintenance, troubleshooting, taking of backups on disk spaces and time and trouble required for installing software are also done away. 3. Lower costs: Web based applications cost cheaper than desktop applications due to reduced support and maintenance, lower requirements on the end user system and simplified architecture. It also doesn't waste the space of the computer. 4. Multiple Platforms: Normally all web based applications are much more harmonious across platforms than traditional installed software. Generally there is a need of the web browsers like Internet Explorer, Firefox, and Netscape. They are also compatible with most of the computer operating systems (Windows, Linux or Mac). Immaterial of the browser or the operating system, there is no difference in the way the applications work. The quality of work remains the same all the time.

5. Always up-to-date: The web based applications are normally up to date as there is no need of being on the run always, as the up-gradation, etc. is taken care of. User does not have to frustrate about whether the application is up-to-date or not. This is one of the benefits of open source web applications.

1.8.

Data Warehousing for Data Integration

We have a large variety of technologies in place how do we achieve what we want from all these technologies? (Vosburg & Kumar, 2001) try to answer this when they comment that it is often the integration of systems that provides real competitive advantage and step changes in efficiency. Having a good MIS depends a lot on a good data source, a good proper database is necessary to achieve the MIS benefits. Integration of appropriate data into a data warehouse for easier centralized data access. According to (Vosburg & Kumar, 2001), the integrity of the data used to operate and make decisions about a business affects the relative efficiency of operations and quality of decisions made. Protecting that integrity can be difficult and becomes more difficult as the size and complexity of the business and its systems increase. (Carter, 1999) Explains that as organizations become more sophisticated and more demanding in their use of information - the consolidation of inconsistent data for tactical and strategic level management is difficult (and in many cases impossible) and takes so long that the information loses its value. Organizations need to improve their systems to easily address their information needs more and as (Carter, 1999) assert, what is needed is a more systematic and holistic way of planning to meet the organizations information needs that avoids these problems. Proper planning has to be done to ensure an effective data architecture which is important in ensuring both effective and efficient delivery of information systems - and especially in the integration of disparate systems it is often the integration of systems that provides real competitive and step changes in efficiency (Carter, 1999). According to (Mainhart, 1999) [19] information lies at the very heart of microfinance. Whether by hand or by computer, microfinance institutions are maintain large amounts of critical business data, from basic client information to detailed analyses of portfolio statistics. These data must be stored, manipulated and, most important,

presented coherently to system users so that they can make sound decisions. A good information system should do just that: it should act as a conduit through which raw data becomes useful and usable information. A good information system is a necessary tool for managing an institution successfully.

1.9. Current System1.9.1. Background of the Organization

BRAC started working in Sri Lanka in the spring of 2005, a few months after the devastating Asian Tsunami of 2004. By 2007, BRAC shifted focus from disaster relief to longer term efforts in revitalizing affected enterprises and economies through microfinance. We focus on both the economic and social needs of our target borrowers in Sri Lanka, recognizing and understanding that communities of borrowers require multiple interventions to move out of poverty. Microfinance initially paves the way for BRAC because it harnesses the power of the group as both an economic and social unit offering support and security for the loans of its members. Microfinance groups or Village Organizations (VOs) can later become a community-based delivery platform for information and services such as health care, education and livelihood development. This approach to development has a multiplying affect by not only helping individuals but their entire community pull itself out of the spiral of poverty. BRAC believes that community partnerships and institution building are essential in sustainable development and in spreading knowledge to future generations. Since lack of capital was one of the main impediments to expansion and growth of small business, microfinance was identified as BRACs greatest development opportunity in Sri Lanka. With its long and successful history of microfinance in Bangladesh, BRAC quickly established a sustainable microfinance presence in Sri Lanka

1.9.2.

Programme Description

BRACs microfinance programme in Sri Lanka goes beyond lending financial assistance to poor women. The programme acts as a recruitment and capacity building platform for BRAC to expand further across the country. The entry point for BRAC into many deprived areas in Sri Lanka is through the provision of microloans to poor women who act as highly effective conduits for development interventions in their communities.

Micro Loan They deliver their microfinance service through Village Organizations (VOs) which organize poor women together into groups to improve their socio-economic positions. BRAC believes community partnerships and institution building are essential for poor women if they are to change their economic, social and political conditions. BRACs microfinance Branch Officers conduct area surveys and consult community leaders and local elders to select the 20-40 members of each Village Organization. Prospective members must have been residents of the village or area for at least five years. Only one member of the household is considered and widows are encouraged to join. The group is then sub-divided into smaller peer groups of five, each with its own elected leader. The members of the small groups take co-responsibility to resolve peer repayment problems. The VO meets weekly with its assigned BRAC Credit Officer to discuss credit decisions, make loan payments, and discuss issues of common interest. Microloans are exclusively for poor women participating in the VOs. Borrowers range in age from 18-60 with no minimum education requirement. BRAC lends to women who are not served by other microfinance institutions

The BRACs current system is a manual; the Accountant and employees use books to enter the data. The Member or Loan application they receive is maintained in a

separate file and stored in a cabin. The loan payment is checked once a week to identify any members who have to pay weekly payment. The existing loan system at BRAC Sri Lanka is paper based , the used method are media where post, e-mail and Direct meetings are used to inform about their product and loan Application, Loan Approval and the interested members may apply to loan using the papers. And data recording and retrieving are done manually; which can result in some inconvenience such as ease loss of data, the lack of accessibility of information about loan, all applicants and the lack of transparency in loan delivery process.

