Lessons from the Field: ICTs in Microfinance (October 2004 update)


The majority of poor people in rural areas around the world lack access to financial services. In India alone, over 200 million people (36% of the rural population) do not have access to a bank. Although India has more microfinance organizations than any other, these programs only reach a small percentage of needy households. The rest have no alternative to the local moneylenders whose exorbitant interest rates reinforce the indebtedness that contributes to a lifetime of poverty.

Microfinance Institutions (MFIs) play an important role in the economic development of poor communities. Access to credit enables households to accumulate wealth and assets, which allow them to better cope with their economic and social vulnerabilities. MFIs include non-governmental organizations (NGOs), credit unions, non-bank financial intermediaries, and even a few commercial banks. The majority of these microfinance organizations are donor funded, which is an obstacle to their scalability and sustainability. Of the more than 7,000 MFIs worldwide, less than 100 can claim financial self-sufficiency.

To combat this problem, some MFIs are using new information and communication technologies (ICTs) to improve their operations in three main areas: expanding their customer base and extending their reach into underserved areas, establishing secure identities for customers, and lowering transaction costs.


Reach
Larger banks, whose access to capital, scale, reach, and expertise could alleviate many of the problems associated with microfinance, have been reluctant to respond to the unmet demand for microfinance services due to the large costs of building and maintaining physical bank branchs, and the high transaction costs and low profit margin on small loans. With this in mind, many initiatives are currently using new information and communication technologies (ICTs), such as smart cards, handhelds, and modified ATMs, to bypass the traditional methods of providing bank services. In doing so, they are lowering their overhead costs and expanding their reach, helping to extend the availability of microfinance.

In Bolivia, one MFI is providing ATM-enabled banking services to Bolivians that do not have access to the traditional banking system. PRODEM FFP was established as an NGO in 1986 by ACCION International. Since 1999, it has been a regulated, privately held financial fund focused on bringing microfinance services to underserved communities, both rural and urban.

In a country where 70% of the general population and 94% of the rural population are classified as poor, PRODEM has designed its own ATM, tailored to meet the needs of its rural customers. The company provides its customers with a smart card, so that the ATMs are able to verify the customer's identity and complete transactions without being electronically connected to the central office, thereby allowing PRODEM to expand its reach into remote areas.

PRODEM finds that the ATMs allow it to serve customers who cannot come to their branches during normal business hours. Moreover, the ATMs are capable of "speaking" to their users in their local language, thus enabling illiterate customers to access their services. Audio instructions are currently available in Spanish, Quechua, or Aymara. Combined with a touch screen interface, customers are able to deposit and withdraw funds without filling out a deposit slip or withdrawal form. Additionally, the ATMs facilitate money transfers, provide access to government programs that provide work for low-skill workers, and make payments to senior citizens.

PRODEM's ATM software was developed by a subsidiary of PRODEM, Innova Empresarial, which specializes in technology and consulting services. Its features include an easy-to-use administrative interface, as well as a number of reporting options, including daily, weekly, and monthly. In addition, Innova is in the process of developing Palm technology that would enable PRODEM to take their financial services, via a handheld, into local homes and businesses of their customers.

ICTs are also being used by VOXIVA to allow MFIs located in Peru to expand their reach. The company uses a phone-based system with voice prompts to expand microfinance networks into rural areas that have high numbers of illiterate people. The service reduces operating and transaction costs, resulting in savings that can be passed on to the borrower.

In Asia, ICICI Bank, India's second largest financial institution, is betting its future expansion on leveraging new partnerships and innovative uses of ICTs to profitably market banking services to the poorest of the poor. The bank has combined its capital and expertise with the social mobilization strength of existing microfinance organizations and self-help groups (SHGs), in order to help such groups scale up their activities. In two years alone, the company increased the number of SHGs it serves from 1,500 to more than 8,000. To further increase their rural presence, ICICI has also partnered with several Internet kiosk networks that will utilize ICTs to provide online banking services. This includes both online banking as well as the deployment of inexpensive rural ATMs that make use of the kiosk computer's capabilities. By formalizing the rural financial services market, ICICI is helping to fulfill the long unmet demand for rural credit at an interest rate that enables the borrower to lift themselves out of poverty.

Identity
Rural poor people frequently lack an "identity" that allows them to access credit. Banks are reluctant to provide services to these potential customers, who are often illiterate and have no credit history. By providing secure identification, new ICTs such as smart cards and biometrics are compensating for this, allowing many to access credit from formalized institutions for the first time.

PRODEM, for example, is using ICTs to verify the identity of its customers. It utilizes a combination of smart card technology combined with biometrics to allow fingerprint ID verification at all of its branches and ATMs. The use of fingerprint verification ensures that only the account holder can complete a transaction, making it more secure than traditional ATMs that simply require a PIN number. The system is also easier to use for customers not familiar with PINs, passwords, or other identifiers that require memorizing an identification code. The smart cards store all of the customer's personal and financial data. As a result, the ATMs are able to verify the customer's identity and complete transactions without being electronically connected to the central office. As of May 2003, PRODEM had 32,000 smart card account holders. The company plans to extend its network throughout Bolivia, and intends to expand into other countries in the near future.

