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HOW TO MAKE THE MOST OUT OF MICROFINANCE DIGITIZATION

Digital Banking

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What does digitization mean in today’s time?

Digitization. It’s everywhere. From the fingerprint scanner, as you walk into your office to the fund transfer you just made within seconds through your Facebook Messenger app, everything is being digitized now!

Spanning across all industries, at home and abroad, in metropolitan areas and even villages too, Digitization has touched upon every lifestyle, to say the least. You can see it amongst the corporates, and the micro-entrepreneurs, who are today utilizing microfinance services through financial technology. 

Since the 50s, when supercomputers were discovered until now, when we have much more powerful devices in our pocket, we have come a long way in digital transformation. We are far more connected than ever, with digital transformation binding us all, in ways previously unimaginable. 

Advanced Technology: The 21st Century STANDARD

Technology has crept into our everyday lives, like the oxygen we breathe in. It takes very little to realize how accustomed we have become towards it. Take a simple power outage for example. Or imagine a very slow internet connection. How frustrated were you the last time that happened? More importantly, how crippled did you feel without access to any of it?

This phenomenon, i.e., Digitalization, came like a wave, and needless to say, we have been surfing on this life-changing transformation ever since. 

What digitization looks like in the world of Microfinance

The scope of digitization is vast. Every sector has come leaps and bounds. From small organizations to big tech companies, they are all thriving with the help of digital technology. The Microfinance sector is no different. The Microfinance industry, in particular, has grown and continues to grow in interesting ways. Let’s have a look at how:

Cashless Banking

With Microfinance, the aim has always been to promote financial inclusion. Microfinance institutions which are impact-oriented look for ways to increase their reach to the underbanked while keeping operating costs bearable. An emerging change in their traditional process is cashless banking service. Where no physical disbursement of cash or deposit is required. 

A complete digitization of microfinance. 

This approach helps to overcome geographical and infrastructural barriers, lending a great deal of relief for its borrowers. Instead of having to travel all the way to repay to field officers or collect money, they can simply use e-wallet and complete it within minutes. 

LEVERAGING TECHNOLOGY FOR OPTIMAL USE OF MICROFINANCE

Cashless banking, or as many many call it, mobile banking, saves the borrowers who are already on limited income extra commute cost and time. This means that he/she can now use the saved time and money more productively such as attend to their micro-business that they have so keenly taken microloans for. 

If you are an MFI, you can guess how this will also help save your costs. Carrying stashes of physical cash to disburse it out to all the microfinance clients is rather impractical. Moreover, a majority of these clients stay in the remote locations which are difficult to access, and far away from the banks. 

Majority of microfinance clients stay in the remote locations

This increases operating costs by a huge percent. Subsequently, this cost then gets added to the interest rates for microcredit, thus giving rise to the ever-increasing interest rates of many such institutions. This nullifies the whole purpose of microfinance.

Keeping this in mind, many microfinance banks are now switching to cashless banking. Hindustan Microfinance is one of them. From the previous cost per each debt collection that was 18 rupees, it saw a drastic decrease to only 2 rupees, thereby reducing their operating costs by a remarkable 80%.

Working Together to Enable Financial Inclusion: Mobile Services Provider + Microfinance Bank 

When it comes to cashless banking, mobile service providers have a significant role to play. They are literally the medium that helps ‘bridge the gap’ between those deprived of simple financial services and microfinance institutions. 

Musoni, the pioneer Microfinance Institution (MFI) in mobile banking, established the idea of a completely paperless transaction. Working alongside M-PESA, Kenya’s highly successful mobile money service, allows its members for quick and inexpensive transactions irrespective of the amount of money. 

“Kenya’s M-Pesa proves that when people are empowered, they will use digital tech to innovate on their own behalf.”
—Bill Gates

When linked to mobile money, microfinance members are able to transfer their savings and loan repayments directly into a shared bank account, and the paperless system is used to record the transaction. What’s in it for the borrowers?

  • Faster transactions
  • Reduced cash handling
  • Complete autonomy

How Does It Work?

M-PESA: A mobile phone-based money transfer, financing and microfinancing service, launched by Vodafone in 2007 for Safaricom and Vodacom, mobile network operators in Africa.

HOW EFFECTIVE WAS THE INTRODUCTION OF M-PESA IN KENYA?

Intuitive Credit Scoring

Giving out microloans would be impractical without any way to recognize the risks involved with the potential borrower. That’s where Big Data has stepped in. Imagine vast volumes of data- structured and unstructured of the 1.7 billion people looking to access microfinance services.

Big Data works with huge volumes of these data, which, when accessed within the correct time frame, enables real-time analysis. 

These are available data:

  • In electronic form
  • Centralized and aggregated
  • Generated in real-time
  • Easy to gather and store

The sources of these data are generally the SMS’s, email, call records, social media, emails, etc. 

Deep Data Mining

A combination of big data alongside the traditional banking model data means microfinance institutions get a more transparent credit profile of their potential clients. 

