information and communication technology and the sustainability of microfinance

Electronic Commerce Research and Applications 11 (2012) 450–468

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Electronic Commerce Research and Applications

journal homepage: www.elsevier .com/locate /ecra

Information and communication technology and the sustainability of microfinance

Robert J. Kauffman a,b,⇑, Frederick J. Riggins c

a School of Information Systems and Lee Kong Chian School of Business, Singapore Management University, 178902, Singaporeb Glassmeyer/McNamee Center for Digital Strategies, Tuck School of Business at Dartmouth, Hanover, NH 03755, United Statesc College of Business, North Dakota State University, ND 58108, United States

a r t i c l e i n f o

Article history:Available online 3 April 2012

Keywords:Digital divideEconomic developmentFinancial servicesICTIndustry ecosystemIndustry structureITMicrofinancePovertyStakeholdersValue chain

1567-4223/$ - see front matter � 2012 Elsevier B.V. Ahttp://dx.doi.org/10.1016/j.elerap.2012.03.001

⇑ Corresponding author at: School of InformationSchool of Business, Singapore Management University6828 0929.

E-mail addresses: [email protected] (R.J. Kcom (F.J. Riggins).

a b s t r a c t

Information and communication technology (ICT) is an important driver in the maturing microfinanceindustry. Microfinance providers, both non-profit microfinance institutions (MFIs) and for-profit banks, pro-vide financial services to the poor that are critical for eradicating poverty and promoting economic devel-opment in developing nations. As the industry matures, MFIs face an increasingly competitive environmentforcing them to balance the dual goals of outreach and sustainability. Interestingly, ICT may be both theinstigator of this new environment and the potential solution to MFI survivability. We propose researchdirections on the role and impact of ICT in the microfinance industry, with special attention given to theindustry’s stakeholders and to the value chain of microfinancial services that are provided to the poor peoplein the world who need access to them. This research is at the intersection of inquiry on ICT for developmentand the digital divide, the impact of microfinance on poverty and development, and the use of informationtechnology (IT) in the financial services industry. It is aimed at encouraging new research that exploresimportant issues with respect to microfinance services to open up a dialogue and debate among interestedacademic researchers, microfinance institution leaders, and public policy-makers. We discuss the role andimpact of ICT at the customer level, the microfinance institutional level, the donor level, and the microfi-nance industry level, with insights that showcase the value chain impacts and transformations that areoccurring as a basis for assessing the extent to which ICT supports the sustainability of microfinance.

� 2012 Elsevier B.V. All rights reserved.

We introduced our first microcredit program [in Thailand] in 1975,and the women who organized it said, ‘. . . after 35 [or] 36 years, it’sstill going on. It’s a part of the Village Development Bank; it’s not areal bank, but it’s a fund – microcredit. And we didn’t need a bigorganization to run it – it was run by the villagers themselves.And you probably hardly see a Thai man there. It’s always women,women, women, women.’– Khun Mechai Viravaidya, Thai social entrepreneur.From a speech made at TED Talks at TEDxChange, September30, 2010, Bangkok, Thailand.

You know that mantra, ‘Give a man a fish, he’ll eat for a day. Teacha man to fish, he’ll eat for a lifetime.’ It’s missing something: micro-finance is the fishing rod, the boat, the net, etc. Cash and dignity,side by side. . . . Maybe the mantra should be: ‘Give a man a fish,he’ll eat for a day. Give a woman microcredit, she, her husband,her children and her extended family will eat for a lifetime.– Bono, lead singer of U2 and Irish social activist.

ll rights reserved.

Systems and Lee Kong Chian, 178902, Singapore. Tel.: +65

auffman), fredriggins@gmail.

1

aretechdevoccin w

From an article ‘‘10 Questions for Bono’’ in the New York Times,September 21, 2005.

1. Introduction

Information and communications technology (ICT) is an importantenabler of economic development and the elimination of povertyin developing nations (Warschauer 2004; Dewan and Riggins2005).1 The United Nations and the World Bank have been partner-ing with governments from the developed and developing countriesto promote the diffusion of ICT to the neediest parts of the worldwith the aim of bridging the digital divide and making aid fundsstretch further to promote economic development. This aim is

Information technology (IT) and information and communications technology (ICT)often used interchangeably. IT is used in banking industry research andnology productivity studies. ICT is more often used in the international

elopment and microfinance literature. We prefer to use the latter here since iturs elsewhere in the special issue of Electronic Commerce Research and Applications

hich this article has been published.

http://dx.doi.org/10.1016/j.elerap.2012.03.001

mailto:[email protected]



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R.J. Kauffman, F.J. Riggins / Electronic Commerce Research and Applications 11 (2012) 450–468 451

conceptualized in the UN’s Millennium Declaration from September2000. It states that the eighth Millennium Development Goal is to‘‘develop a global partnership for development,’’ and includes thetarget objective to ‘‘in cooperation with the private sector, makeavailable the benefits of new technologies, especially informationand communications’’ (www.un.org/millenniumgoals).2

One of the important economic mechanisms that emerged overthe past three decades to encourage economic development is theprovision of microfinance services (Robinson 2001). Microfinancehas been defined as providing ‘‘financial services to poor or low-in-come clients, including consumers and the self-employed’’ (Ledger-wood 2000). A subset of microfinance, microcredit is theprovisioning of small loans to such clients, which has proven partic-ularly valuable to small business entrepreneurs who otherwisemight not be served by traditional financial institutions due to cer-tain economic constraints (Aghion de Armendáriz and Mordoch2010). The impact of the microfinance industry gained considerablepublicity with the award of the 2006 Nobel Peace Prize to the Gram-een Bank and its founder Muhammad Yunus (2007a), who is oftencredited with formalizing the microfinance approach to serve theunbanked poor (Chaia et al. 2009).

There are several types of microfinance providers (MFPs), includ-ing microfinance institutions (MFIs) that are mostly non-profit non-governmental organizations (NGOs), and peer-to-peer (P2P) lendingmarkets, along with some emerging for-profit banking organiza-tions. (See Appendix A for additional background on P2P lending.)There are also more traditional financial institutions that arebeginning to provide services to poorer segments of the popula-tion. Yunus founded the Grameen Bank as a non-profit MFI to servethe poor of Bangladesh, and later the broader-based GrameenFoundation (www.grameenfoundation.org). (See Figs. 1 and 2.)

In the process, several important microfinance innovationsdeveloped, including those focusing on women and group lending,as well as those originating in developed economics, as a platformfor social lending to people in developing nations, as well as social

2 The eight Millennium Development Goals of the United Nations also include: (1)to eradicate extreme poverty and hunger; (2) to achieve universal primary education;(3) to promote gender equality and empower women; (4) to reduce child mortalityrates; (5) to improve maternal health; (6) to combat HIV/AIDS, malaria and otherdiseases; and (7) to ensure environmental sustainability. Efforts related to microfi-nance are typically viewed as falling under the first of the eight goals. The overall goalhas been to halve the number of people who are the most impoverished, withearnings of only US$1 per day in purchasing power parity terms. As of 2000, theproportion of the world’s population living at this extreme level of poverty was on theorder of 30%, and had fallen to closer to 20% by 2010.

