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The use of IT in microfinance
Finance Forum
The World Bank
Thesis
The use of IT can help at two crucial levels in the microfinance process, including to reach out to the poorest, or those in remote areas,
but severe obstacles require creative solutions
Agenda
• How can IT help in the microfinance process?• What obstacles make this difficult?• What kind of creative solutions can be found?• What can the Bank do ?
IT can help at two levels: (i) in assessing loans, and (ii) in reaching out to clients
• In assessing loans: IT-based credit scoring or other credit assessment models are key to:– Ensure a good quality of loans
– Increase productivity
• In reaching out to clients: IT can help expand programs in a profitable way, even:– In the absence of a pre-existing branch network
– In rural and remote areas
Outreach has traditionally been built through branches
• Nearly all microfinance programs rely on branches• Programs with large outreach have medium to large networks • Those which focus on large cities, have medium size
networks• BancoSol in Bolivia (33 branches / 650,000 clients)
• Those with a presence in rural areas have very large networks, which either:– Relied on a pre-existing extended branch network
• Unit Desas in Indonesia (3500 village units / 2.5 million borrowers) • SHG program in India (networks of 40 banks / 2 million borrowers)
– Benefited from large subsidies to finance a wide scale branch expansion in rural areas
• Grameen Bank in Bangladesh (1160 branches / 2.4 million borrowers)
Large rural programs, relying on large networks, have received heavy subsidies
First soft loan First bond issue
Grameen Bank
Source: Grameen Bank
Reliance on branch networks constraints growth, in particular in remote areas
• In many countries, many programs remain small as increasing outreach via branches would not be profitable
• Rural and remote areas have often been left unattended, even by microfinance institutions !
Hence, IT can help build up outreach profitably, especially in smaller city centers and remoter areas
IT could facilitate the profitable expansion of microfinance programs
$1.40
$1.20$1.08
$0.20$0.32 $0.33
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Branch Online
EStimated cost of banking transactions
US Latin America Brazil
Source: TowerGroup, 2000
Agenda
• How can IT help in the microfinance process?• What obstacles make this difficult?• What kind of creative solutions can be found?• What can the Bank do ?
Low connectivity is the main obstacle …
Source: Telecommunication Union Data Base
Personal computers (% pop.)
0%
10%
20%
30%
40%
50%
60%
Brazil Argentina Chile Mexico Korea HK SouthAfrica
UK USA Finland
1999 2000
… even for fixed and cellular phones …
Source: Telecommunication Union Data Base
Mobile cellular subscribers (% pop.)
0%10%20%
30%40%50%60%
70%80%90%
Brazil Argentina Chile Mexico Korea HK SouthAfrica
UK USA Finland
1999 2000
… even more so for the poor
Source: Central Bank of Brazil
Telephone density in Sao Paulo
8%1%
98%
78%
39%
2%
98%
57%
23%
8%
35%
75%
94%
12%
93%
0%
20%
40%
60%
80%
100%
120%
A B C D E
1997 1998 1999
Other obstacles play a more limited role
• Costs of IT services (device, subscription, calls)– In Brazil, monthly subscription charges for cellular
phones can be up to 10% of the minimum salary
• Security issues (internet, cell phones)• Education• Cost of money transport to remote areas
– Breakeven point for ATMs reached at about 4,000 daily transactions
Agenda
• How can IT help in the microfinance process?• What obstacles make this difficult?• What kind of creative solutions can be found?• What can the Bank do ?
Creative solutions have started to emerge in various countries
• Make use of public infrastructure:– The post office network (India)
• Create own IT infrastructure at cheap cost:– Internet-based e.g. PopBank machines in
grocery stores (Brazil)– Satellite-based e.g. Caixa’s correspondent
banker network (Brazil)– Cellular-based e.g. TEBA Bank (South Africa)
Using public infrastructure
India Post– Idea: allow microfinance providers to access
new clients via the post office network– Advantages: costs to reach out lower segments
are reduced• Existing network with large rural presence• Existing client data base with saving information• Potential competition among various providers• Limited cash transport requirements
Creating own internet-based IT infrastructure
Pop Bank– Idea: install internet-linked terminals in “panaderias”– Advantages: costs to reach out lower segments are
reduced• Internet-based technology• Limited cash transport requirements by using grocer’s
liquidities• Automatic link with a commercial bank’s back office
capabilities• Potential presence at heart of 25,000 villages• Other potential sources of income• Attractive machine
Creating own satellite-based IT infrastructure
Caixa– Idea: install satellite-linked machines in grocery stores
– Advantages: costs to reach out lower segments are reduced
• Limited cash transport requirements by using grocer’s liquidities
• Automatic link with the commercial bank’s back office capabilities
• Cheap device and card (debit)
• Simple to use
Creating own cellular-based IT infrastructure
Teba Bank– Idea: install wireless terminals in “Spazza” shops – Advantages: costs to reach out lower segments are
reduced• Limited cash transport requirements by using grocer’s
liquidities• Automatic link with the commercial bank’s back office
capabilities• Cheap device and card (debit)• Agreement with telecom company• Simple to use
Agenda
• How can IT help in the microfinance process?• What obstacles make this difficult?• What kind of creative solutions can be found?• What can the Bank do ?
The Bank can help
• Build up the required IT infrastructure• Increase competition in the telecom sector• Ensure that the regulation of small microfinance
providers does not prevent creativity (ex: private partnerships)
• Encourage and support creative solutions– IFC
– Government incentives