It is believed in microfinance industry that innovative use of ICT has potential to achieve objective of microfinance through cost reduction and geographic expansion.
There is no doubt that the innovative use of existing technologies, such as, automated teller machines (ATMs), smart cards, Personal Digital Assistants (PDAs), mobile phone technologies, simputers and remote transaction services can significantly expand the customer reach, improve quality of service and customer satisfaction, increase data collection and analysis, and reduce transactions costs. It is also believed that the widespread use of Information and Communication Technology (ICT) will increase when it becomes easier, more convenient, cost effective, reliable, and secure for the consumers. Though each delivery technology provides significant benefits, banks and MFIs (or any other entity in this domain) need to undertake in–depth cost benefit analysis and study of availability of supportive infrastructure and the technology familiarity, language preferences and literacy of the clients before choosing a technological solution for applying in rural areas.
Currently in India, the use of following three cutting edge technologies has been observed to reduce the operating cost and increase outreach:
1. Management Information System (MIS)
2. Tailored Automatic Teller Machines (ATMs)
3. Smart phones/PDAs
I will discuss two cases (ICICI bank and SKS finance) later in another post to study the effectiveness of these technologies, and what we can learn!
SWOT Analysis
Here is the SWOT analysis for technology usage in microfinance industry:
Strength
* Technology is used for data analysis and persistence
* ICT is used for fast transfer of money
* ICT can significantly reduce paper work and increase efficiency
* Management and even the government has strong commitment to ICT enabled business processes
* The MFI staff are enthusiastic to use technology
* Access to remote communities because of the good networking of rural banks (Regional Rural Banks) in India
* Centralized databases adds flexibility and ability to add new features easily
Weakness
* High level of technical expertise are needed to support ICT use for business expansion
* Expensive (net connections, accounting software, hardware costs)
* Not everyone is ready to use new technology
* Lack of tailor-made software for local needs
* Lack of technical support for maintenance
* Microfinance institutions are not like big banks that can invest a lot of money in technology
* Insufficient Internet bandwidth in India
* Most borrowers are computer illiterate
Opportunity
* Chances to establish branchless banks
* Integrating various technology solutions such as MIS with PDAs
* Mobile banking initiatives
* ATM services for clients
* Low cost open source software for MFIs
* Distributed systems for MFIs
* Allowing platform for different MFIs (with common goal) to interact and learn from with each other
Threats
* Technology changes very fast
* The initial investment in technology is normally high
* Need for more professionals in software development
* Specializing in microfinance business.
People from both domains – technology and microfinance need to collaborate effectively to create a successful technology solution
Thursday, November 27, 2008
Grassroot problems $30 finance trying to address
In India, almost 36% of the rural population do not have access to the formal banking services. Although, India has a good network and outreach of banks in the rural areas, but a small number of population has been served by these banks and specifically, low income generating clients have been left out. As a result, this 36% population has mainly relied on informal money lending sector for fast access to money whose exorbitant interest rate reinforces the indebtedness that ultimately results in life time poverty for the poor.
One of the main goals of UN’s Millennium Development Goals (MDGs) is “Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day.” Providing microfinance services to poor people is cited as one of the effective mechanism to alleviate poverty. There are evidences that corroborate this claim – notable example is Grameen bank which helped transform lives of more than 7 million disadvantaged and marginalized women in Bangladesh. It is apparent that Microfinance Institutions (MFIs) can play an important role in the social and economic development of poor communities. MFIs are the institutes that seek to provide credits to low income household and small informal businesses. Access to (micro) credit enables households to accumulate assets including wealth, which allow them to better cope with their economic and social vulnerabilities. In India, MFIs include non-governmental organizations (NGOs), not-for-profit bank financial intermediaries, and even a few commercial banks. Even though the there is a realization of the potential of microfinance in reducing poverty and empowering low income generating clients, replicating the success story of Grameen Bank is still far from reality. That said Indian government has taken some right steps to promote MFIs in the country. One of the steps is acknowledging the fact that Information and Communication Technologies (ICT) has an important role to play to leap frog the banking sector in the delivery of quality and timely financial services to the remotest areas with significant efficiencies.
