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November 14, 2005 - Microfinance institutions (MFIs) have filled a gap between formal financial institutions, such as banks, and informal sources such as moneylenders and credit associations. Still, increasing access to microfinance remains a formidable challenge: with a global market of up to three billion working-age adults, more than two-thirds do not have access to financial services. Providing access is key to the competitive next phase of the microfinance movement, which aims for more innovative use of technology and the stronger institutions that come with it.  | Like everyone else, poor people need safe places to save, access to reasonably priced credit, and reliable ways to transfer money within and across borders |
Many of these microfinance institutions have demonstrated impressive results. A recent survey conducted by Consultative Group to Assist the Poor (CGAP) shows that several hundred MFIs have been earning profits and sustaining growth over the past decade, sometimes at considerably higher rates than mainstream banks and established financial institutions. One factor separating many of the top MFIs from their peers is the effective use of technology to standardize processes and reduce the costs of operation.
"Leading MFIs are already beginning to provide services to millions of poor with the delivery of technologies such as automated teller machine (ATM) and point-of-sale (POS) networks, particularly in Africa and Latin America," says Gautam Ivatury, Manager of CGAP's Microfinance Technology Program.
Still, relatively few banks and other formal financial institutions are directly targeting poor and very poor customers. Until they find profitable ways of delivering financial services to low-income people and rural areas, these organizations will ignore the vast majority of people in developing countries without access to formal financial services.
Technology appears an answer
Technology appears to be a promising solution to this problem. ATM transaction costs are as much as five times less expensive than those of a bank teller. Other technologies, particularly mobile phones, are now widely used among poor people across Africa, for example. And inexpensive POS devices which read debit and credit cards can now be used without constant telecommunications and electricity connections.
According to Ivatury, "One challenge will be to convert hardware and software technologies that process zeros and ones, into information that financial institutions can use to deliver a range of financial services." The most powerful approach may be to use technology to create partnerships between banks, MFIs and retail outlets to achieve this, such as through a CGAP-sponsored pilot project with ICICI, India's second-largest bank, and VISA. Innovation is taking place worldwide: SMART, a leading mobile phone operator in the Philippines, is already processing 2 million mobile banking transactions a day.
All of this is good news for scaling up microfinance, notes Ivatury. "Technology has the potential to open new markets for microfinance in hard-to-reach areas, especially if these technologies are integrated into existing large-scale networks." He cites, for example, India's 1.3 million manned public phone booths, which, with the right technology, can offer POS service to millions more microfinance clients.  | By making transactions faster and less costly, technology can help connect the poor with the financial system in their countries. |
Ideas like these top the agenda of CGAP's tenth annual meeting, which is taking place this week in Oaxaca, Mexico. Over 100 microfinance experts, aid agencies, and investors are participating in the meeting, whose theme is "Microfinance Today and Tomorrow: Current Challenges, Future Visions."
Ahead of the curve
In a taped video address to conference participants, President Paul Wolfowitz said: "CGAP is ahead of the curve in recognizing how technology can reduce costs and put microfinance within reach of many more poor people. This is a very exciting area of CGAP's work, and this week provides an opportunity for sharing ideas on how technology will impact the lives of the poor."
The hope is that as more MFIs become partners and competitors of mainstream financial institutions, they can combine efficient and convenient technologies with MFIs' proximity to rural areas and familiarity with poorer customers. Where there are no bank branches in rural areas, an established MFI could manage a bank's microfinance lending operations or act as an exclusive agent issuing insurance policies to poor rural farmers.
"With the effective use of technology, providing the world with universal access to financial services suddenly seems achievable," says Elizabeth L. Littlefield, CGAP's Director. "Microfinance has already proven to be a powerful instrument for helping the poor lift themselves out of poverty both indirectly though increased growth, and directly as they gain access to needed services. To provide more of these services to more people, we have to continue to work with a diverse range of institutions," she added.
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CGAP is a global resource center for microfinance standards, operational tools, training, and advisory services. Its 31 members - including bilateral, multilateral, and private donors - are committed to building more inclusive financial systems for the poor. For more information, visit www.cgap.org or e-mail cgap@worldbank.org. |
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