3 In late November 2010, The New York Times ran an article that was ominouslyentitled ‘‘Tiny Loans, Big Worries in India’’ (Polgreen and Bajaj 2010). It is suggestiveof the importance of our exploration of the MFI and ICT issues in this article. Theauthors reported on the growth of social entrepreneurship in India, which involvesdifferent kinds of institutions that try to fulfill social needs while earning a profit (e.g.,domestic and foreign commercial banks, beneficent foundations and venture capitalfirms). Apparently local for-profit microfinance enterprises in the Indian State ofAndra Pradesh were charging high interest rates to people with low capabilities torepay their loans (Ryne 2010; Salmon 2010). After a number of suicides among poorborrowers were reported in the press, a public outcry ensued, and the governmentpromulgated an emergency ordinance that sought to limit predatory microlendingpractices and issued an order in October 2010 to suspend microloan collections forone month (Government of Andra Pradesh 2010). Although the order to haltcollections soon was lifted, many microfinance borrowers conducted a repaymentstrike, so that about 50% of all loans were not being repaid at the time (Bellman andChang 2010; Kazmin 2010). This example points to the importance of client-centeredmicrofinance, which has been espoused by Datar et al. (2008). They contrast thisapproach with the more common institution-centered microfinance, in which MFIstend to be more focused on borrower payback rates, value-at-risk in their microloanportfolios, and a failure to lend to the truly poor – the 1% at the bottom of thepyramid. Bridgers (2011) reports that the microcredit crisis in India has led to newthinking among MFIs, who are now less likely to target groups of borrowers, wheresocial network dynamics sometimes lead to negative contagion effects for non-payment. Instead, they are more likely to target men now, who are more likely tohave the ability to control the payback of a microloan, although only their wives mayhave their names on the load documentation.

entrepreneurship.3 An example is Kiva (www.kiva.org) in the UnitedStates (Flannery 2007), which now operates in 217 countries, andhas greater than one million users, among which almost 690,000have funded loans. (See Fig. 3 and Tables 1 and 2.) On the other hand,Banco Compartamos was founded as a non-profit MFI in Mexico in1990, but transitioned to a for-profit bank in 2000. (See Fig. 4.) It be-came the first MFI to launch an initial public offering (IPO) of stock in2007. In other cases, traditional banks in search of market expansionhave been examining the feasibility of providing credit to poorersegments of the population, so they can create business and eco-nomic solutions for themselves (Rangan et al. 2007). All three ofthese types of MFPs are converging toward the same marketspace,though they are bringing different ICT capabilities to the table. Whilemicrofinance originally was rather low tech, the maturing of theindustry, the development of new ICT hardware and software tools,and the rise of new entrants into the market have forced new levelsof ICT sophistication onto MFIs.4

As some MFIs seek sustainable business models and tradi-tional financial services firms seek new customers among thepoor, the boundaries between MFIs and traditional firms havebeen dissolving. This has generated a number of serious ethicaland moral issues (Cull et al. 2009). For example, most MFIs holdthe dual objectives of outreach, to extend their reach to more ofthe poor, and financial sustainability, to achieve better financialperformance or even profit, in some cases. However, some haveargued that the new competition from traditional financialservices firms is facilitating a ‘‘mission drift’’ away from outreachto embrace more financial performance outcomes (Mersland andStrom 2009). These changes in industry structure have created anenvironment leading to excessive microloan interest rates and anavoidance of providing services to the neediest poor that maythreaten the outreach objective of MFIs (Velasco 2007; Yunus2007b).

As the microfinance industry matures, ICT is being promoted asan important tool to help MFIs extend the reach of their helpinghands and remain viable in an increasing competitive environ-ment. ICT has long been a favorite area for capital investment inthe banking and financial services industry. Traditional financialinstitutions have found ICT to be particularly valuable at contribut-ing to operational efficiency, analyzing and controlling risk, andreaching existing and new customers. Recently, MFIs have begunto invest in ICT to achieve similar benefits and remain afloat in amore competitive environment. On the other hand, the use of ICTby MFIs and traditional lending institutions is what is driving theelimination of the boundary between the two groups. This is forc-ing MFIs into a more competitive business arena. A third perspec-tive is that increased visibility into the microfinance industry bythird-party Web sites such as the Microfinance Information ex-change (MIX Market, www.mixmarket.org) creates competitionamong MFIs for donor funds. (See Figs. 5 and 6.) This, in our view,is causing them to seek more efficient business operational modelsand more profitable business performance. A question arises: DoesICT help MFIs to extend the reach of their helping hands or does itcause them to clinch their fists to combat increased competition, orperhaps both?

4 Other kinds of technology-led innovations in microfinancial intermediation havealso appeared with the intention of broadening the coverage of microfinance services.An especially interesting example is the creation of weather index and crop disastermicroinsurance markets in support of farming in semi-arid and weather shock-proneareas of the developing world. For an introduction to the Indian rainfall indexinsurance market, the interested reader should see Bryla and Syroka (2007), Ginéet al. (2007), and Hess (2003). Other microinsurance developments are occurring inmany other places around the world, including Ethiopia’s Horn of Africa Risk TransferProgram, Nigeria’s The Nigerian Micro / Grass Roots Program, South Africa, thePhilippines, the South Pacific Islands, and in various Chinese provinces. The interestedreader should see the website of Microfinance Africa (microfinanceafrica.net).

http://www.popfunding.com

http://www.grameenfoundation.org

http://www.kiva.org

http://www.mixmarket.org

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Fig. 1. The Grameen Bank. Source: www.grameen-info.org/index.php?option=com_content&task=view&id=19&Itemid=114 (accessed February 11, 2012).

452 R.J. Kauffman, F.J. Riggins / Electronic Commerce Research and Applications 11 (2012) 450–468

To date, there has been limited formal research on the role andimpact of ICT in the microfinance industry – something that wethink is worthwhile to address. One aspect of microfinance thatreflects some new developments is that ICT has made it into a new-ly-vulnerable market, and one that is ripe for structural change(Baumol and Willig 1981, Clemons et al. 2002, Granados et al.2008). We will apply concepts from Spulber (1996) on marketmicrostructure to develop a robust stakeholder framework for themicrofinance industry that we use to suggest future research direc-tions on the role and impact of ICT on the microfinance industry. Todo this, we first provide a background summary in Section 2 ofthree emerging and relevant areas of research: (1) the role of ICTin furthering economic development and efforts to bridge thedigital divide; (2) the role of microfinance in promoting economicdevelopment and encouraging entrepreneurship in micro-businesses; and (3) how traditional financial institutions have

benefited from the use of ICT. In Section 3, we survey the few stud-ies devoted to ICT and microfinance and propose a market micro-structure view of the microfinance industry that we use tosuggest a number of research directions for this important area.In Section 4, we analyze the impact of ICT on microfinance at thecustomer level, the MFI level, the donor level, and the microfinanceindustry level, and then offer some brief final observations. Wehope that, through this effort and the special issue of ElectronicCommerce Research and Applications in which this article appears,we can encourage new research efforts that will shed light onhow ICT is driving microfinance and global economic development.

2. Background

We next discuss the background of the microfinance and ICTcontext that are central to our exploration in this article. We first


Souurcee: wwww.graameeenfoounddatioon.oorg, acccesseed oon Februuaryy 11, 20012.

Fig. 2. The Grameen Foundation. Source: www.grameenfoundation.org (accessed on February 11, 2012).


consider the role of ICT in global economic development. We thennarrow our discussion to the role that microfinance also plays inthis respect. We close with a brief consideration of the benefits thatfinancial services organizations have obtained from investments inICT, and evaluate how they are being propagated over to the micro-finance industry.

2.1. ICT and Economic Development

ICT is believed to be an enabler of economic development,e-commerce, and in a broader context, social inclusion, such ase-democracy and e-health (Warschauer 2004). Many organizationsincluding the United Nations, the World Bank and numerous NGOshave worked aggressively with the governments of countriesaround the world to bridge the digital divide separating the ICT-capable haves and have nots. There are a number of related researchissues that exist at the individual level within countries, the orga-nizational level within markets, and at the global level across na-tions (Riggins and Dewan 2005, Doong and Ho 2012; Ganleyet al. 2010). Within the context of the global digital divide, Rigginsand Dewan (2005) summarize existing research on the globaladoption of ICT and the linkages between adoption and country-le-vel output and growth. For example, Dewan and Kraemer (2000)show that ICT capital investments in developing countries arenot particularly productive at the macro level since other comple-mentary capabilities may not be present. They suggest that untiladequate supporting infrastructure is built up most developingcountries would benefit from putting their aid monies in places

other than ICT investments. Several research studies have exam-ined the adoption of ICT and factors that encourage adoption in dif-ferent international contexts (Hargittai 1999; Dasgupta et al. 2001;Kiiski and Pohjola 2002; Wallsten 2003; Dewan et al. 2005, Ganleyet al. 2005, Chinn and Fairlie 2007). Others studies have exploredthe adoption of wireless technologies that are particularly relevantfor mobile banking (Kauffman and Techatassanasoontorn 2005a,2005b, 2005c, 2009).

Dewan and Riggins (2005) have recommended that researchersshould examine what complementary policies and investments atthe governmental level are necessary to encourage productive useof ICT. In the context of microfinance, this recommendation wouldtake the form of investigating what governmental policies andinvestments need to be in place that would allow MFPs to makeproductive use of ICT. Mathison (2005) suggested that ICT-enabledbanking services may be the ‘‘killer apps’’ that set off economicdevelopment and ICT adoption in the developing world.

