One of the challenges to growth in microfinance has been the tremendous time and effort required to make loans and collect funds. Digital solutions are upending current practices, however, and enabling companies to scale up as well as to provide better service to borrowers.
The traditional model for microfinance institutions (MFIs) has often started with a loan officer spending time, sometimes an hour or two, with a loan applicant or group of applicants to understand their needs, capacity and character. Applications were reviewed manually and, if approved, disbursed in cash. MFI staff then made regular rounds to collect repayments.
With mobile banking and digital payments upending other sectors in financial services, it seemed natural to apply digital solutions to MFIs. While mobility had for some time seemed more like talk than reality, digital delivery is now coming to fruition.
On the front end, MFIs have begun collecting information digitally. SKS Microfinance in India, for instance, found that staff were wasting time in administrative tasks such as gathering data and collecting paper. Staff spent hours travelling to villages, SKS Srinivas Peddada told the Economic Times, then returned to the branch and waited to enter data. A new tablet-based solution whereby SKS staff enter data digitally has reduced meetings with loan recipients from 45 minutes to 30 and enabled them cover 6 centers per day compared to the previous 5. Loan rates at SKS are now among the lowest in the market.
Tala Mobile has gone even further, with a smartphone app that applicants in the Philippines and Tanzania can download. The app gives Tala access to a range of data, according to Forbes, from basic demographic information to the number of people loan applicants contact each day, the size of their network, where they go and whether they make a daily call to their parents. Tala uses the data for credit scoring, having found that a person’s routine habits are more meaningful than traditional scoring. Applicants can apply 24/7 and receive approval in minutes.
Indeed, alternative scoring has become far more common. Scoring models in emerging markets evaluate borrowers using mobile phone data such as the frequency and timing of calls, account top-up, the average time between calls, continuity of account service and balance inquiry frequency as well as Facebook and other social media data.
One challenge once a loan is approved has been disbursing funds in a way that borrowers can use them for purchases. In villages without point-of-sale terminal infrastructure, that has often meant using cash. In Tunisia, however, Taysir Microfinance partnered with La Poste Tunisienne (the postal service) and mobile phone operator Ooredoo to go cashless. Taysir uses a mobile payment service developed specifically for microfinance whereby loans are disbursed via bank transfer on a La Poste card, which can be used to manage withdrawals or purchases. For repayment, according to EY, clients reload their cards in La Poste’s cash in network of 1,500 rural branches and use them to pay with their mobile phones.
Lending in urban areas can be even easier. In India, for instance, Axis Bank’s Urban Microfinance program uses geo-tagging of villages, digital KYC, instant loan approval and disbursement via cash or debit cards to disburse loans to women in joint liability groups.
Turning Technology into Triumph
The range of solutions in a multitude of markets exemplifies the power of using technology to scale up microfinance while speeding up services to customers and bringing down the cost. Those solutions don’t happen instantaneously, of course, and it will take time for them to become widespread. MFIs need to obtain funding to customize the technology solution and put the infrastructure in place, then train staff to take an entirely different approach than what they’ve used in the past. While some MFIs are making the shift on their own others are leveraging initiatives such as the Mobile Financial Services Accelerator program from the Grameen Foundation for funding. Once they make the shift, MFIs will be better able to scale up and have an even greater impact than ever before.
This article was written by Richard Hartung, Managing Director, Transcarta.
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