Increasing the Outreach and Sustainability of Microfinance through ICT Innovation By Stuart Mathison Presented by Debasis Mahapatra

What is Microfinance Microfinance is the provision of relevant and affordable financial services to poor households. Primarily concerned with credit and saving although, in recent time allied services such as insurance, leasing, payment transfers and remittance are being introduced.

Challenges before MFIs Providing microfinance to poor clients requires innovative operating methods to manage risk and reduce transaction cost. Poor clients don’t have physical assets to offer as collateral for loans. Therefore formation of group of borrower and establishment of joint liability procedure substitute collateral.

Type of MFIs Community based savings and loans cooperatives also known as “self-help” groups or SHGs Charitable non-governmental organization providing revolving loans to the poor. MFIs established by commercial banks or government owned development banks.

The Microfinance Theme of “Outreach” and “Sustainability” If “increasing outreach” is taken to mean more clients from a similar demographic area then “outreach” and “sustainability” are effectively synonymous terms. But, if “increasing outreach” is taken to mean “targeting hard to reach clients” such as people living in remote areas, then “outreach” and “sustainability” are effectively competing terms. ICT innovation can help reaching clients in remote areas in cost effective manner.

Importance of ICT in Microfinace Electronic commerce has its genesis in the banking sector. E-commerce has changed the methods of cash transaction. Can same evolution occur in less developed countries? Many microfinance practitioner see ICT innovation as a key strategy in efforts to take microfinance to the next level in terms of outreach and sustainability.

Back-Office Management Information System (MIS) The most fundamental ICT application is back-office MIS. Sophisticated MIS is prerequisite for MFIs to monitor the quality, sustainability, and efficiency of its loan portfolio, to monitor development impact, and manage general administrative tasks. MFIs also track the non-financial information. So, they need modified off-the-self software package for these requirements.

Mobile Computing The back-office MIS helps the MFIs to monitor its loan portfolio, this functionality is undermined if the data analysed by the MIS is not up-to-date or contains errors. Through mobile computing systems the Loan officer have a palmtop computer, so that the financial transaction can be recorded directly into the MIS. It has significant implication with respect to data accuracy and integrity, there by enhancing “client confidence”.

The Branch Office Franchise Model MFIs have an overwhelming pressure to reduce transaction costs and increase profit margins. Through branch office franchise model, the MFI links with third-party merchants in remote areas. The rural telecentre networks are particularly suited to serving as retail outlets for MFIs.

Card Service, EFTPOS and ATMs There are many similarities between consumer credit cards and microcredit services. Both tries to reduce high cost associated with small transaction lending. Introduction of card-based services require the roll- out of either EFTPOS functionality with third-party merchants and/or ATMs. Card- based microfinance offers even more opportunities like allowing clients who have proven creditworthiness over time should given access to additional products and services.

Internet Banking Gives client real-time information about their account, and the ability to transfer funds between accounts. It is an efficient tool to reduce the work of tellers and therefore reduce the labour costs. Rural telecentre networks can help in implementing Internet Banking for MFIs.

Remittances: Microfinance Outreach to International Labour Migrants MFIs through technological innovation, product design can tap this market by extending outreach to these migrant workers and their families at home. For example Sri Lanka’s Hatton National Bank, whose “HNB Easy Remittance” help Sri Lankan migrant workers to remit funds directly to HNB accounts.

Challenges and Criticism Wide digital divide persist in India. Finance sector regulation restricts innovation in MFIs. ICT- enabled services de- personalize and individualize the banking process, thereby conflict with those group- based methodologies that can be held up as the key reason for high-repayment rates of MFIs.

Conclusion Some says “it can’t be done in microfinance, electronic banking for poor will not work”. It has to work. Otherwise will be at a continuing disadvantage with current economies and enterprises. 20 year ago when microfinance was in its infancy many at that said “poor can’t repay, the poor will not repay, the poor can’t save.

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