2.2. Microfinance and Economic Development

Microfinance is an innovation that has helped lift hundreds ofmillions of people out of poverty (Microcredit Summit Campaign2009). As a result of providing financial services, particularlymicrocredit and savings accounts to poor and low-income individ-uals, small entrepreneurial microenterprises have been establishedthat provide people with a livelihood that may not have existed be-fore. Apart from microcredit services from MFIs, many individualsare forced to access the informal lending market in their area,



resulting in huge interest rate burdens.5 For example, interest ratesin the informal lending markets of rural India can range from 3% to10% monthly (Singhal and Duggal 2005).

There are several more detailed estimates available as to thenumber of poor and low-income individuals served by the micro-finance industry. In 2004, there were 500 million microfinance cus-tomers receiving mostly savings account services and 100 millionmicrocredit borrowers (Christen et al. 2004, Mersland and Oystein2009). As of 2006, 133 million people out of the one billionlow-income customers were receiving microfinance services (Da-ley-Harris 2007). If we assume a typical family size of about five,this represents about half a billion poor and low-income peoplewith access to microfinance services globally, which is consistentwith other estimates (Cull et al. 2009). However, it is clear thatthe provision of ICT services to the microfinance industry is grow-ing but still immature (Dailey 2005). As of 2005, 1.7 billion work-ing adults made less than $2 per day and would be classified asamong the global poor. About half of these or nearly a billion peo-ple made less than $1 per day. They are considered to be among theextreme poor and are the least served in terms of financial services.In fact, up to 80% of the population in developing nations still lacksbasic financial services (Firpo 2005; Cull et al. 2009). Even thoughmicrofinance began in Bangladesh in the 1970s, after thirty yearsof lending innovation, Mia (2005) reported that as of 2005 abouthalf of the population was still outside the reach of the major MFIs.

Why have the poor and low-income populations been neglectedby traditional financial services organizations? To traditionalbanks, the poor are considered hard to serve operationally andhave typically represented a financial risk; they may not be in-clined or able to pay back loans (Aghion de Armendáriz and Mor-duch 2010, Yunus 2007b). Providing financial services to thisclientele carries considerable moral hazard and information asym-metry risk. Are their plans to start a microenterprise economicallyfeasible? Do they have the capabilities to make their businesseswork? Because the poor have little or no collateral, have no credithistory, have little or no experience handling money or managing abusiness, and may reside in a distant location, there is considerablerisk serving these people. Rural markets are difficult to reach withfinancial services because they are in remote locations, have lowpopulation density and the size of transactions are relatively small(Mathison 2005; Singhal and Duggal 2005). Mersland and Strom(2009) reported that MFIs serve more urban customers than ruralcustomers. Traditional lenders have avoided this market becausethe loan amounts are typically quite small, perhaps a little as$100 per customer, leading to diseconomies of scale.

Parikh (2005) notes several challenges in providing financialservices to remote rural regions. First, it is difficult to collect infor-mation from clients, which has resulted in the innovation of villagebanking or group banking, as well as bank officers equipped withhandheld technology devices. While group banking has provenvery successful, Parikh notes that pilot tests from handheld devices

5 There is a large literature available on the issue of access to financial services forthe poor and financial inclusivity (Ehrbeck et al. 2012). The primary issues studiedinclude frameworks for making the creation of financial access and making financialaccess more effective (Barr et al. 2007; Helms 2006), government policy-making toenhance support (Barr 2007), the nature of the impacts on growth and poverty (Ginéetal. 2007), performance measurement as a means of policy-making and institutionaleffectiveness (Kumar et al. 2007), the role of commercial banks (Nair and von Pischke2007) and MFIs (Peachey 2007), and new business models involving the use of ICT forbranchless banking (Diniz et al. 2008, 2012; Jayo et al. 2012). Loan access is dictatedby the issues of scale, scope, costs, risks and pricing, and whether small-scale financialintermediation can be a sustainable activity, similar to what we already know aboutlarge-scale financial intermediation in the retail and wholesale banking contexts. Inthe small-scale setting, these include diseconomies of scale for small dollartransactions and loans, too expensive economies of scope for operations involvingthe full spectrum of financial services when the revenues don’t support, disincentive-based pricing due to the overhead costs of operating, and so on.

in the field have not always resulted in the efficiency gains ex-pected, particularly in projects where there was insufficient invest-ment in the technology. Second, insufficient internal IT capabilitieshinder MFPs operational efficiency. Many MFPs have developedtheir own internal IT capabilities that prohibit them from takingadvantage of developing standards and platforms across the indus-try. The third problem is the actual execution of financial transac-tions in remote rural regions. Security has proven to be a difficultproblem when cash must be transported into and out of villagesand when fraud is hard to detect at the local level. Lack of securitymakes financial operations intractable. To reach rural and poorpopulations, it is imperative to eliminate the handling of cashand to increase innovation to build lower-cost delivery channels(Singhal and Duggal 2005).

In the absence of sophisticated analytical tools to estimate andmanage risk, and ICT to overcome distance barriers, early microfi-nance pioneers developed a number of innovations to mitigate riskin this market. One such innovation is the concept of group lending,also called joint liability, whereby MFIs substitute group lending forcollateral to reduce risk (Cull et al. 2009). With group lending, a lo-cal MFI representative meets regularly, often weekly, with a grouptwenty to thirty individuals who have jointly received microcreditfor their various microenterprises. The representative collects verysmall weekly payments, conducts training on money management,provides encouragement to micro-entrepreneurs, and relies ongroup pressure to encourage financial responsibility. Merslandand Strom (2009) found that group lending accounts for 44% ofMFI microloans versus 55.5% in individual loans. While group lend-ing has been successful in the past three decades and is not ex-pected to disappear anytime soon, recent research has shownthat there is a trend away from group lending to more individ-ual-based lending to the poor in remote regions (Cull et al. 2009).

A second innovation has been to focus on women. For example,95% of Grameen Bank customers in 2000 were women (Cull et al.2009). As we noted earlier, the third United Nations MillenniumDevelopment Goal is to ‘‘promote gender equality and empowerwomen.’’ Microfinance is believed to be an important tool toachieve this goal. Focusing on providing financial services to wo-men typically results in the development of more focused microen-terprises, a lower likelihood the money will be used for non-productive purposes, has a more positive impact on children, andresults in a higher repayment rate. Cull et al. (2009) examined346 institutions engaged in microfinance operations. Of those,156 were non-governmental organizations (NGOs) that had non-profit status. For these NGOs, 95% of borrowers were women.The other 190 institutions were a mixture of banks, non-bankfinancial institutions, and credit unions that typically had morefor-profit motives. For these institutions, 37% of the borrowerswere women. Because women are the key target customers ofmany MFPs, the role of women within MFPs has been examined.For example, Mersland and Strom (2009) showed that MFIs witha woman CEO have had better returns on assets and lower opera-tional costs.

Microfinance originally suggested the provisioning of micro-credit. Later this view broadened to include savings accounts forthe poor. Recently, it has encompassed a range of financial servicesto the poor, including credit, savings, insurance, leasing, paymenttransfers and remittance to foreign countries (Mathison 2005).The growth in product offerings indicates a maturing of this indus-try, but it also brings operational complexities.

MFIs face two often competing, although occasionally comple-mentary goals: to increase outreach to serve more clients and toimprove sustainability through satisfactory financial performanceto maintain operations. The issue of sustainability versus outreachis one that has been hotly debated in the microfinance literature(Morduch 2000; Schreiner 2000). Most researchers argue that they

Souurcee: wwww.kivva.orrg/aabouut/hoow/eevenn-moore, acccessed oon FFebruuaryy 111, 20012.

Fig. 3. The microfinance lending process at Kiva, an MFI based in the United States. Source: www.kiva.org/about/how/even-more (accessed on February 11, 2012).


are competing goals and act as substitutes. Mersland and Strom(2009) show that higher average microloan amounts increase re-turn on assets. So MFIs motivated by performance measures wouldtend to provide fewer loans in larger amounts, thus moving awayfrom the microfinance model of microloans to help as many low-income customers as possible.

The debate over sustainability versus outreach is fueled by tra-ditional financial services organizations that are becoming new en-trants into the microfinance industry. An example of this is Bancodel Estado de Chile, a government commercial bank that enteredthe microcredit business and was able to reduce the costs of micro-credit loans by 18% using ICT. Silva (2002) has reported that ICT

devices in the field are no longer just useful tools, but necessarydevices in situations like this.