As briefly touched upon in the previous section, the problem we are trying to address is the wide gap that exists in the availability of financial services to poor (rural or urban slum) population. It is important to address both demand and supply side of the problem. As far as demand side is concerned, following are the notable reasons for the exclusion of large number of rural population from the formal banking sector:
• Lack of collateral security
• Lack of banking habits and credit culture
• The loan amount is too small to catch the attention of profit oriented banks
• Due to small loan amount and high number of accounts, the transaction costs is high
• Lack of infrastructure and mechanisms to monitor and evaluate the cash flows
• Lack of credit history for the low income clients
• Presence of information asymmetry and lack of data base
• Physical constraints for reaching out to some of the remotest part of India
• Human resource related constraints in terms of lack of manpower and expertise
Further, the supply side reasons for this exclusion are as follows:
• High transaction costs at client (borrower) level such as travel costs, incidental expenses
• Lack of awareness mainly due to illiteracy
• Very small amounts – not encouraged by formal banks
• Efforts and resource involvement in documentation and procedures in the formal system for serving big number of clients
• Prior experience of rejection by the formal banks
The above mentioned reasons are very general and applicable to most of the rural parts in India. These reasons are also complemented by other factors influenced by local condition, caste structure etc.
One of the main goals of UN’s Millennium Development Goals (MDGs) is “Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day.” Providing microfinance services to poor people is cited as one of the effective mechanism to alleviate poverty. There are evidences that corroborate this claim – notable example is Grameen bank which helped transform lives of more than 7 million disadvantaged and marginalized women in Bangladesh. It is apparent that Microfinance Institutions (MFIs) can play an important role in the social and economic development of poor communities. MFIs are the institutes that seek to provide credits to low income household and small informal businesses. Access to (micro) credit enables households to accumulate assets including wealth, which allow them to better cope with their economic and social vulnerabilities. In India, MFIs include non-governmental organizations (NGOs), not-for-profit bank financial intermediaries, and even a few commercial banks. Even though the there is a realization of the potential of microfinance in reducing poverty and empowering low income generating clients, replicating the success story of Grameen Bank is still far from reality. That said Indian government has taken some right steps to promote MFIs in the country. One of the steps is acknowledging the fact that Information and Communication Technologies (ICT) has an important role to play to leap frog the banking sector in the delivery of quality and timely financial services to the remotest areas with significant efficiencies.
As briefly touched upon in the previous section, the problem we are trying to address is the wide gap that exists in the availability of financial services to poor (rural or urban slum) population. It is important to address both demand and supply side of the problem. As far as demand side is concerned, following are the notable reasons for the exclusion of large number of rural population from the formal banking sector:
• Lack of collateral security
• Lack of banking habits and credit culture
• The loan amount is too small to catch the attention of profit oriented banks
• Due to small loan amount and high number of accounts, the transaction costs is high
• Lack of infrastructure and mechanisms to monitor and evaluate the cash flows
• Lack of credit history for the low income clients
• Presence of information asymmetry and lack of data base
• Physical constraints for reaching out to some of the remotest part of India
• Human resource related constraints in terms of lack of manpower and expertise
Further, the supply side reasons for this exclusion are as follows:
• High transaction costs at client (borrower) level such as travel costs, incidental expenses
• Lack of awareness mainly due to illiteracy
• Very small amounts – not encouraged by formal banks
• Efforts and resource involvement in documentation and procedures in the formal system for serving big number of clients
• Prior experience of rejection by the formal banks
The above mentioned reasons are very general and applicable to most of the rural parts in India. These reasons are also complemented by other factors influenced by local condition, caste structure etc.
Sunday, November 23, 2008
Little more on "$30 Finance"
I gave a small and informal presentation to a group of student at Carnegie Mellon who showed interest in the idea. Following is the edited version of the same:
$30 Finance - Vision, by Snehal Fulzele, CMU (21st November) Part I
$30 Finance - Vision, by Snehal Fulzele, CMU (21st November) Part II
$30 Finance - Vision, by Snehal Fulzele, CMU (21st November) Part III
$30 Finance - Vision, by Snehal Fulzele, CMU (21st November) Part I
$30 Finance - Vision, by Snehal Fulzele, CMU (21st November) Part II
$30 Finance - Vision, by Snehal Fulzele, CMU (21st November) Part III
Saturday, November 15, 2008
Vision of ‘$30 Finance’
Lot of initiatives has been incepted in last decade or so with a common goal of alleviating poverty in developing economies. There is substantial number of approaches taken by different people and organizations to address this problem. Recently, I have come across an impressive paper by Martin Fisher, founder of KickStart [1], which talks about how cash based economy can be a viable and sustainable solution to poverty. My personal interest lies in using technology to deal with problems of developing communities.
