CHAPTER 2: LITERATURE REVIEW

1.1. 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 microfinance 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 (Waterfield 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 microfinance institution is very vital and will

depend heavily on the management information systems in place.

(Waterfield and Ramsing, 1998) emphasize this when they say that

Management which is also an important factor of microfinance

institutions relies heavily on information provided to it and having a

good MIS is important for these. (Waterfield and Ramsing, 1998)

also assert that an MIS is one of the most critical but least

understood elements of a microfinance 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 Microfinance

institutions. Timely and appropriate information is essential to the

management function.

(Waterfield 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,

Microfinance institutions (MFI’s) 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 financial

institutions to manage large amounts of data, the drive to improve

the manipulation and understanding of these data has grown.

According to (Waterfield and Ramsing, 1998) a management

information system is one of the most critical but least understood

elements of a successful Microfinance institution. They further

assert that as more and more microfinance 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 MFI’s has underscored

the need for better systems. (Waterfield and Ramsing, 1998) say

that as Microfinance 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

financial 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 (Waterfieldand 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

microfinance usually offers no quick fix, in part because local

technical support is not widely available. Most MFI’s find that they

must custom design a large part of their MIS.

Information systems play a vital role in microfinance 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 financial 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

institution’s performance, from operational effectiveness to

strategic management.

As (Waterfield 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 institution’s

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, (Waterfield

and Ramsing, 1998) assert that developing a solid MIS is one of the

most important tasks facing microfinance 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 so-

called 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 technology

Gilbert (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 organization’s

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 System

1.9.1. 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 BRAC’s 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

BRAC’s 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.

BRAC’s 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 BRAC’s 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 MIS

A 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 project

The 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-to-

date information. For example, loan officers get information on loans that need

follow-up, branch manager’s 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 organization’s

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 system

While 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.

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

• 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

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

• Manages large number of concurrent

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

Weaknesses

• Complex to configure

• High cost

• License fee per user

• High-end Hardware requirement

• Requires technical skills

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. Summary

This 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.