Another example of the operational efficiency that banksachieve relative to NGO MFIs is that of the 346 institutions exam-ined by Cull et al. (2009). The median bank spent about 12¢ onoperating costs per dollar of loans outstanding compared to theNGOs that spent about 26¢. The authors point out many possibleexplanations for the higher rates of NGOs, including their effortsto make many loans in small amounts, making loans to individualsin hard to reach locations, and the possibility that being subsidizedby donors may lead to inefficiencies. They also found that institu-tions with higher operating costs tended to charge higher interest


Table 1Grameen Bank’s historical data series, 1976–2009 (in US$).

Performance indicator 1976 1980 1985 1990 1995 2000 2005 2009

Cumulative disbursement (all loans) 0.001 1.3 38.3 248.1 1405.9 3060.4 5025.6 8741.9Disbursement in year (all loans) 0.001 1.1 16.5 68.7 333.2 268.4 608.8 1150.5Year-end outstanding amount 0.0003 0.8 8.7 38.6 206.4 193.3 415.8 791.8Housing loan disbursement in year – – 0.7 224.6 17.4 1.41 3.0 2.4Number of houses built cumulative – – 1581 91,16 331,201 533,041 627,058 679,577Total deposits (balance) – 0.1 3.1 25.9 117.6 126.8 481.2 1200.5Deposits of members (balance) – 0.1 2.8 16.5 99.8 100.5 306.10 648.7Members’ deposit as % total deposit – 100 90 64 85 79 64 54Number of groups – 2935 34,324 173,907 424,993 503,001 877,142 1253,160Number of members 10 14,830 171,622 869,538 2065,661 2378,356 5579,399 79,70,616Percentage of female members 20 31 65 91 94 95 96 97Number of villages covered 1 363 3666 19,536 35,533 40,225 59,912 83,458Number of branches 1 24 226 781 1055 1160 1735 2562Profit for year – – 0.0008 0.003 0.4 0.2 15.2 5.4

Note: Data are adapted from www.grameen-info.org/index.php?option=com_content&task=view&id=177&Itemid=144.

Table 2Statistics for Kiva, as of February 11, 2012.

Descriptive categories Statistics

Total value of all loans made through Kiva $284,484,650Number of Kiva users 1089,310Number of Kiva users who have funded a loan 689,799Number of countries represented by Kiva lenders 217Number of entrepreneurs funded through Kiva 727,329Number of loans funded through Kiva 372,760Percentage of loans made to women entrepreneurs 80.44%Number of Kiva field partners 147Number of countries Kiva field partners are located 61Current repayment rate for all partners 98.88%Average loan size $388.52Average total amount loaned per Kiva lender $261.34Average number of loans per Kiva lender 7.96

Note: The source of this data is www.kiva.org/about/stats (accessed on February 11,2012). The statistics provided by Kiva are updated each night. Some information hasbeen suppressed.

6 A range of issues arise in rural credit markets, including the difficulties ofdiscovering borrower creditworthiness for microfinance (Hope and Stiglitz 1990;Schreiner 2000), the roles of risk and insurance (Udry 1994), and the role of familyrelations and kin groups (La Ferrara 2003).


rates to their customers. But if MFIs charged lower interested rates,many of them would require substantially higher donation rates tosustain their operations. Mersland and Strom (2009), based ontheir study of the operational capabilities of MFIs, concluded thatgovernments and regulators should seek to foster competitionamong MFIs thereby forcing them to employ good managementtechniques and seek operational efficiencies.

Singhal and Duggal (2005) pointed out regulatory constraintsthat hinder innovation to allow MFPs to provide financial servicesto India’s poor. For example, MFPs would like to provide bankingservices to the poor using cashless smart cards (Frederick 2009).However, banks may offer services through smart cards only toindividuals who have maintained satisfactory accounts for at leastsix months, can only make transactions via a particular type of POSterminal, and may accept deposits only within bank premises.Singhal and Duggal (2005) have called for research into the feasi-bility of low-cost physical devices and what infrastructure isneeded to boost services to the poor.

The results of an extensive study by a consortium of public andprivate organizations on microfinance services to the poor and howICT could help concluded that three things must happen beforemicrofinance services can be extended beyond the current clientbase (Firpo 2005). First, business process redesign must accom-pany investment in new technology. Second, new markets requireinnovative uses of appropriate technologies that can be easilyscaled in a manner that supports a wider scope of services andtransaction volumes. Finally, the infrastructure to support thisinvestment in new ITs will not be able to be borne by MFIs alone.They will need partners, investors and external support.

2.3. IT in the financial services industry

The value of IT in the financial services industry most oftendevelops from its application to business processes that offer‘‘cheaper, better, faster’’ operational connectivity (Davamanirajanet al. 2006), new bases for the creation of value in the process offinancial intermediation (Greenspan 2000), and improvements inthe reach to customers and the range of services offered (TheMicrofinance Gateway 2009). The microfinance context isespecially interesting due to the service distances involved, thenecessity for building operational processes that are lean andeffective, without undue complexity or expensive maintenancerequirements.

Some of the most effective applications of IT in financial ser-vices are those that have impacts, leading to the death of distance,as described by Cairncross (2001). Recent work by Diniz et al.(2008, 2012) and Jayo et al. (2012) on the operational and institu-

tional networks for microfinance and rural branchless banking ser-vices in Brazil are exemplars in this respect. The authors report onthe changes that network-based microfinance brought to remoteareas of the Amazon River Basin, including bringing a cash econ-omy to small villages, localizing salary disbursements, and improv-ing the financial security of banking clients. In addition, Lymanet al. (2008) describe the impacts of mobile phones in Kenya andthe Philippines. They report that another transformation – thistime from cash to stored electronic value, made possible by mobilephones – led to one million new mobile banking service users inless than one year in Kenya. It shows the transformation in reachthat new mobile financial services can offer (Au and Kauffman2008). Surprisingly, Kenya had less than four million people withbank accounts in 2007.6

3. The structure of the microfinance industry

The microfinance industry is very information and service-intensive. These characteristics, the dynamic nature of competi-tion, and the emerging role of ICT allow us to qualify this industryas a newly vulnerable market (Baumol and Willig 1981, Clemonset al. 2002, Granados et al. 2008). It is newly vulnerable becauseit is now easy to attack and enter, difficult for the incumbents to

http://www.grameen-info.org/index.php?option=com_content&task=view&id=177&Itemid=144

http://www.kiva.org/about/stats

Souurcee: wwww.commpaartammos.comm/wwps/pporttal/Innicio, accesssedd onn Febbruaary 111, 22012.

Fig. 4. Compartamos Banco. Source: www.compartamos.com/wps/portal/Inicio (accessed on February 11, 2012).


defend, and attractive to attack due to its large size in the globaleconomy. Clemons et al. (1996) suggested that there are manyindustries where new entrants are able to enter and challengethe business of traditionally dominant firms. In the microfinanceindustry, non-profit MFIs pioneered the industry and currently ex-ist as dominant organizations. However, traditional financial ser-vices organizations and other for-profit new entrant banks areseeking to exploit the current market conditions to enter and chal-lenge MFIs for dominance. New entrants into newly vulnerablemarkets typically seek to leverage lower overhead costs, new tech-nologies, alternative distribution channels and the targeting ofmore profitable customers to make significant inroads into estab-lished markets. Traditional financial services organizations andfor-profit new entrant banks are seeking to exploit each of thesefactors to challenge more established MFIs in the market for low-end banking customers. So the microfinance industry is ripe formarket restructuring in the coming years.

Mathison (2005) has noted similar factors, emphasizing thatfor-profit and non-profit MFIs are being forced to adopt formalgovernance mechanisms and modern information systems (IS)due to three factors: increased financial services regulatoryrequirements, the need to enable expansion of outreach to more

clients, which provides economies of scale and ultimately financialstability, and to attract capital from donors and commercial inves-tors. Organizations that are able to implement and make use ofmodern ICTs will be more likely to survive in this newly vulnerablemarket arena in the future. The structure of the microfinanceindustry is shown in Fig. 7.

