November 15, 2010
Jason Polen works as a Social Media Intern for Grameen Foundation based out of our Seattle office.
In developing countries, the demand for financial services still far exceeds the supply. Usually when this occurs, businesses scale-up to meet the demands of the market. However, microfinance institutions (MFIs) are still not fulfilling the financial demands of the world’s poor. What is preventing MFIs from reaching everyone hoping to break the cycle of poverty? The key barrier is technology; many small and medium sized MFIs lack affordable, efficient, and usable technology.
In New Delhi, on November 17th, Grameen Foundation and Microsoft are holding a conference focused solely on the intersection between technology and microfinance. The 2010 Microfinance Leadership Summit entitled, “Fueling Growth: Strategic Technology for Microfinance” will bring together leaders from throughout the microfinance and technology ecosystem to discuss how they can better leverage technology to meet their business and social goals. Grameen Foundation and Microsoft will outline how MFIs can use technology to decrease administrative and transactions costs, increase social benefits, and maximize transparency.
Unfortunately, most small and medium sized MFIs charge relatively high interest rates (though they are still lower than the alternatives offered by informal loan sharks). Providing a thousand $25 microloans has significantly higher administrative costs than providing one $25,000 loan. Charging high interest rates is the only way for most MFIs to be sustainable, but adopting the appropriate technology can change this. It has the potential to significantly reduce the cost of distributing, monitoring, and collecting microloans, which decreases administrative costs and therefore interest rates. MFIs that have successfully integrated their banking software with mobile banking technology have experienced enormous decreases in overhead costs. Transactions become automated, reducing accounting costs and thousands of hours spent calculating inefficient or duplicate data entry. With the increased use of technology, MFIs can decrease the interest rates charged to borrowers and focus on reaching more people in need.
Besides cutting costs, increasing technology offers a number of social benefits to borrowers. MFIs will be able to collect valuable information about their clients. This data can then be used to identify long and short-term trends, allowing the MFIs to constantly evaluate how they can better serve their clients’ needs. It provides answers to important questions. Are the loan recipients’ incomes increasing? Is there is a need for new products, like savings accounts or health insurance? Are clients in rural areas being reached? Being able to answer these types of questions allows MFIs to be forward-looking, which helps align their efforts with the needs of the poor.
Finally, investing in technology in a strategic way will lead to greater transparency and therefore accountability. Through more sophisticated reporting tools, MFIs are able to know where they stand minute-by-minute, and then this information can be shared with stakeholders. The transparency technology offers gives important insight into the microfinance market as a whole. Tracking and reporting on borrowers, savers and their movement out of poverty allows MFIs to make a more accurate, data-backed business case to social investors. Increased social investment provides more access to the funding needed to fuel growth and expand reach.
At this year’s Microfinance Leadership Summit, Grameen Foundation and Microsoft are “Fueling Growth” with technology; enabling MFIs to expand their poverty alleviation power, focus their efforts on the areas with the most need, and ensure they are meeting their missions—to end the cycle of poverty.