the use of it in microfinance finance forum the world bank

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The use of IT in microfinance Finance Forum The World Bank

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Page 1: The use of IT in microfinance Finance Forum The World Bank

The use of IT in microfinance

Finance Forum

The World Bank

Page 2: The use of IT in microfinance Finance Forum The World Bank

Thesis

The use of IT can help at two crucial levels in the microfinance process, including to reach out to the poorest, or those in remote areas,

but severe obstacles require creative solutions

Page 3: The use of IT in microfinance Finance Forum The World Bank

Agenda

• How can IT help in the microfinance process?• What obstacles make this difficult?• What kind of creative solutions can be found?• What can the Bank do ?

Page 4: The use of IT in microfinance Finance Forum The World Bank

IT can help at two levels: (i) in assessing loans, and (ii) in reaching out to clients

• In assessing loans: IT-based credit scoring or other credit assessment models are key to:– Ensure a good quality of loans

– Increase productivity

• In reaching out to clients: IT can help expand programs in a profitable way, even:– In the absence of a pre-existing branch network

– In rural and remote areas

Page 5: The use of IT in microfinance Finance Forum The World Bank

Outreach has traditionally been built through branches

• Nearly all microfinance programs rely on branches• Programs with large outreach have medium to large networks • Those which focus on large cities, have medium size

networks• BancoSol in Bolivia (33 branches / 650,000 clients)

• Those with a presence in rural areas have very large networks, which either:– Relied on a pre-existing extended branch network

• Unit Desas in Indonesia (3500 village units / 2.5 million borrowers) • SHG program in India (networks of 40 banks / 2 million borrowers)

– Benefited from large subsidies to finance a wide scale branch expansion in rural areas

• Grameen Bank in Bangladesh (1160 branches / 2.4 million borrowers)

Page 6: The use of IT in microfinance Finance Forum The World Bank

Large rural programs, relying on large networks, have received heavy subsidies

First soft loan First bond issue

Grameen Bank

Source: Grameen Bank

Page 7: The use of IT in microfinance Finance Forum The World Bank

Reliance on branch networks constraints growth, in particular in remote areas

• In many countries, many programs remain small as increasing outreach via branches would not be profitable

• Rural and remote areas have often been left unattended, even by microfinance institutions !

Hence, IT can help build up outreach profitably, especially in smaller city centers and remoter areas

Page 8: The use of IT in microfinance Finance Forum The World Bank

IT could facilitate the profitable expansion of microfinance programs

$1.40

$1.20$1.08

$0.20$0.32 $0.33

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Branch Online

EStimated cost of banking transactions

US Latin America Brazil

Source: TowerGroup, 2000

Page 9: The use of IT in microfinance Finance Forum The World Bank

Agenda

• How can IT help in the microfinance process?• What obstacles make this difficult?• What kind of creative solutions can be found?• What can the Bank do ?

Page 10: The use of IT in microfinance Finance Forum The World Bank

Low connectivity is the main obstacle …

Source: Telecommunication Union Data Base

Personal computers (% pop.)

0%

10%

20%

30%

40%

50%

60%

Brazil Argentina Chile Mexico Korea HK SouthAfrica

UK USA Finland

1999 2000

Page 11: The use of IT in microfinance Finance Forum The World Bank

… even for fixed and cellular phones …

Source: Telecommunication Union Data Base

Mobile cellular subscribers (% pop.)

0%10%20%

30%40%50%60%

70%80%90%

Brazil Argentina Chile Mexico Korea HK SouthAfrica

UK USA Finland

1999 2000

Page 12: The use of IT in microfinance Finance Forum The World Bank

… even more so for the poor

Source: Central Bank of Brazil

Telephone density in Sao Paulo

8%1%

98%

78%

39%

2%

98%

57%

23%

8%

35%

75%

94%

12%

93%

0%

20%

40%

60%

80%

100%

120%

A B C D E

1997 1998 1999

Page 13: The use of IT in microfinance Finance Forum The World Bank

Other obstacles play a more limited role

• Costs of IT services (device, subscription, calls)– In Brazil, monthly subscription charges for cellular

phones can be up to 10% of the minimum salary

• Security issues (internet, cell phones)• Education• Cost of money transport to remote areas

– Breakeven point for ATMs reached at about 4,000 daily transactions

Page 14: The use of IT in microfinance Finance Forum The World Bank

Agenda

• How can IT help in the microfinance process?• What obstacles make this difficult?• What kind of creative solutions can be found?• What can the Bank do ?

Page 15: The use of IT in microfinance Finance Forum The World Bank

Creative solutions have started to emerge in various countries

• Make use of public infrastructure:– The post office network (India)

• Create own IT infrastructure at cheap cost:– Internet-based e.g. PopBank machines in

grocery stores (Brazil)– Satellite-based e.g. Caixa’s correspondent

banker network (Brazil)– Cellular-based e.g. TEBA Bank (South Africa)

Page 16: The use of IT in microfinance Finance Forum The World Bank

Using public infrastructure

India Post– Idea: allow microfinance providers to access

new clients via the post office network– Advantages: costs to reach out lower segments

are reduced• Existing network with large rural presence• Existing client data base with saving information• Potential competition among various providers• Limited cash transport requirements

Page 17: The use of IT in microfinance Finance Forum The World Bank

Creating own internet-based IT infrastructure

Pop Bank– Idea: install internet-linked terminals in “panaderias”– Advantages: costs to reach out lower segments are

reduced• Internet-based technology• Limited cash transport requirements by using grocer’s

liquidities• Automatic link with a commercial bank’s back office

capabilities• Potential presence at heart of 25,000 villages• Other potential sources of income• Attractive machine

Page 18: The use of IT in microfinance Finance Forum The World Bank

Creating own satellite-based IT infrastructure

Caixa– Idea: install satellite-linked machines in grocery stores

– Advantages: costs to reach out lower segments are reduced

• Limited cash transport requirements by using grocer’s liquidities

• Automatic link with the commercial bank’s back office capabilities

• Cheap device and card (debit)

• Simple to use

Page 19: The use of IT in microfinance Finance Forum The World Bank

Creating own cellular-based IT infrastructure

Teba Bank– Idea: install wireless terminals in “Spazza” shops – Advantages: costs to reach out lower segments are

reduced• Limited cash transport requirements by using grocer’s

liquidities• Automatic link with the commercial bank’s back office

capabilities• Cheap device and card (debit)• Agreement with telecom company• Simple to use

Page 20: The use of IT in microfinance Finance Forum The World Bank

Agenda

• How can IT help in the microfinance process?• What obstacles make this difficult?• What kind of creative solutions can be found?• What can the Bank do ?

Page 21: The use of IT in microfinance Finance Forum The World Bank

The Bank can help

• Build up the required IT infrastructure• Increase competition in the telecom sector• Ensure that the regulation of small microfinance

providers does not prevent creativity (ex: private partnerships)

• Encourage and support creative solutions– IFC

– Government incentives