Role of Technology in Microfinance

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