Technology is a Crucial Element for Microfinance

Intelligent design is the answer.

Internal Control in Microfinance

In certain economies, the microfinance sector is at the risk of implosion as reckless growth in lending portfolios of microfinance providers has brought on a repayment crisis, marked by high default rates. These incidents demonstrate that mere growth is lethal if it is not backed up by institutional and technical capacity building to deal with the growth. Prudent policies and procedures, which integrate the expansion of each organizational discipline, go a long way in protecting microfinance institutes from biting off more than they can chew, and risking the impairment of their loan portfolios and the well-being of their clients. As a result, MFIs must start investing time and money into strengthening internal control systems that are backed by appropriate technology solutions.

Improving Management and Generating Returns for Investor

Technology is more intrinsic to microfinance than we realize. Impressive repayment rates have now caught the eye of investors who are willing to provide much needed capital in return for social and financial gains on their funds. Unfortunately, since a majority of microfinance providers rely on manual bookkeeping, this high-touch, volume-based business model prevents them from gaining efficiencies and keeping costs under control as their client base grows. The alternative sources of profit are higher interest rates and service charges, but they are undesirable in the social context of microfinance.

One solution is to adopt scalable microfinance information technology that not only delivers cost savings, data security but also provides absorbs masses of data in order to provide accurate and timely reports for better managerial decision-making. Such information systems may be developed in-house or by an external vendor, which enables microfinance providers to focus on their core business.

Serving Needs of Micro Entrepreneurs

Speaking of core business, MFIs are eager to explore different geographical markets and cater to each segment’s varying needs with customized products. The explosive growth of mobile banking in Sub-Saharan Africa is a telling example of how the right strategy, backed by the right technology, can open new horizons for microfinance providers. Specialized information systems not only cater to each MFI’s unique processes and each market segment’s nuanced characteristics, they also allow MFIs to experiment with product elements and tweak them to suit client needs.

Managing Credit Risk

Another tool that ensures MFIs expand in a manner that is cautious enough for clients, yet rewarding enough for investors, is a microfinance credit bureau. By developing risk profiles of individual borrowers, credit bureaus deliver immense short term gains, which include:

• Better understanding of clients and their needs,
• Improved Know your Customer (KYC) implementation,
• Lower cost of credit for low-risk clients,
• Product customization according to risk profile,
• Reduced transaction cost and quicker loan processing in the presence of immediate risk profiles,
• Prompt credit collection as borrowers seek to improve their ratings, and
• Better portfolio management with the removal of risky loans.

These benefits yield long term gains, such as:

Greater credit discipline as multiple borrowings are prevented,

Responsible finance, marked by better decision-making and safe portfolio growth,

Better supervision of sector by investors and regulators,

Greater availability of information, which will attract competition, and

Improve financial and social performance of the MFI itself

The role of technology in microfinance, in terms of each area discussed above, will be discovered in upcoming posts on this blog. Indubitably, the possibilities for innovation, growth and impact are immense, and the power of technology can be leveraged to deliver the ‘intelligent design’ needed to help microfinance achieve its potential.

Further reading:

Neralla, D. (2010). Adopting ASP Model for Cost Effective Technology Solution in MFIs.Microfinance Insights. 16
Dutheil, M. (2006). Microfinance Bureaus : Balancing Vision and Pragmatic Solutions. Available: info.worldbank.org/etools/library/latestversion.asp?235943. Last accessed 2, April, 2010.