Secure identity can also protect MFIs from customers who have proven to be bad credit risks "shopping" for loans from one branch or one MFI to the next. Addressing this problem requires sharing customers' credit histories among MFIs operating within a country--a function typically performed by a credit bureau. A new effort to explore such cooperative approaches, and the ICT tools to make them possible, is the Microdevelopment Finance Team (MFT), an initiative convened by technology giant Hewlett-Packard as part of its pro bono initiative under the UNICT Task Force working group on entrepreneurship. The MFG is developing new "end-to-end" technology solutions for microfinance as well as new organizational forms that could increase cooperative efforts such as credit bureaus or pooling loans across many MFIs to access capital markets.


Efficiency
ICTs also allow microfinance organizations to increase their efficiency, thereby lowering their overhead costs, and helping them to achieve sustainability. The Dhan Foundation, for example, is streamlining its microfinance activities using a combination of handhelds and smart cards. The technology results in time savings for loan officers, while also ensuring more accurate accounting and record keeping. Because all the information is stored on a smart card, field officers can make decisions on the spot, reducing the number of visits required to complete a transaction.

BASIX, India's largest microfinance organization, is experimenting with handhelds and smart card technology to automate the loan process and keep track of repayments, in order to reduce labor and cash handling costs. BASIX's Mobile Portfolio Management System also helps to minimize accounting errors.

Swayamkrushi, a women's lending cooperative in India, has also experienced an increase in efficiency since it computerized its operations. In addition, the computers used in the microfinance operations are being used by members to access the Internet, providing additional benefits to the women.

Pride Africa, a cluster of MFIs currently operating in five sub-Saharan African countries, is using IT for increased efficiency and faster growth. In Kenya, it has launched an experimental portal, DrumNet, which stores information on the buying and business habits of Pride clients in order to group the purchasing power of thousands of small entrepreneurs.

In India, micro-finance is primarily administered through self-help groups (SHGs). One shortcoming is that the accurate accounting procedures needed to maintain solvency are often overlooked, leading to longer processing times to the MFIs that service them. To increase efficiency, PRADAN introduced the Computer Munshi program, through which a community-based computer entrepreneur provides accounting services to the SHGs for a reasonable payment. The entrepreneur provides monthly data to PRADAN for a fee. Each "munshi" serves about 200 SHGs, sufficent scale to make the business sustainable. While each SHG retains their own accountant, the Computer Munshis are better trained in both accounting and computer skills, and therefore able to process reports more quickly to the benefit of both SHGs and MFIs.

Various software packages are contributing to the increase in efficiency of many MFIs. HISAAB, for example, is a group-level microfinance software designed for illiterate and uneducated users. The software is used to document transactions, and allows for more macro-level analysis of lending patterns, cash flows, and repayments. Other software features include the ability to record meeting attendance and savings/credit account transactions, and to exchange data with the central bank office. Cooptions Technologies has developed a software package, Pax@2000, which will computerize the activities of cooperative lending societies and micro-lending banks. The software features online disbursals, data transfer to managing banks, savings/credit account modules, and financial accounting systems. Another, Microfinancer MATRIX, is designed for large micro-lenders. It links the head office to branch offices, and also has built-in accounting and evaluation capabilities.

Additionally, software enables microfinance organizations to consolidate their loans. Once microloan details are stored in an electronic format, their amounts can be combined into a larger loan that can be bought by a larger bank, or securitized to capital markets, thereby providing a much needed supply of capital to MFIs. The Microdevelopment Finance Team hopes to field test some elements of a system that can potentially provide increased efficiency and other aggregate benefits to MFIs over the coming year.

MFIs often don't know what software they need, or are not culturally ready to adopt it within their organization. To address this deficiency, the Consultative Group to Assist the Poorest (CGAP) will soon begin a consulting program that helps these MFIs to decide what software they need, and then assist them in buying and implementing it. Another organization, echange, also advises microfinance organizations on selecting appropriate information technology to increase efficiency and improve institutional management.

ICTs will continue to impact microfinance operations worldwide. As prices of relevant technology like ATMs, biometrics, voice recognition, smart-cards, and PDAs continue to fall, more MFIs will be able to take advantage of the benefits they offer. New technologies and applications are constantly being developed aimed at increasing the reach and efficiency of microfinance organizations. Improvements will make operations more secure, increase transparency (and thus scalability), reduce repetitive tasks, and provide data mining capabilities that will allow MFIs to compete effectively and better manage their operations. Together, ICTs are helping MFIs to finally meet the unmet demand for microcredit throughout the developing world.


More Resources
The projects highlighted in this article represent only a portion of what is available in the Digital Dividend Project Clearinghouse. You can Search the Clearinghouse for more than 30 microfinance projects yourself... click here.

The Microfinance Gateway is a public forum for the microfinance industry at large that offers a wealth of tailored services for microfinance professionals, including resource centers on specific topics in microfinance, a searchable library of electronic documents, a consultant database, a jobs listing service, and specialized discussion groups.

The Virtual Library on Microcredit is a repository of information on alternative, non-conventional financial systems and microfinance/microcredit issues.

The Development Gateway Microfinance page contains links to articles searchable by key issues.

The Consultative Group to Assist the Poorest (CGAP) is a consortium of 29 bilateral and multilateral donor agencies who serve microfinance institutions, donors, and the microfinance industry through the development of technical tools and services, the delivery of training, strategic advice and technical assistance, and action research on innovations. The portal also reviews several software packages available to MFIs.