By Stuart Mathison, published by the Foundation for Development Cooperation (FDC), March 2007, 4 pages, available at http://www.microfinancegateway.org/content/article/detail/41751Stuart Mathison’s paper explores the impact of e-banking on microfinance. He highlights information and communication technologies (ICT) and their potential uses. He argues ICT innovations are crucial elements in the industry’s long-term objectives. Yet, core business models and methodologies that have served microfinance for years will require adaptation. Microfinance institutions (MFIs) need to reevaluate and revise policies in order to successfully implement new technologies.
Mr. Mathison explains that with the proliferation of microfinance, an emphasis on institutionalization emerged. The need to instill governance and sound management within MFIs was necessitated by three motivations:
- MFIs need to comply with local banking laws. Compliance requires governance and management.
- MFIs must achieve scale to obtain financial sustainability.
- Grants and subsidies are not sufficient to grow. To acquire private investment capital from external sources, MFIs need governance and sound management practices to prove sustainability.
Mr. Mathison defines the MFI imperatives, “outreach” and “sustainability.” He contends that two definitions exist for outreach. First, outreach can be seen as “more clients from a similar demographic.” If this definition is used, outreach lends a hand to sustainability. Outreaching inwardly in a tight demographic keeps costs low and provides efficiency that allows for financial sustainability. However, if one defines outreach as “targeting hard-to-reach clients,” then outreach hinders sustainability as it increases costs and is detrimental to solvency. Both schools of thought can benefit from ICT.
Mr. Mathison starts by describing the back office management information system (MIS). The MIS is software/hardware used to monitor and manage the MFI’s product offerings. It helps to measure development impact and to manage core administrative tasks. Mr. Mathison asserts ICT innovation is not possible without the foundation of a back office MIS. For an MIS to be effective, MFIs must enter transaction data in it. Paper-based processes delay the input of data, increase the likelihood of entry errors, and make real-time reporting impossible. With laptops and palmtop computers, data can be entered in devices on-the-fly and uploaded to the core MIS in batch or real-time resulting in near real-time data collection and monitoring of transactions. By using mobile computing, immediate efficiency and accuracy benefits can be obtained with very little disruption to existing operations.
Additionally, correspondent branches can help manage transactions for the MFI. Correspondents must be equipped with technology to interface with the MFI’s existing ICT infrastructure. Special care must be made to empower the correspondent branches to perform services and to train them to prevent fraud, theft, and money laundering activities. In addition, card service programs, like EFTPOS (electronic funds transfer point of sale) networks and ATMs (automatic teller machine), provide MFI borrowers with a means to easily utilize their funds. Since transactions are conducted electronically, records are automatically updated. Smart card technologies, which store financial data within the card itself, reduce the need for printed receipts and in some situations the need for persistent connectivity to the MFI’s core network.
Internet banking can provide clients with real-time access to account information and allow self-service. Internet banking reduces MFI transaction costs and is inexpensive to service. The incremental cost of adding clients that utilize Internet banking is insignificant. However, success with Internet banking is constrained by client adoption. Mr. Mathison also describes the concept of electronic community banking (ECB). ECB utilizes the benefits of Internet banking while incorporating microfinance principles. ECB’s objective is to promote local economic development by investing in local enterprise. The system allows for funds to be transferred electronically into and out of an ECB account. Funds are used as “local investment in local enterprise.” ECBs require local management and administration, which permit local configuration of lending terms.
Finally, Mr. Mathison explains the growing prevalence of GSM (Global System for Mobile) cellular phones and their potential as a microfinance tool. GSM phones are becoming advanced enough to serve as “mobile wallets,” capable of facilitating transactions between clients and MFIs. Many of the transactions previously restricted to face-to-face interaction will soon be widely available via cellular communications.
Mr. Mathison concludes by emphasizing the constraints of ICT-enabled microfinance. Many MFIs do not have the expertise to deploy ICT. Knowledge deficiencies and infrastructure costs are prohibitive. Also, financial sector regulation in various countries prohibits the use of electronic and mobile devices. However, Mr. Mathison believes MFIs will deploy ICT and evolve. For MFIs to coexist with the world’s advanced financial markets, ICT integration is not just a luxury, it is necessity.
-Steven Craig
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