First, MFIs operate for the most part in developing countries toprovide microloans and other financial services, such as savings ac-counts, to groups, entrepreneurial micro-enterprises and individu-als. The microfinance industry exhibits considerable informationasymmetries in that recipients of these financial services typicallyhave limited or no credit history, making it difficult to determinethe feasibility of repayment of microloans (Yum and Lee 2012).MFIs face considerable moral hazard with loan recipients’ effortsat repayment too (Banerjee et al. 1994, Cason et al. 2011, Matin1997; Simtowe and Zeller 2006). Thus, the microfinance industryhas distortions that ICT potentially could reduce, leading to moreefficient outcomes. Financial services may be provided directlyfrom the MFI to the recipient or through the use of a third-partybanking correspondent that could be a local retailer, postal outlet,lottery dispensing merchant, etc. The financial services could beprovided to individuals or to groups who ultimately redistribute


Souurcee: wwww.mixxmaarket.orgg, acccesssedd on Febbruaary 111, 220122.

Fig. 5. The MIX market. Source: www.mixmarket.org (accessed on February 11, 2012).


money and services to individuals. This redistribution could be atthe local level or may extend outside the local context, as in thecase of international remittances.

Second, like other financial services institutions, MFIs face con-siderable internal information processing, storage, and sharingchallenges. Adoption of ICT by MFIs has lagged due to a varietyof digital divide barriers and concerns that limited funds couldbe better used by providing loans directly to the needy. Only re-cently have these organizations begun investing in ICT capabilities,formal governance procedures, and other managerial techniques toachieve operational benefits.

Third, MFIs are constantly on the lookout for new sources offunding. Historically, there are several sources of funds. Interna-tional donor organizations and individual donors can provide mon-ies to MFIs who act on their behalf to provide outreach to the poor.

MFIs provide a valuable intermediary function because they aretypically located within developing countries, as opposed to inter-national donors who have limited visibility on the ground whereservices are needed. Thus, donors face considerable risk becauseof their unfamiliarity with the local environment where theirdonations are intended for use. In some cases, funds may be do-nated directly to MFIs, especially when the receiving MFI hasdeveloped an international reputation. Donations can also be fun-neled through various types of relief organizations and networksoperating in both the international environment and the develop-ing countries. A third source of funds is from investors, mostlyfrom the international environment, who seek higher rates of re-turn and may split their investment funds between MFIs and tradi-tional financial services organizations. It should be noted thatmany MFIs have an explicit goal of moving away from dependence


Souurcee: wwww.mixxmaarkeet.orrg/mmfi/ggrammeenn-baank, accesseed oon Feebruuaryy 11, 20012.

Fig. 6. The MIX market’s coverage of global MFIs: the example of Grameen Bank. Source: www.mixmarket.org/mfi/grameen-bank (accessed on February 11, 2012).

INTERNATIONALENVIRONMENT

Relief Organizations

Donor Organizations and Individuals

Donations DevelopmentFunds

DEVELOPINGCOUNTRIES

MicrofinanceInstitutions (MFIs) Groups

Micro EnterprisesIndividuals

Financialservices

Banking Correspondents

Investors InvestmentFunds

Traditional Financial Services Organizations

Regulators

CreditBureaus

Information Exchange

Fig. 7. Microfinance industry structure.


on the donor model to an internally self-sustaining financial modelbased on expanded savings services to the poor (Yunus 2007b).

Finally, MFIs operate in an environment where traditionalfinancial services firms may consider providing competing services


7 This question is tied in with the much larger issue of whether microfinancediminishes poverty overall in the social settings where it has been implemented. Foradditional perspectives on this issue up to the present, see Appendix B.


to customers in developing nations. The extent to which these newentrants operate in a given region will impact incentives on MFIs toinvest in ICT, adjust interest rates, and adopt more aggressive man-agement strategic objectives. This form of competition plays out ina context of increased activity by regulators both at the interna-tional and country-level, various types of third-party credit bu-reaus that provide information services on the financial viabilityof financial service recipients, and non-profit information ex-changes that seek to provide visibility into market processes.

Part of what makes this newly vulnerable market ripe for struc-tural change is the dynamic nature and number of intermediariesin the industry. Spulber (1996) states that intermediaries performfour important functions: setting prices and clearing markets; pro-viding liquidity and immediacy; coordinating buyers and sellersusing matching and searching functions; and guaranteeing qualityand monitoring performance. ICT plays a critical role in allowing allof these intermediaries to perform these functions. We can identifyseveral different intermediaries by noting players in the industrythat have both an inflow and outflow of money or services.

Group leaders act as intermediaries between the lenders and themicroloan recipients. They ensure good financial management andrepayment accountability. Banking correspondents are intermediar-ies between the more distant financial institution and the recipientto ensure safe and convenient transactions. MFIs are intermediariesbetween international donors or relief organizations and local loanrecipients to ensure development funds get used effectively.Traditional financial services organizations intermediate betweeninvestors and loan recipients to ensure investments are used pro-ductively. Relief organizations are intermediaries between interna-tional donors and MFIs to ensure that donations are used wiselyand responsibility. Regulators, credit bureaus, and information ex-changes infomediate between those providing funds and thosereceiving funds across the value chain.

We consider four levels where ICT can impact the microfinanceindustry. At the customer level, we consider how ICT impacts MFIloans use by customers, what types of projects are funded, andhow ICT is used to reach and interact with the customer are theprominent issues. At the MFI level, the questions focus on howICT impacts how MFIs operate internally for operational efficiencyand risk management. At the donor level, the focus shifts to how ICTimpacts the mechanisms for MFIs to secure funding and providevisibility to donors. Finally, at the microfinance industry level, the is-sues for study are how ICT impacts the structure of the industry interms of strategic/outreach objectives, interest rates, and ability forother entities to enter the market.

4. Research directions with an ICT emphasis

Using the four functions of intermediaries, we next propose aseries of research questions and approaches on how ICT impactsthe microfinance industry.

4.1. The role and impacts of ICT at the customer level

MFIs can provide lending and other financial services to supporta variety of projects and microenterprises that can facilitate eco-nomic development. Twenty to thirty years ago, most microfinanc-ing was provided to farmers, handicraft entrepreneurs, livestockowners, and small store operators (Cull et al. 2009). Funds that pro-mote small business ownership can instead be used to promoteother much-needed development activities, such as clean waterand power generation initiatives. In recent years, MFIs have pro-vided loans to small businesses seeking to capitalize on the de-mand for ICT services themselves. Community-based telecentres,for-profit cybercafes, and mobile phone service providers areexamples of community and entrepreneurial activities that can

benefit from microfinance services. Since ICT is considered an en-abling technology for a variety of economic development activities,examining the role of ICT at the project level is an important issueto study:

� Are supported projects with ICT components more likely to beprofitable to the customer and the MFP compared to projectsthat don’t? Do they help to reduce poverty?7

� Are microfinance projects aimed at increasing an area’s accessand use of ICT more beneficial than non-ICT related projectsfor economic development? Are project coordinators and entre-preneurs better served if they were encouraged to put theirefforts into non-ICT activities?� What complementarities help ICT-enabled projects to be suc-

cessful? Are projects aimed at increasing physical access toICT ineffective if certain digital, human, and social resourcesare lacking (Warschauer 2004)?� To what extent should MFIs seek to promote the use of ICT

within the project or business itself? Should funding be contin-gent the customer’s ICT sophistication? What ICT-enabledfinancial services are important for success?

With the information asymmetries and moral hazard that MFIsface, ICT-based analytical tools can be used to increase understand-ing of the market risk which may allow MFIs to be more efficientand effective in dealing with potential customers. Silva (2002) re-ports that use of a credit scoring system on mobile devices allowsMFIs to target a larger population with financial services. We pro-pose a series of questions relate to how ICT analytical tools allowMFIs to directly serve their customers:

� How do ICT-based analytical tools allow MFIs to overcomeinformation asymmetries to better understand the viability ofpotential customers to repay loans? Does this result in poorpotential customers not receiving services? What are the impli-cations for poverty reduction?� Does ICT allow MFIs to improve their ability to screen custom-

ers, leading to successful economic development?� Does equipping remote loan officers with analytical tools

improve their ability to make loan decisions in the field? Dothese analytical tools impact the dual goals of outreach andsustainability?

ICT can help overcome distance barriers that allow MFIs toserve remote rural customers better. ICT can help MFIs to monitoractivities at local villages, which can reduce moral hazard and pro-mote repayment. There are additional questions:

� Does ICT allow MFIs to overcome distance barriers and achievea deeper geographical reach to serve remote customers inharder to reach, or remote locations? Does use of ICT communi-cation channels alter the share of microfinance services pro-vided to the urban poor versus the rural poor?� Does the use of ICT by the customer to interact with the MFI

allow the customer to receive better services? Does ICT allowMFIs to establish closer relationships with customers and meettheir particular needs more effectively?� Does ICT allow MFIs to overcome social barriers and achieve the

sociological reach to serve diverse customers including women,minorities and disadvantaged groups?


