Role of Technology in Microfinance: Crucial to Rapid Development

Role of Technology in Microfinance

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The role of technology in Microfinance is crucial to the rapid development of the industry. In particular, technology has enhanced customer-centricity, market outreach and profit margin.

Since the beginning, microfinance organisations have been working to eliminate financial exclusion. As part of that, it had to reduce the huge gap between financially excluded people and the financial service providers where technology players an important role. The formal banking system needs a guaranty of their loans and investment. But individuals and small businesses from rural areas cannot guaranty to that extent. Thus, microfinance organisations came to aid those who needed it.

So, the microlending business is risky because it operates without collateral. On the other hand, the entire operation requires a large workforce and resources. Moreover, small loan profiles, huge paper works, the manual collection process, and the cost of operation made things unprofitable. For large microfinance organisations, it became insufferable. In this particular situation, the role of technology in microfinance was time-defying. And until now, technology solutions continue to help the microcredit sector to expand to a global extent.

African man receiving microfinance loan
Photo: Maciej Dakowicz (Flickr)

Role of Technology in Microfinance

Technology is everywhere, and it makes our life easier. From our home to offices, it occupies us most of the time. Like our personal life, the role of technology in microfinance is undeniable for the microfinance sector. So, let’s talk about how technology is helping the microfinance industry.

Improving Customer Centricity

A customer-centric approach is important for every business. Thus, you should entirely focus on customers in every aspect of your business. If your business cannot make your customers happy, it will not survive long. Eventually, it is not about your customer’s satisfaction; it is about your survival. Therefore, the most important role of technology in microfinance is to boost customer-centricity.

Go back to thirty years ago, was there any technology helping microfinance except calculators? No, there wasn’t any. At that time, people were not bothered. They just wanted loans for improving their financial condition. But you have to understand; you are living in 2021 with high competition. Customers have new demands according to the present world. As a result, microfinance organisations need to adapt to the new business models to stay in the market. As part of your organisational development, you need to analyze your market to improve your customer-centric approaches. And this is what microfinance software does. It helps you analyze your customer’s demands. It also helps you improving trust among customers.

Reducing Operational Risk   

We already spoke about the high risk involved in the microfinance business. And it is not easy to reduce operational risk. You deal with marginalized people mostly without educational background. Besides, they are mostly hard labouring people without fixed assets and income. Therefore, reducing the existing risk is a tough job for microlenders.

an women microcredit borrowers
Photo: Michael Foley (Flickr)

A major role of technology in microfinance is, it reduces risks. It might trigger a question, how? Microfinance software, for example, helps you analyze your customers. Based on your data, you can see their previous borrowing records. So think, if you have information and you can process it faster, would you not recognise the risk before loan disbursement. Besides, it can also help you see total outstanding, daily collections, set targets etc. which eventually helps you make wise decisions.

Apart from the customer risk analysis, it helps you making reports, such as year-end closing and MRA report. And reporting to Microcredit Regulatory Authority (MRA) is not easy. Alternatively, it has a huge risk. But technology made everything easy for you.

Adapting to New Business Models     

Like humans, businesses are also changing. And if you do not adapt to new business models, your company is at risk. Therefore, you always need to remember that adaptability is survival. The microfinance industry is going through a massive transition. So, in this global shift, you must adapt to new business models.

In this shifting period, the role of technology in microfinance is rewarding. Everything is shifting towards technology-based solutions, and the latest is the only hope. So, you must recognise which is the latest technology. For decades, microfinance software has been helping businesses to adapt to new business models according to customer demands. So, helping to adapt to new business models is a very important role played by microfinance technologies.

Reducing Operational Cost

Operational cost minimisation is the most important role of technology in Microfinance. We have said before that microfinance organisations mostly deal with low-income people without fixed assets. According to their demand and industry requirements, loan profiles are very small. Despite the small loan profiles, the outreach cost is the same as banks. On the other hand, the interest rate is very less in comparison to formal lenders.

Small loan profiles in microfinance
Photo: Peter Haden (Flickr)

Furthermore, the operation requires more workforce. As a result, the operational cost is very high. These are the reasons most microfinance fails miserably.

During that crisis moment, technology was a blessing. Today most microfinance organisations are surviving because of technology. It helps organisations to reduce a significant amount of operational costs. Microfinance software, in particular, reduces paper cost, extra workforce, and person-hour. Therefore, the technology is helping microfinance to increase its profit margin.    

To conclude, we have to admit that the role of technology in microfinance is very important. From cost minimisation to improving outreach, it is helping the microfinance industry without any doubt. And we believe, if you want to expand and survive in the market, there is no alternative for microfinance software. So, you better make your decision now!

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