IBM GLOBAL SERVICES

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MFI Initiative LA Processing Hub Executive briefing

Oct, 2008

Confidential to IBM

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IBM GLOBAL SERVICES

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$ wealth

Emerging Markets

1.7 billion mobile phone users in BRIC by 2012

Developed Markets

1 Billion Worldwide Mobile Workers by 2011

Secondary Focus:

Enterprises that serve the “top of the pyramid” are targets for business process solutions

Mobile enablement opportunities for distributed workforces and distribution system solutions (Insurance, telecom, etc.)

Real time retail supply chain optimization

Primary Focus:

Enterprises, Government, & NGO’s serve “base of the pyramid”

Micro-Finance, Micro-insurance

Manufacturing / Agriculture

Providing services such as health care, education, government

Our Alliance is primarily focused on the unique opportunities in emerging growth markets, while addressing developed markets opportunities opportunistically.

Cloud-enablement of mobile communications allows enterprises, governments, and NGOs to deliver services to employees, business partners, consumers, and citizens on any device, anywhere

1 Billion Worldwide Mobile Internet Users by 2011

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0

100

200

300

400

500

600

700

2004 2005 2006 2007 2008 2009 2010

Source: Demirguc-Kunt, Beck and Honohan, 2007, Policy Research Report on Access to Finance, World Bank

Households with at least one bank account2007

Num

ber of accounts

Supply and demand of MicrofinanceNumber of accounts, millions

Population in need of Microfinance services (# accounts) 1

Population with access to Microfinance services (# accounts) 2

83%(500+ Million) Accounts Unserved

72%(475+ Million)

Accounts Unserved

Supply

Demand

Over 3 billion people live on less than two dollars a day and only 17% of them have access to formal financial services

20-40%

40-60%

60-80%< 20%

> 80%

Notes: 1 Based on CGAP data and population growth rates from the UN Population Division2 Current and forecasted numbers based on Microcredit Summit Campaign data, 2005Assumption that 1 Account = 1 Family = 5 People

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Daily Income*

Personalized, high touch†

Low touch

US$ 500

US$ 1

Unbanked Segments

Traditional Banking

~ 2 Billion

People

~ 4 Billion

People

Private Banking

Type of Service vs. Daily Income

Global Banking Pyramid

* Log Scale

† Service includes origination, management and collection

Current model in traditional banking

Microfinance innovation + technology required to lower the cost of this high-touch model

Inappropriate microfinance

distribution model

US$ 10

Type of Service

Traditional retail banking model is inappropriate for profitable microfinance operations

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In 2006 Microfinance was selected as one of the top ideas from the Innovation Jam and now we are in the process of establishing five Microfinance Processing hubs over the next three years

Latin America Working with the World Bank and associations of MFIs to establish a 14 million account processing hub to serve the MF market of the region

Russia Working with IBM Russia as the Kremlin announced its decision to use the country’s post office network to deliver financial services to Russia’s unbanked

China Initial conversations with global and local banks to find a partner for a China processing hub

Africa Working with a CARE international to jointly establish hub to serve 10 countries in the sub-Saharan region

IndonesiaSigned an MoU with the government agency with a mandate to strengthen national microfinance sector

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The vast majority of microfinance institutions don’t have access to appropriate back-end technology

77% 76%

33% 36%

54%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

E. Eur

ope/

C. A

sia (2

6)

Latin

Americ

a (25)

SE Asia

(43)

Sub-S

ahar

an Afri

ca (4

4)

All Resp

onden

ts (1

38)

Use of Information ManagementSystems by Region

Type of Information Management System

Source: CGAP

Custom Outsourced

25%

Spreadsheet 35%

Off-the-shelf10%

Manual11%

In-house 19%

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IBM GLOBAL SERVICES

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Current back office alternatives for Microfinance Institutions limit the ability to grow and compete with larger Financial Institutions