We need to make a distinction between Internet banking andmobile banking. In developing countries, there are many more mo-bile phone users than Internet users. In some countries the ratio isas high as ten to one, for example (Keltey and Duminy 2003). Mobilebanking may allow MFIs to reach more customers, yet Internet bank-ing can provide a richer medium with more functionality and moreservices. Research questions related to the appropriate communica-tions channel for the microfinancial services context include:

� Given that mobile phone adoption in developing countries ismuch higher than Internet adoption, what are the prospectsfor providing financial services to the poor using these twocommunication channels?� What are the short-term tradeoffs for providing financial ser-

vices to the poor between accessibility via cell phones and func-tionality via the Internet? How about in the long term?

A related issue is the use of hand-held computing devices byloan officers in remote regions that allow communication back tothe MFP, perhaps even in real-time. In addition to having the cus-tomer equipped with mobile phone technology or the Internet,loan officers may be equipped with handheld personal digitalassistants (PDAs) or mobile devices. By having such devices inthe field linked with the MFI, microcredit officers can get immedi-ate authorization for loan requests (Silva 2002). But then:

� Which model will be the most acceptable to the customers –having customers equipped with mobile phone devices or theInternet versus having the loan officer equipped with hand-helddevices? Under what circumstances will which be preferable?And when?� Which of these models will be the most efficient and under

what specific circumstances? Can these be clearly understoodin advance of deployment, so that adoption doesn’t becomeproblematic as efficiency is lost? Does a loan officer with real-time linkages to MFPs improve service to customers? Whattypes of benefits can be realized?

The role of ICT at the local level can lessen the need for groupbanking and may be part of what is driving toward more individ-ual-based microfinancial services. Research should examine theextent to which ICT use by MFIs impacts their ability to engagein microloan activity to individuals versus groups and in what con-texts. Answers to the following research questions are appropriateto bring new insights for this context:

� Is ICT driving a shift to individual banking? Are ICT-based finan-cial services and group lending near substitutes? Will ICT pro-vide a basis for more effective monitoring and servicing of loans?� Is individual-based banking less personal than group banking,

or more so in the presence of ICT? Can media-rich ICT function-ality make individual-based more personal and offset the bene-fits typically gained by the socially-oriented group banking?

Some analysts believe that ICT-based delivery channels, such asmobile phones and the Internet, can be used to alleviate many ofthe security concerns associated with providing microfinancial ser-vices in remote locations (Keltey and Duminy 2003). Further, Silva(2002) reports that integration of microfinance with identificationtools, such as fingerprint IDs, helped to boost microfinance opera-tions at Prodem (www.prodemfff.com) in Bolivia, since manyrecipients of microfinancial services can neither read nor write.These communication and identification tools not only have thepotential to lower the risk incurred by MFPs, but they also havethe capacity to improve the safety the organization’s customers.Some relevant research questions include:

� To what extent does introducing ICT help to enhance securityand support more successful financial operations? Does ICTshift risk away from the MFIs and make them more operation-ally feasible?� Would users trust and adopt mobile phone confirmations from

financial institutions more than confirmation via direct humaninteraction? How effective are automated ID tools in ruralmicrofinance contexts?

Women make up the majority of microfinance customers, par-ticularly among non-profit MFPs. In addition, the role of womenin leadership positions within MFPs has been shown to be impor-tant in the success of the provider. If women are specific targets ofMFI operations and MFIs with women CEOs perform better, thenthere are important implications for providing microfinance ser-vices in areas where a gender digital divide exists. Research shouldexamine the following issues:

� Do microfinance operational practices and results differ inregions with a significant gender divide versus regions thatare more gender neutral in the use of ICT?� Will ICT-based financial services be adopted as readily by

women as microfinance practices were?

Aghion de Armendáriz and Morduch (2010) emphasize thatgroup lending may increase repayment rates as peer pressurebears on members of the group to act in good faith, appointedgroup leaders receive and pass on training that encourages goodfinancial management among group members, and group lendingencourages groups to form where members have similar repay-ment capabilities. As members of groups receiving microloansincrease their ICT access, there may be a role for Web 2.0 andrelated social networking technologies to increase group interac-tion that facilities good financial management practices. Re-search should investigate the adoption, use and impact ofsocial networking technologies that could facilitate more respon-sible financial management among microfinance users. Forexample:

� To what extent could social networking technologies be used toachieve existing benefits of group lending, without requiringthe group to physically meet? Any limitations?� What new approaches to group lending would work by using

social networking adjacent to existing group lending practices?Will it enhance microfinance capabilities?

4.2. The role and impacts of ICT at the MFI level

Financial services organizations have typically led in ICT invest-ment. Much of this investment has been targeted at internal oper-ational efficiency benefits. We propose a series of researchquestions on the role and impact of ICT on MFI internal operations.

Research needs to examine why MFIs have been reluctant toadopt ICT and invest in ICT as a resource. In Bangladesh, MFPs haveadopted ICT for operational efficiency reasons to manage the infor-mation processing needs of the large number of existing customersneeding microfinance services rather than to improve their capa-bility to reach out to a broader customer segment (Mia 2005).Mia also suggests that in Bangladesh some MFPs are hesitant toadopt ICT because they do not know of the benefits that could beachieved, have a history of making decisions based on intuitionrather than computer-based models, conservative accounting prac-tices, the wide availability of low-cost labor markets, and the lackof an adequate ICT labor pool. Relative to the adoption of MFIpractices, several additional research questions will be importantfor researchers to pursue:

http://www.prodemfff.com


� What main factors lead to the adoption of ICT by MFIs? BecauseMFIs operate in less developed countries that usually have wideavailability of low-cost labor, does that impact the need fordeveloping technical automated systems?� Does MFI size matter? Do large MFIs have the capabilities to

invest in needed ICT capabilities that are beyond the reach ofsmall MFIs? To what extent does this impact the ability of smallMFIs to survive and provide outreach? Does the emergingnecessity of ICT in the microfinance industry mean that largerMFIs will survive in the new environment resulting in a trans-formation of this industry?

Even after the organization adopts ICT as a resource, it is possi-ble that individuals within MFIs might be reluctant to make use ofthe technology. For example, employees may not be familiar withICT and may be hesitant to adopt. Or they may be willing to adopt,but lack the appropriate skill sets that would facilitate adoption.Research questions along this line should examine:

� To what extent are bank officers at the local level willing andable to adopt ICT technology, such as hand-held devices, laptopPCs, or analytical software tools? How does their acceptance ofICT impact MFI strategy?� How effective is technical support provided to officers in the

field? What skills and human resource capacity are needed tomake adoption at the individual level smooth?

Given the insufficient number of skilled ICT workers in develop-ing countries, there are concerns about staffing MIS operations atMFIs. All operations must examine carefully the extent to whichthey outsource their ICT needs versus develop skilled MIS intellec-tual property. However, the context within which most MFIs oper-ate makes this a difficult problem. Recently, new software toolshave entered the market dedicated to meeting the needs of micro-finance service providers. However, MFI managers must choosewhether they will develop internal capabilities or look outside. So:

� When MFIs develop their own internal systems, to what extentdo they need to employ fully capable IT operational staff? Is thisrealistic for all but the largest players?� If MFIs are using external service providers, do these providers

have or need an understanding of local conditions within thecountry or are larger international IT service providers capableof providing the needed services? Is there a tradeoff betweenacquiring international technical talent that may lack an under-standing of the local context versus local IT service providersthat understand the culture, but may lack certain technicalskills?

Banks have more efficient operational capabilities than NGOMFIs (Cull et al. 2009). The authors suggested that MFIs makemany loans in small amounts, make loans to individuals in hardto reach locations, and their subsidy business models may leadto inefficiencies (Morduch 1999a). However, it could be that bankshave more sophisticated ICT capabilities, allowing them to be moreefficient in their operations. Research related to the operationalefficiencies achieved via ICT needs to explore:

� What metrics should be used to determine the ICT sophistica-tion by these organizations to allow apples-to-apples compari-sons? Are operational efficiencies for traditional banks relativeto NGO MFIs attributable to ICT use? Are more customersserved than before? More risky customers?� Is there a link between ICT use and interest rates charged to cus-

tomers? To what extent does use of ICT by MFIs allows them toimprove ROA for small microloans?

