The future of microfinance and the financial inclusion conundrum


“Innovation” seems to be the buzzword nowadays in the microfinance industry. Articles with titles like “We need disruption in financial inclusion”(1) or “How Big Data can expand financial opportunities for the world’s poor”(2) or extolling the digital finance “revolution”(3) are commonplace in today’s literature regarding financial inclusion.

The belief structure underlying this emphasis on innovation is that while “traditional” financial service providers serving the poor and excluded have expanded rapidly in the past 20 years, the 200 million clients they serve are just a drop in the bucket compared to the billions who remain unbanked. It is unrealistic to expect these same traditional service providers to close this gap because, by definition, traditional institutions are limited by both their brick-and-mortar structure and the fact that many seek to balance financial and social goals, which lowers returns and thus limits their resource generation capacity.

Financial Inclusion 2.0, in this vision, use technology to reach the unbanked. The two technologies most often cited are mobile/electronic banking and agent/branchless banking. Sometimes these two approaches are intertwined, such as when branchless banking networks are held together by mobile technologies. But while the assumption that technology will solve the gap in financial inclusion is explicit, what is not always clearly stated is who will wield this technology in service of the poor. The emphasis on “public-private partnerships” provides a clue. Often the only organizations that can afford the investment in the networks and technologies needed to manage them are commercial entities¬¬––ones without a specific social mission to serve the poor.

While it can be surprising to see for-profit companies or their associated foundations seeking grants, low interest loans and other support from development agencies to expand their business even though that business will generate profits for them, there is nothing conceptually wrong with purely commercially-oriented companies serving the poor––at least as long as these companies do not take advantage of the clients’ relatively low level of education and awareness to add in extra costs. The past decade revealed that even social mission-driven institutions were not always putting their clients’ needs first. This ultimately gave birth to the client protection movement. One would hope that the new, technology-laden entrants into the industry also abide by these same principles.

In fact, what is also implied in this emphasis on technology over traditional approaches is the belief that only purely profit-driven organizations have the capacity to raise sufficient resources to close the gap in financial inclusion. The traditional service providers, no matter how commercialized, are seen as limited in their ability to raise both equity and debt, mainly because they promise “social returns” that are perceived to cut into financial returns.

A lot of the cheerleading in favor of disruptive technology comes from Africa, where indeed mobile platforms have come to dominate payments transactions and expanded in to loan repayment and savings deposit services. Amidst all this hoopla, however, there is scant mention that the true lifeblood of any financial intermediary––loan origination––is still done the old fashioned way, through a face-to-face meeting between the loan officer and the client. Scoring and other technologies have been introduced, but to date have not been able to completely substitute for human judgment.

Africa may be unique because it had the least developed financial sector in the world 10 years ago. Asia has been a different story, with many long-established players. Perhaps this is one factor behind why three countries that are considered among the best sectors in the world––the Philippines, Cambodia and Pakistan––to date have not experienced “disruptions”, much less “revolutions”. To be sure, all three countries have witnessed significant effort to mainstream mobile banking and branchless banking. The Philippines has one of the world’s first joint ventures between a bank and telecommunications company (BPI Globe BanKO). In Pakistan, some MNOs have purchased or created financial institutions. Wing has been offering mobile payments in Cambodia since 2010.

And yet, in none of these countries does there seem to be a massive threat to the market share of the more traditional service providers that is leading them to seek their own technological solutions. If anything, most financial institutions are too complacent, sticking with their tried-and-true methodologies rather than trying anything new. For the most part, there are still so many unserved clients in all of these countries that there actually isn’t much pressure to change.

Perhaps these institutions are blind to the future. Will they eventually go the way of the dinosaur? To answer that question, perhaps it is best to look at what clients want. Do they want to be served by a local retail shop acting as an agent of a distant financial institution? Do they trust their phones to ensure their money is safe when they make deposits? Most importantly, do they prefer the no-frills approach offered by those types of “disruptive” players versus the social mobilization programs that usually come with services from social mission-driven institutions?

Some clients may indeed prefer the no-frills approach; not everybody wants to sit through an hour-long training each week. But if some clients want quick and easy access with no requirements like weekly group meetings, we should ask why they would choose a mobile or branchless banking channel when they already have no-frills, easy access service from their local moneylender. Sure, informal moneylenders charge a high nominal interest rate. But their importance in the lives of the poor cannot be underestimated; even in countries like Bangladesh, clients still borrow more from their local moneylenders than they do from their microfinance institution. Mobile or branchless banking can never be as convenient as the local moneylender¬¬––or as flexible. And the cost of the technology and need to have multiple partners to deliver the service does not necessarily give the new approaches a definitive price advantage.

Other clients may continue to value the personal relationship they have with their loan officer, who they see every week, and the training and support he or she provides. If that is what a large segment of the market wants, the traditional MFIs may be better off responding to the putative disruptive technologies by becoming more traditional, in the sense of going back to their NGO/project roots and combining financial services with other forms of support.

Unfortunately, it may be the case that the opposite will happen. The “disruptive technologies” narrative appeals to the worldview of many in Europe and the US, and this will have a significant impact on how much resources are available. These days, mobile banking, for example, receives enormous financial support from the development community, leaving less funding to improve traditional services through training of loan officers, mainstreaming of client protection practices and social performance management, or providing wholesale funds for on-lending. The long-term impact of this shift in resource priorities may be to act as a disincentive for traditional service providers to increase non-financial services.

Ultimately, resources in support of financial inclusion should be allocated toward services that the clients really want and need. Today, with so many decision-makers and commentators enamored with technological fixes, it is unclear whether clients’ needs are really being incorporated. The push for the technological approach continues despite the recent news that usage of both on-line and mobile payments services in the US has slowed for two years in a row , suggesting that even in a country where people readily adopt new technologies, when it comes to money most people still prefer humans over digits.

It is interesting to talk about the kinds of services clients demand and why, what this means for development at either the micro or macro level. These things will define how MFIs should position themselves in the future to meet their clients’ needs while remaining attractive to the investors who give them the money the use to lend to their clients.



This article was contributed by Mr. Ron Bevacqua, Managing Director of PFTAS.


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