Costs vs. Functionality

Source: Based on a sample of MFIs in LA

Functionality Spectrum

Co

st P

er A

cco

un

t P

er Y

ear

$5

$10

$15

Pen and paper,

Spreadsheet

Off-the-shelf or custom built

traditional Core Banking with high

costs and very limited support of MF requirements

Full support of MF requirements, access to international payments networks, automated

reporting, flexibility and cost efficiency of traditional

banks

$20

Majority of MFIs globally, high costs and lack of flexibility limit growth

Hub environment reaches cost

efficiencies of traditional banks

Small MFIs but still common in some markets

Goal of Processing Hub*

* Indicative price, not actual

Size of MFIsCosts per Accounts

Very Large MFIs (+250,000 accounts) $50-$60

Large MFIs (50,000 –2 50,000 accounts) $20-$30

Medium MFIs (10,000 – 50,000 accounts) $15-$25

Small MFIs (2,000-10,000 accounts) $5-$12

Very Small MFIs (less than 2,000 accounts) $2-$5

Annualized cost per account

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The Processing Hub provides an end-to-end technology solution for low-income retail banking institutions to increase productivity and business opportunities

Microfinance Processing Hub

Service Oriented Architecture

Microfinance Institutions

Underbanked/ rural population

Products and Funding

Agent/reseller operations

Core BankingFS

Ap

plic

atio

ns

Liquidity Management

Collections and Recoveries

Risk Management

Payroll

Cro

ss in

du

stry

Customer Management

Accounting

Reporting (i.e. MIX, regulatory)

ATMs Networks/ Switches

Proprietary Applications

Credit Bureaus

Remittances Networks

Payment Networks

Applications Interfaces Infrastructure Management

Performance Monitoring

Storage

Infr

astr

uct

ure

Business Recovery Services

Connectivity

DB Management

Data Center

Help Desk Levels 1, 2 and 3

National Banking Networks

Mobile Devices/ Carriers

Sec

uri

ty Firewalls

Redundancy

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The Processing Hub also helps to integrate MFIs with other key participants from across the economy to create a more efficient and vibrant financial ecosystem

IBM Processing Hub Established BanksInt’l Payment Networks

Regulators

Credit Bureaus Telcos

1. Lend funds to MFIs at commercial rates. MFI performance reports available thru the Grid.

2. Sell products through the Grid, leveraging MFIs as distribution networks

3. Banks can also use online banking software of the Grid to expand into MF activities themselves

The Grid delivers automated, accurate, and transparent regulatory reporting & compliance

IBM can negotiate cost-effective deals with payment or ATM networks, giving MFIs global payments capabilities

The Grid can read from, and provide data back to, credit bureaus. This helps end customers establish an identity and get larger and cheaper loans over time

The Grid can integrate with one or more telcos offering mobile banking, allowing customers to repay loans or transfer money on their cell phone

Microfinance Institutions

NGOs / Donors

Greater transparency from MFIs, accurate & custom reports, and electronic funds transfer

Smartcard / POS Vendors

ATM or debit cards, payment terminals, and transaction routing

Agent/reseller operations

Core BankingFS

Ap

plic

atio

ns

Liquidity Management

Collections and Recoveries

Risk Management

PayrollC

ross

ind

ust

ry

Customer Management

Accounting

Applications Infrastructure Management

Performance Monitoring

Storage

Infr

astr

uct

ure

Business Recovery Services

Connectivity

DB Management

Data Center

Sec

uri

ty

Firewalls

Redundancy

10

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The LA Processing Hub will be accessed through different channels to allow many-to-many interactions

MFIs (central office)The Hub End Users

Agent/reseller operations

Core BankingFS

Ap

pli

cati

on

s

Liquidity Management

Collections and Recoveries

Risk Management

Payroll

Cro

ss

ind

us

try

Customer Management

Accounting

Applications Infrastructure Management

Performance Monitoring

Storage

Infr

astr

uct

ure

Business Recovery Services

Connectivity

DB Management

Data Center

Sec

uri

ty

Firewalls

Redundancy

Smaller MFIs or Branches

VPN

VPN VPN Physical

Physical

PhysicalMobile loan

officer

MB

an

kin

g