Information technology innovations that extend rural microfinance

Abstract

Creating a breakthrough in delivering microfinance services to marginalised rural populations is one of the greatest challenges facing the microfinance industry. Best estimates indicate that 5,000 microfinance institutions worldwide-and thousands more counting credit unions and other cooperatives-serve approximately 50 million low-income individuals and their families. While the success of microfinance is well documented, there is still room for improvement to meet existing demand, especially in rural areas. Possibly 20 institutions world wide have a client base of a million or more low-income customers, yet the majority of microfinance institutions (MFIs) serve fewer than 50,000. The reasons for differences in scale vary from country to country, but there remain a number of common problems in the industry worldwide, including: Many MFIs operate in an inefficient manner because centralised information processing has not been possible. Loan decisions are generated by time-intensive processes for gathering data, performing qualitative analysis and in efforts to form groups. Risk-based product pricing has recently become available with automated information systems, but many MFIs still offer only a single, generic product for all clients. Customers transaction costs, such as for journeys to town, are often high in proportion to the amounts of money they transact. In some rural areas customers' access to financial services is limited to once a week or every other week when a field officer or mobile unit comes to the Village Much information is still recorded on paper though the number of institutions that have automated management information systems (MIS) has increased significantly. Very few institutions link their internal systems with external systems, either directly or through data protocols. The primary approach of the microfinance industry in addressing these issues has been to increase the capacity of individual institutions so that each might serve more customers, collectively inching beyond the Microcredit Summit Campaign goal of serving 100 million1 people at the bottom of the economic pyramid. Looking ahead to 2015, imagine a financial services industry that serves 500 million or even a billion customers living on only a few dollars a day. Realisation of this scenario will require hundreds of thousands of outlets and locations from which to access services, massive information systems that process billions of transactions per month, and more than a million people involved in providing these services. This industry will require common data standards, more flexible structures and systems and a strong, customer-driven culture to create the necessary framework. Dramatically increasing the volume of microfinance service delivery to this level will require significant investments in product and process innovations, guided by strong management committed to change and creating business value, and building staff capacity. Information technology will simply facilitate or enable the growth; the pillars will be innovative business models and strategic partnerships. However, business processes often require revision in order to accommodate and reap the rewards of information communication technology (ICT). This chapter focuses on the emerging role of ICT in the microfinance industry, and how new partnerships and collaboration models can enable microfinance service delivery systems to support an ever-growing demand. Different models that use ICT to improve and expand the capacity of microfinance providers are examined in detail and compared, concrete examples are described, and challenges facing implementation are identified. Microfinance (MF) providers are defined here as financial institutions that range from formal banks to semiformal cooperatives, NGOs, and village savings banks, to informal savings and credit groups-institutions that provide financial services,2 including insurance. The ideas and recommendations advanced here focus on the role of ICT in expanding rural microfinance outreach, although they could be adapted to urban and peri-urban areas. © 2009 Springer-Verlag Berlin Heidelberg.