� To what extent can MFIs successfully operate without sophisti-cated back-office ICT automation? Without sophisticated cus-tomer-facing systems? Without adequate integration of theback office with customer-facing systems?

Ahmad (2005) suggests that MFIs fail to plan for effective use oftheir back-end management information systems. This could bebecause their use of ICT has not matured to the strategic use phaseyet. Or, MFIs may not be aware of the potential that ICT can havefor shaping and impacting their organizational strategy. As theindustry matures and MFIs are forced to increase their sophistica-tion of ICT use, relevant research questions are:

� Are MFIs planning for strategic uses of ICT? To what extent doesstrategic ICT planning regarding integration of the front-endwith the back-end systems impact performance and the abilityto provide effective services to clients?� How can ICT shape MFI strategy? How can MFIs align their busi-

ness strategy with their ICT strategy?

4.3. The role and impacts of ICT at the donor level

MFIs rely on external donors to supply funds necessary to carryout microfinance activities (Basu et al. 2004). Donors typically existoutside of the local country context where microfinance activitiestake place. Therefore, it can be difficult for donors to know if a par-ticular MFI is making a good faith effort to engage in good businesspractices and make an honest effort to extent outreach services tothe truly needy. In addition to this moral hazard, donors also lackinformation about the internal workings of MFIs due to informa-tion asymmetries. Therefore, it is difficult for donors to be assuredthat their donation moneys are being used as they intended. Infor-mation systems that provide more transparency into the opera-tions of MFIs decrease donor risk and should increasecompetition for donor funds among MFIs. The MIX Market is onesuch information intermediary that seeks to meet this need. Inaddition, some observers have suggested that too great a relianceon donor money might diminish the extent of the financial disci-pline and efforts to mobilize deposits, as well as misdirect thefunding so that projects that are of the greatest local economicimportance cannot be undertaken (Basu et al. 2004).

New research should explore the following questions:

� To what extent does internal ICT investment impact the abilityof MFIs to be more transparent in providing information to theproviders of the capital they receive? Can industry data andmore transparency strengthen MFIs (Larson and Lahaye 2011)?� Do MFIs that have invested in internal systems and link with

third-party information providers such as the MIX Marketreceive more donor capital? More investment capital? DoesICT allow MFIs to establish closer relationships with donorsand yield more resources to provide to customers? Does ICTallow MFIs to be more financially viable and gain more donorsupport? Is there any relationship at all?� Do third-party information intermediaries change the nature

and scope of information made available to outside parties?What theories of information transparency can inform researchinto the impact of these infomediaries?� Can external donors and investors trust internally-generated

MFP financial information when there is a lower level of trans-parency due to poor use of ICT?

4.4. The role and impacts of ICT at the microfinance industry level

It is worthwhile to evaluate how ICT impacts the microfinanceindustry structure and the strategic transformation that many


believe is now under way. There is increased competition betweennon-profit MFIs and for-profit financial services firms for donorand investor financing on the front-end and the search for custom-ers on the recipient end. There also are new intermediaries emerg-ing in the market structure who may be able to alter the balance ofpower in the industry. In terms of industry transformation due tothe changing balance between sustainability versus outreach fornon-profit MFIs and for-profit financial services organizations,there are several important questions:

� Will the NGOs be acquired by for-profit firms? Can they make aprofit by offering better financial services to the poor? Are weseeing a major transformation due to ICT? Or for other reasons?� For traditional financial institutions, does ICT allow them to

reach lower in the client population to serve customers thatthey previously were not able to reach? Does distance-spanningtechnology allow them to expand their geographic reach tomore distant customers?� Do ICT-based efficiency benefits allow firms seeking profits to

offer services to customers that were not previously justifiable?Are these firms better at making use of analytical tools tounderstand lending risk?� What analytical models could be developed that investigate

impacts of for-profit lenders versus non-profit lenders seekingto serve different levels of customers?� What are the long-term prospects for traditional financial insti-

tutions to expand into new markets if they are able to invest inICT at a faster rate than MFIs? How is the microfinance industryecosystem likely to evolve in the future?� To what extent is leverage gained for an MFI by joining together

with other MFPs? What externality benefits can be realizedwhen MFPs link together to form an international network ofmicrofinance providers (Firpo 2005).

Because MFIs and traditional financial services firms have diffi-culty reaching remote customers, an emerging model is to partnerwith local establishments that act as agents to make financial ser-vices available to local clientele. Called branch office franchises byMathison (2005) and banking correspondents by Ivatury (2005),these local partners are equipped with ICT access devices thatmay potentially be leveraged for other purposes. Local third-partyservice providers can be retailers such as grocery stores, drugstores,gas stations, the postal company, and the local lottery outlet. Some-times, an existing telecentre can function as a local intermediary(Mathison 2005). Because telecentres are often equipped with PCsand Internet connections, MFPs may be able to offer additionalfinancial services that are not particularly useable via a cell phoneor even an ATM machine. In addition to the list of important ques-tions posed by Ivatury (2005), also suggest to consider these others:

� Do banking correspondents as microfinance intermediariesincrease the overall ability in society to provide services tothe poor? Does one type of establishment make for a betterfinancial services intermediary than another? Should localthird-party intermediaries invest in ICT capabilities as a directrevenue source? As a service to generate foot traffic to sell otherservices? How are these new intermediaries like to create pres-sures for changes in the industry structure?� Are communities that have existing telecentres more attractive

recipients of microfinance services? What type of telecentreswork best for a microfinance intermediary? When telecentresact as local intermediaries, do more functionally-rich Internet-based microfinancial services become available when comparedto other forms of microfinance service mechanisms? Does thisimpact microfinance’s beneficial force in local economicdevelopment?

� What is the appropriate business model for banking correspon-dents that allows them to make a profit and increase perfor-mance and outreach of MFPs? How is the local marketimpacted when it has only one viable banking correspondentestablishment? Does local monopoly impact sustainability ofmicrofinance in a village?

In a globalized world, migrant workers are working in, andsending money to almost any country (Abeywickrema 2005). Thus,it’s not a surprise that MFIs are looking to provide financial servicesto the poor, not only in a given local developing country context,but in a cross-border, multi-currency context. This increases thecomplexity of microfinancial services, and the need for sophisti-cated international ICT capabilities, and cross-national regulatorycooperation. Thus, we ask:

� Under what circumstances will microfinance-based remittancesfuel local economic growth? Will they promote a new level ofglobalization that is beneficial for the poor?

As we have seen, information transparency is increasing in thisindustry due to government and regulator requirements, as well asinformation provided by third-party infomediaries, such as theMIX Market (Merland and Strom 2009). Regulators exist in theinternational context and within most countries where microfi-nance operations take place. Regulators may require specificreporting procedures that can burden small MFIs relative to tradi-tional financial services firms that are accustomed to such require-ments. Depending on the regulators’ policies, lenders may engagein more or less aggressive lending policies based on the extent towhich deposits are guaranteed. Different regulation in different re-gions may impact the extent to which MFIs operate in just a few orin many countries. These issues are also going to be impacted bythe level and sophistication of MFI investments in ICT. We proposethe following research questions:

� Does information transparency from third-party infomediariessubstitute for formal regulation in the microfinance industry?What is the tradeoff between information transparency regard-ing MFI internal operations, customer interaction, and donorrelations versus the role of regulators?� Do increased regulations foster competition among MFIs, forc-

ing them to employ good management techniques and seekoperational efficiencies through IT investments?

5. Conclusion

Since this is the main theme piece of the special issue on ‘‘Pov-erty, Technology, Microfinance and Development,’’ we have soughtto lay out a set of study questions to motivate new research thatwill explore multiple levels of analysis related to the impacts ofICT on microfinance, based on our analysis of the industry struc-ture and relevant stakeholders. We have given special care to therole of ICT in furthering economic development and the related ef-forts to bridge the digital divide. We have also considered the roleof microfinance in promoting economic development and encour-aging entrepreneurship in micro-businesses, where it is possible totreat the Millennium Development Goals of the United Nations.We have also discussed a number of issues that bear on the extentto which microfinance, as we have seen it in operation around theworld to date, is a sustainable business model in changing businessand social environments.

