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 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

… even for fixed and cellular phones … Source: Telecommunication Union Data Base

… even more so for the poor Source: Central Bank of Brazil

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