Today, big data allows microfinance institutions and banks to look beyond the numbers and assess the creditworthiness based on other factors too, such as- individual’s behavior, willingness to repay, ability, etc.

A huge reason why there is an increasing number of SMEs is due to the fact that more institutions are looking more in-depth than just the traditional bank data models while providing loans. They are now applying a more human and practical approach towards analyzing the creditworthiness for microloans.

SMARTPHONES: DIGITIZING MICROFINANCE ONE SUBSCRIBER AT A TIME

It is not an uncommon sight to see smartphones today in the hands of people ranging from the elderly to the young, both in the urban and rural settings. This reflects the very high and increasing level of smartphone penetration. This means a massive bank of data exists, much of which are being used to measure the creditworthiness of rural microfinance borrowers. 

smartphones today ranging from the elderly to the young

To put point to context:

For example, only 31% of the adult population in Vietnam actually have a bank account. This is one of the lowest rates in East Asia, even though it is one of the fastest-growing economies amongst other countries. Yet, more than 71 million mobile service users are present there. That means a massive chunk of data coming in from this largely rural-based unbanked population today presents an enormous scope for lending platforms. 

Better Business Intelligence

All the data that we talk about is meaningless if we don’t know what they add up to. You can be easily caught overwhelmed with all that data if you have no clue how to process them. 

Communication is key but effective communication is the real deal!

Today, tools such as Business Intelligence (BI) are helping to transform data into valuable pieces of information. It is helping to turn all that gibberish numbers and figures into insightful facts that show the management which way to go next. 

Are your borrowers showing remarkable repayment rates across most branches?

Do you feel that your institution’s borrowers qualify for loans as large as 50,000 BDT but cannot confirm it?

Have you been considering transforming into a microfinance bank lately?

BI helps you get answers to all of this and more by providing you with a comprehensive graphical view of your microfinance operations for easy understanding.

With BI, Microfinance institutions are now able to study trends and filter out which processes are working for them and which are yielding no results. Based on this, microfinance directors qualify to take definitive decisions.  

If you are running an MFI and are yet to have a BI in place, then you are losing out on powerful information!

How is Southtech Helping Digitize Microfinance using Technology:

An Integrated BI Tool

When you have to make essential calls on behalf of the MFI, merely having access to borrower records will not be enough. A simple representation of complex data through dynamic reporting of our BI tool, enables decision-makers of MFIs to make those calls. 

By providing a birds-eye view to senior management on efficiency, performance, and risk, we are enabling them to take measures based on informed judgment. Because we understand the power and necessity of what a BI tool offers, ours is integrated with our leading microfinance software- Ascend Financials.

Graphical report using Ascend Business Intelligence tool
Southtech Ascend BI

Centralized Solution:

Time is money, and digitization influences both of these very strongly. When information is available at your fingertips as and when needed, running an MFI becomes just that much easier. 

Having a centralized microfinance solution means access to microfinance records are not limited to a designated desktop/PC, thus reducing inefficiency in the process. Several hours of work lost mindlessly, now has a much smarter and efficient alternate. 

By providing a centralized web-based microfinance software solution, accountants of microfinance institutions are no longer restricted physically to a singular access. They can update repayment records anytime and view them in case of emergencies from anywhere


Branchless Banking:

Time and distance are no more factors of barriers. Therefore, keeping up with the changing times, we help field officers of MFIs to reach the remotest of areas where there is low internet connectivity. Using Smart Collect, our Android-based mobile app, we are ensuring that no loan or repayment from any borrower remains interrupted or pending. 

You can sync the collections on your device automatically once connected to the Internet. This way, you risk not losing any information and save upon hours of manual entry. 

Branchless banking of microfinance institutions

KEEPING UP WITH THE TIMES

When it comes to technology, there is no end. Technology and more specifically, financial technology holds immense opportunities for the field of microfinance. Combining traditional methods with modern digital concepts opens doors of expansion for microfinance institutions.  Therefore, it is important for microfinance practitioners to embrace new ways to digitize microfinance for the benefit of both the institution and the target communities.

Microfinance institutions already have a tried and tested successful business model. To build on that to digitize their operations is, therefore, both encouraged and doable. Furthermore, we are now looking at an extremely data-driven microfinance industry. Therefore, if channeled properly, MFI’s could benefit a great deal through the use of financial technology. 

DIGITIZE TO OPTIMIZE 

The ultimate goal of microfinance institutions is to provide financial services to the underprivileged. Keeping this goal in mind, it is best to adapt to the changing ways of running microfinance operations. The world at large is far more accepting of the positive impacts digitization brings along, rather than resistant. If embraced and followed, you as an MFI can be sure of not lagging behind when it comes to ensuring optimal measures for financial inclusion. 

Click here to find out more on how Southtech is helping to digitize Microfinance in Bangladesh

BASIS awards Southtech’s Microfinance software 2nd Runner-up for Fintech

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