Microfinance – paving its way to economic and social development for bottom of the pyramid

The way we interact with money has a whole new dimension in this digital age. From the way you pay for your morning coffee without reaching out for a credit card let alone cash, to the way you reimburse a friend for dinner in a few taps on your smartphone.

But as the tech sphere continues to grow sleeker financial technology, the potential for sustainable, progressive and pervasive change in the microfinance industry becomes more challenging especially for the people who need it the most.

Traditional banks normally can’t afford to serve the poor segment because of the high associated maintenance cost. While small loans are inconsequential and trivial for most of the banks, which aren’t also encouraged to design products for small savers and borrowers.

By the end of 2017, the microfinance industry in Pakistan took an in-depth understanding of the services other than just lending, which is equally important for borrowers. Services like deposits, non-financial services involving health, education or top-up insurance services. The telecom sector, however, has provided a new, convenient and cheaper way to provide basic financial services to nearly everyone through mobile phones.

The Silver Lining  

By escalating their reach for financial services, microfinance can work wonders to lift people out of poverty. While the SBP continues to support the MFIs to work on poverty alleviation and financial inclusion for the underserved, the isolated and disconnected nature of MFIs signifies that they’ve been able to focus on building trust in the local communities. But it also means, they don’t always have ways to communicate and connect to each other.

It demands persistence and patience to build and shape the humanized network on which sustainable microfinance hinges. Trust can be won or lost – one loan or transaction at a time. As many as thousands of discrete MFIs operating all over the world have meticulously nurtured these networks – they’re closer to their customers and know them better than most traditional financial organizations can ever hope to.

MFIs have the expertise and know how to serve the unreachable communities with financial services. But they are less acquainted with edifice tech and software, to expand their reach. Fortunately, more organizations have started to develop finance software and technology for MFIs that is convenient, modern and provide out-of-the-box solutions – that are able to manage customer accounts transactions, allowing each branch to operate its own system and maintain a local database of transactions.

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While the microfinance movement is still formulating and struggling to articulate a coherent theory of behavioural change, and the resulting impact of specific MFIs, individually, on communities may vary; one thing is abundantly clear – MFIs have a great potential and the appetite to act as an experimentation nucleus around financial services for the poor and the underserved, especially if we start linking those nuclei. This ideally, could be a great strategic alliance that enables the MFIs to work together.

However, increasingly, the communities that MFIs serve are as mobile as the smartphones in their hands, which raise a multitude of questions and new challenges. The solutions to these problems have a lot to do with – you guessed it, right – Technology.

Surprisingly, fintech services can and do remarkable things, but their solutions are repeatedly siloed. Communal boundaries, national and state regulations and relationships between financial institutions reconstruct the same accessibility glitches, of lesser degree (most of the time), that we encounter in traditional banking services.

The debate around financial inclusion technologies for unbankable communities striving in poverty has been concentrated and focused predominantly on apps and services that individuals interact with directly. And much of the buzz in fintech – over the decade has been around the dominant players, including the telecom players that have extended the financial services. Tap or click, and transfer money – to one degree or the other, customers interact with these apps, directly and conveniently.

Better Technology – Tougher Challenges

Society for Worldwide Interbank Financial Telecommunication is a non-profit, facility that enables financial institutions to exchange business information. Currently, no such infrastructure or even close to it exists in Pakistan or the developing world. High time MFIs focus on infrastructural solutions and look beyond apps, to address the problem that MFIs are dealing with.

Micro Funds – Low-income families usually rely on springiness to manage their funds throughout the month. And mostly the daily financial (often critical) decisions, require small transactions to fit and stretch their limited monthly budgets – only to cover basic needs.

Instantaneous clearance – A lot of Microfinance customers demand immediate access to their funds and capital due to the personal urgencies – health emergencies, natural disasters, weather calamities, weddings and funerals – are very often, uncalled for.

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Financial history – Due to a lack of credit history, credibility remains a massive challenge for both lenders and borrowers. First due to the absence of enough data and the other, struggling to prove their reliability.

No-cost or Low-cost transactions – the developing world is highly mobile. With most of the labour working outside of their hometowns and working on $5 a day – imagine the predicament if they spend $1, just to send the money back home? And these hefty transaction fees can restrict families to pull themselves out of vicious poverty circle and continue to live hand to mouth.

Imagine the possibilities

In order for infrastructure to meet the needs of the population in developing world – Solutions like these can enable MFIs to connect with wider markets and with a greater capital flow. These institutions, subsequently, can unravel new products and business models that go beyond lending credit.

Perhaps most of all – since MFIs know their clients better than any other financial institutions or service providers, MFIs together with infrastructure and technology can do wonders by serving unreachable communities in Pakistan. Let alone lending; payment services, savings accounts and remittances could become a standard for people.

Women, mostly in rural areas represent a major chunk of a potential market but remain untapped and underestimated segment, can actually be the drivers of expansion and diversification for the microfinance industry.