We proposed a market and industry ecosystem view of themicrofinance industry as a basis for formulating a series of researchdirections that relate to the kinds of impacts that different stake-holders in microfinance are experiencing or will experience. They


include the customer level, the microfinance institution (MFI) le-vel, the donor level, and the microfinance industry level. Our inves-tigation places a new emphasis on the importance of implementingresearch programs that will yield sharp insights about the stake-holders to microfinance, and the beneficial impacts that will arisearound them in the presence of ICT, consistent with the new effortsthat are occurring in research involving behavioral economics andthe new economics of economic development (Bauchet et al. 2012;Karlan and Zinman 2011). We hope that our research will stimu-late new efforts from interested researchers and practitioners,whose interests involve eradicating extreme poverty wherever itexists, through the application of new technologies and ICTs,including microfinance and P2P lending, and other innovations insociety that aid in improving economic growth and development.

Acknowledgments

We thank Lauren Braniff Reese and Xavier Faz at CGAP and theWorld Bank in Washington, DC, as well as Byungtae Lee and JaeKyu Lee of the Korea Advanced Institute of Technology, JamesYeh of IBM Research, and the participants at the 2010 InternationalConference on Electronic Commerce in Taipei, Taiwan for helpfulcomments. An earlier version of this article also was presented atthe 2010 Hawaii International Conference on Systems Science inKauai. We further would like to acknowledge Karine Barzilai-Nahon, Narcyz Roztocki, Joseph Weiss, the anonymous reviewers,and the mini-track session audience for their input at HICSS, andothers who comments during the paper’s development for the

Souurcee: wwww.proospeer.coom, acceesseed on Feebruuaryy 11,, 2012.

Fig. A1. Prosper.com, a P2P lending platform in the United States

special issue. Rob Kauffman thanks the W. P. Carey Chair at ArizonaState University, the School of Information Systems, and the LeeKong Chian School of Business at Singapore Management Univer-sity for research support. All of the opinions that are expressedare the sole responsibility of the authors.

Appendix A. Peer-to-peer lending markets

P2P lending has been widely studied, but only recently haveempirical advances begun to be made on the basis of careful theorydevelopment, and the analysis of large microdata sets that are usedto analyze P2P borrowers, lenders and the efficacy of the mecha-nism designs that have become available in this new marketspace.The coverage includes: technological and business model innova-tions for P2P lending (Slavin 2007; Sviokla 2009) and Internet-dri-ven market transformation (Wang et al. 2009); and also thelender’s perspective (Klafft 2008), borrower creditworthiness dis-covery and loan default risk (Everett 2011; Iyer et al. 2009), andthe determinants of P2P lending system success (Herzensteinet al. 2008). In addition, there has been research on the role of so-cial networks in P2P lending (Freedman and Jin 2008; Herrero-Lo-pez 2009), community structure (Krumme and Herrero 2009),transaction history influences on loan decisions (Yum and Lee2012), and evidence of borrower discrimination (Pope and Sydnor2008). Other authors have studied the economic phenomena ofmarket herding behavior (Herzenstein et al. 2010, Lee and Lee2012), and social network and adverse selection by borrowers inP2P lending (Lin et al. 2011; Weiss et al. 2010). Two well-known

. Source: www.prosper.com (accessed on February 11, 2012).



examples of P2P lending platforms are Prosper (www.pros-per.com) in the United States and Popfunding (www.popfund-ing.com) in Korea (Farrell 2008). Some of the studies use datafrom these P2P lending platforms as the basis for their analyses.(See Figs. A1 and A2).

Appendix B. How should we think about the evidence for thesuccess of microfinance?

The purpose of this article is not to make an overall evaluationas to whether microfinance has had the kinds of payoffs for thepoor in the nations where it has been implemented to proclaimit a widespread success, or to question what has happened andwonder why it has not produced the kinds of benefits that werepromised. Nevertheless, as long ago as 1999, Morduch (1999a,b),in a lengthy thought piece in the Journal of Economic Literature, ex-pressed concerns amid the hope and the rhetoric of alleviatingpoverty in the developing world. He indicated that it would be nec-essary to make major advances with mechanism designs and man-agerial structures to strip out the overhead costs and achieveflexible best practices for effective outreach to the poor. He alsopointed out that it would be necessary to effectively replace subsi-dies with donors and donors with responsible financial practicesfor institutional sustainability.

Souurcee: wwww.poppfunndinng.coom, acccesseed oon FFebruuaryy 11, 20012.

Fig. A2. Popfunding.com, a P2P lending platform in Korea. Sour

As it stands in mid-2012, the debate continues unabated, andeconomists, bankers, policy-makers and the leading voices of advo-cacy on behalf of the global poor disagree on whether there hastruly been progress (Roodman 2012; Roy 2010; Strauss 2010),amid calls for more rigorous and effective measurement (Helms2010). (See Nathanael (2005) for an overview of the findings onthe effectiveness of microfinance activities up to 2005.) At theone extreme, for example, Bennett (2009) characterized what hastranspired as only ‘‘small change,’’ and argued that, with ‘‘billionsof dollars and a Nobel Prize later, it looks like microlending doesn’tactually do much to fight poverty.’’ Even the reported near to 100%rates of loan payback have been challenged as only having beenmade possible by village money lenders who charge usuriouslyhigh rates of interest, but make it possible for the indebted poorto cover the interest payments on their microloans, when theircash flows didn’t make repayment possible (Gohkale 2009).

Various authors have documented beneficial and measurablegains. An example is Khandker (2005), who evaluated data fromBangladesh, and reported that microloans helped to reduce povertyamong the moderately impoverished by 1% and among the severelyimpoverished by 1.3%, while simultaneously spillover benefits fornon-borrowers led to increased consumption expenditures.Numerous other authors have presented results of this nature, aswell as those whose results contrast with such beneficial outcomes.

ce: www.popfunding.com (accessed on February 11, 2012).

http://www.prosper.com

http://www.prosper.com





More recently, however, we have seen a move to more rigorousmethods of econometric analysis that are representative of behav-ioral economics approaches in the new economics of economicdevelopment to study the impacts of microfinance (Bauchet et al.2012; Rosenberg 2010). Randomized research designs are nowbeing used to emphasize the selection of microfinance borrowersand non-borrrowers in a setting, which permits inferences to bemade regarding causality in ways that past correlation assess-ments in econometrics have not supported. The method also in-volves the approximation of an appropriate counterfactual. Thisallows an analyst to evaluate what would have happened to theborrowers in the absence of the treatment of the microfinance ser-vices in some setting (Bauchet and Morduch 2010; Karlan and Ap-pel 2011). The application of this approach is intended to provide abasis for a more realistic assessment of the impacts.

Bauchet et al. (2012, p. 4) describe what they have learned at ahigh level about the impacts of microcredit and microsavings fromresearch involving these methods:

Recent experimental evidence from three randomized impact eval-uations suggests that while increasing access to credit does not pro-duce the kind of dramatic transformations conjured in the popularimagination, with millions of poor people springing out of povertysimply by taking out loans and applying them to their microbusi-nesses, it does appear to have some important—though more mod-est—outcomes for some people. These include creating newbusinesses and tipping consumption away from temptation goods,such as alcohol, tobacco, and snacks, so that households can investin their businesses or buy more durable goods. This suggests thatmicroloans help some households reprioritize their expendituresand smooth consumption—a valuable function for poor householdsthat suffer from irregular and unpredictable income streams.

Another example of the current degree of new precision thathas entered this research is found in a recent study published in re-cent book and a brief article in Science. Karlan and Zinman (2010,2011) report on a study of 1601 microcredit borrowers in the Phil-ippines, for impacts assessed 11–22 months out from the treat-ments. Their work showcases the refined nature of the newresults that can be obtained, as a means for achieving a much fullerunderstanding of how the impacts of microfinancing work:

Net borrowing increased in the treatment group relative to con-trols. However, the number of business activities and employeesin the treatment group decreased relative to controls, and subjec-tive well-being declined slightly. We also found little evidence thattreatment effects were more pronounced for women. However, wedid find that microloans increase ability to copy with risk,strengthen community ties, and increase access to inform credit.Thus, microcredit here may work, but through channels differentfrom those often hypothesized by its proponents (Karlan and Zin-man 2011).

What remains to be done is to bring these methods into use forthe assessment of the role of ICT in settings that involve persistentpoverty, the introduction of new technological support for finan-cial services, the application of microfinance-related knowledgeand techniques, and the positive impacts that result for bringinghigher quality to the lives of poor people.

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