1.9.3.

Disadvantages of Current system

Some of the disadvantages of manual Information Systems are: Too laborious and time consuming. Prone to Errors. Data manipulation and analysis is very difficult. Maintenance of large amount of data is almost impossible. Data and information is not secured. Loosely controlled. Highly inflexible (addition of new products and change in business processes can not be made). Business continuity is at risk in case of damage to information due to fire, water or any other disaster. Reporting is very cumbersome, time consuming and difficult.

1.10. Difficulties in Adopting MISA number of MIS solutions are emerging. Despite the advances in MIS, practical experience shows that the acquisition of a suitable MIS is not simple. Many MFIs are

struggling with their MIS. Some of the reasons for these difficulties are (Ahmed Ali, 2006): Microfinance operations are unique and complex, compared to commercial, retail banking. The Microfinance sector is still evolving and lacks standardization in its procedures, methodologies, customer characteristics, type of transactions and reporting. There is no of-the-shelf software available that can address the requirements of every MFI. Those MIS that are available are complex and costly for adoption by MFIs. MFIs lack human and organizational capacity to develop or select an appropriate MIS. MFIs operate in remote and difficult areas where communication and power infrastructure do not exist, and are therefore constrained from using IT equipment required to run MIS applications.

1.11. Importance of the projectThe important of the project is determined by some key features, benefits, cost efficiency and other related variables. A major advantage of MIS is that it provides easy access to accurate and up-todate information. For example, loan officers get information on loans that need follow-up, branch managers can monitor daily progress of the branch, and senior management can get a full picture of the portfolio performance and quality. Customers also get quick information on their accounts, payments and balances. Detailed information is captured on customers and their activities that can then be used to assess client business to assess impact. It is also useful in tracking historical information of clients. Activities, such as disbursements, repayments, deposits, withdrawals and money transfers are completed faster, better controlled and with minimum opportunity for errors.

Information is produced in user-required formats, which facilitates better understanding, setting priorities, objectives and strategy. Key performance indicators provide an overview of the organizations performance, efficiency and effectiveness of business procedures so that timely adjustments can be made.

Use of ICT helps make MFI services more interactive, accessible and transparent. In terms of innovation, ICT provides full flexibility to structure products and services to the needs of its target group. Efficiency and productivity of staff is increased, as they are able to manage more products, customers, and transactions in less time. To meet target market needs, introduction of new products and setting procedures is easy and can be quickly applied throughout the branch network. It can also provide the flexibility to integrate with other applications and delivery mechanisms

1.12. The Key deciding factors of IT systemWhile the MIS needs to fulfil the business requirements of the organization, but other factors including appropriate infrastructure and hardware are also important in the success and optimal utilization of information systems. We can categorize the components of an information system solution into five areas:

1. Physical Architecture (Electricity/Power & Communication infrastructure) Physical architecture consists of basic wires or cables to gateways and powerhouses. Together with buildings, offices, and computers, the architecture provides services of voice, data, image and video transmission while the consistent power supply keeps everything live and running. Every system needs electric power, and if systems are required to communicate, then there must be an appropriate communication infrastructure. Usually MFIs operate in remote and underdeveloped areas where this is lacking.

2. Network Three types of environment setups could be made. i. Standalone Environment; MIS is run on individual PCs and data is stored locally. ii. Local Area Network (LAN); PCs are connected together to create a LAN. The network can be either peer-to-peer or client/server. Desirable is the Client/server network where data is stored and shared through a server in a secure way. iii. Wide Area Network (WAN); Branch offices and operation units can be connected through a WAN. It requires proper communication infrastructure and involves high cost to establishing a WAN. For online systems WAN is critical.

3. Hardware Type of hardware depends on the network environment. A client-server environment requires server and switch for connecting the workstations / PCs.

4. Database Generally databases can be categorised as local and client-server. Each category has its own strengths and weaknesses. These details can help MFIs in selecting the appropriate database:

i. Local databases There are a number of local databases but the most widely used databases are Microsoft Access, FoxPro, Paradox, and file maker. Risk of data corruption Data is not well protected Low performance when used by concurrent users and data load Not scalable with hardware Low transaction control, there is no rollback for incomplete and inaccurate entries

Strengths Easy to setup and configure Low hardware requirement Low cost Good performance with less data load Weaknesses No database management Unable to handle large data

ii. Client/Server databases Most popular client/server databases also called enterprise databases include; Oracle, DB2, SQL Server, MySQL, Sybase, and Informix are some of the commonly used client/server databases:

Strengths Database Management System Excellent performance under load Design to handle large data

Weaknesses Complex to configure High cost License fee per user Requires technical skills

Manages large number of concurrent High-end Hardware requirement users Scalable with hardware Detects and corrects data corruption dynamically Rollback for incomplete and inaccurate entries Highly secured Perfect in network environment and for web applications

5. Application A combination of business processes and procedures, user interface, reports and controls operate on top of the backend system. A large variety of software development and report generation tools are available and used to write software applications.

1.13. SummaryThis chapter discuss the technologies and techniques used in producing web-based Microfinance management Information System. This chapter also explains characteristic, elements ad hardware of the technology. And the research problem being investigated and justified clearly.