$30 is a lot of money in most of the developing regions of the world. It can help local entrepreneur start a business and sustain his family. It can help a person give education to his/her kids. It can do lot of things and there are infinite testimonies of my claim which is comprehensively answered by Mohammad Yunus’s microfinance.
30 Dollar Finance believes that there is a gap between people who is willing to help and people who needs help. There are number of reasons of this gap and every reason is justifiable. People are busy making their lives better - professionally, financially, and personally. There is a sense of obligation to return something to society they live in to make it a better place but this sense occupies a very small portion of their heart and mind, but important thing is this sense is still there! $30 Finance envisions to exploit this sense of social obligation to generate funds (in the multiple of $30) in a way that the disconnect between the people who is willing to help and people in need, can be filled with the help of advance technology solutions.
30 Dollar finance is going to be a nonprofit organization.
Microfinance
============
Microfinance is the extension of small loans to low-income people who do not qualify for traditional bank loans. It has been proven an effective tool in the ongoing struggle against poverty, by empowering the poor to better their situation through entrepreneurial activities.
This method of poverty alleviation has affected hundreds of millions of impoverished families worldwide and continues to help the destitute and hopeless.
Distinguished Honors:
Most recently, Professor Muhammad Yunus and the Grameen Bank were honored with the 2006 Nobel Peace Prize "for their efforts to create economic and social development from below."
Successful Microfinance endeavors
=================================
Grameen
http://www.grameen-info.org/
SKS India
http://www.sksindia.com/
30 Dollar Finance offers…
=========================
- A highly motivated pool of intellects who wants to make a difference in the world
- A technology solution to facilitate easy transaction between the local entrepreneurs and lenders
- Radical transparency in the operations
- A platform for volunteers to join $30 Finance to contribute to this noble cause
30 Dollar Finance believes that microfinance concept is not been utilized in its optimal form; that said it has a potential to serve more communities and we strive to go a step ahead. And our motto is: “Making money is the most effective way to eradicate poverty!”
Challenges
==========
TODO
References
==========
[1] Martin Fisher, "Income Is Development: KickStart’s Pumps Help Kenyan Farmers Transition to a Cash Economy: http://www.policyinnovations.org/ideas/policy_library/data/01375
$30 is a lot of money in most of the developing regions of the world. It can help local entrepreneur start a business and sustain his family. It can help a person give education to his/her kids. It can do lot of things and there are infinite testimonies of my claim which is comprehensively answered by Mohammad Yunus’s microfinance.
30 Dollar Finance believes that there is a gap between people who is willing to help and people who needs help. There are number of reasons of this gap and every reason is justifiable. People are busy making their lives better - professionally, financially, and personally. There is a sense of obligation to return something to society they live in to make it a better place but this sense occupies a very small portion of their heart and mind, but important thing is this sense is still there! $30 Finance envisions to exploit this sense of social obligation to generate funds (in the multiple of $30) in a way that the disconnect between the people who is willing to help and people in need, can be filled with the help of advance technology solutions.
30 Dollar finance is going to be a nonprofit organization.
Microfinance
============
Microfinance is the extension of small loans to low-income people who do not qualify for traditional bank loans. It has been proven an effective tool in the ongoing struggle against poverty, by empowering the poor to better their situation through entrepreneurial activities.
This method of poverty alleviation has affected hundreds of millions of impoverished families worldwide and continues to help the destitute and hopeless.
Distinguished Honors:
Most recently, Professor Muhammad Yunus and the Grameen Bank were honored with the 2006 Nobel Peace Prize "for their efforts to create economic and social development from below."
Successful Microfinance endeavors
=================================
Grameen
http://www.grameen-info.org/
SKS India
http://www.sksindia.com/
30 Dollar Finance offers…
=========================
- A highly motivated pool of intellects who wants to make a difference in the world
- A technology solution to facilitate easy transaction between the local entrepreneurs and lenders
- Radical transparency in the operations
- A platform for volunteers to join $30 Finance to contribute to this noble cause
30 Dollar Finance believes that microfinance concept is not been utilized in its optimal form; that said it has a potential to serve more communities and we strive to go a step ahead. And our motto is: “Making money is the most effective way to eradicate poverty!”
Challenges
==========
TODO
References
==========
[1] Martin Fisher, "Income Is Development: KickStart’s Pumps Help Kenyan Farmers Transition to a Cash Economy: http://www.policyinnovations.org/ideas/policy_library/data/01375
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