Microfinance is usually thought of as microcredit. When people say microfinance, many think of it as a small loan, often to a woman. In Asia, where I’ve spent a lot of time recently, the way this works is that a number of women co-guarantee each other’s small loans. We’re talking about small loans to set up or to grow a small business. This loan is repaid over, say, six to 12 months. Typically, around five women cross-guarantee each other’s loans.
This model has worked well for a number of decades in Asia, sub-Saharan Africa and Latin America. It has its roots in Grameen Bank [founded in Bangladesh by Nobel laureate Muhammad Yunus]. But many others also invented that model around the same time that Muhammad Yunus did, including the founders of Opportunity International. In more recent times, the model has changed because of the availability of digital tools.
Mobile phones, in particular, are making a big difference in the way microfinance products, not just credit, but access to remittances, savings, insurance and pensions, are able to be distributed. And that is dramatically changing the way microfinance is operating and who is doing the microfinance.
Digital technology and data allow financial service providers to more effectively serve the financially excluded with a “customer-centric” approach. Using specialized algorithms, providers can analyse information on a customer’s mobile telephone (e.g. frequency and amount of airtime top-up) and non-traditional data (e.g. social media profiles) to develop the credit profile of a client when they make lending decisions. These digital footprints help financial service providers interact better with customers, and provides a range of financial products and services based on a deeper understanding of their financial needs.
Reducing operational risk
For microfinance institutions, the use of digital channels can mitigate cash risk and increase operational efficiency. Current microfinance lending models are cash-intensive, and this exposes the institution and customer to cash risk, such as during storage and transit, which incurs additional costs. As such, time that could have been used more productively is spent managing this risk. Through digital technology, clients have the flexibility to repay loans through their mobile phones, avoiding the risks of cash-in-transit.
New business models
Mobile banking supports new business models through mobile technology and data analytics in credit scoring, decision and underwriting processes. However, implementation has been led by mobile network operators, and to some extent large commercial banks and a small number of new cashless microfinance institutions. While traditional institutes are known for their expertise in clients’ needs, they must adapt and develop more capacity to stay competitive and relevant to take advantage of mobile banking services or those that are soon to become available in their countries. Additionally, crowdfunding can improve access to finance for unserved and underserved borrowers which creates cheaper, community-based financial products, and facilitates access to digital investments for people with limited options to receive financial returns on their savings.
Partnerships and collaboration
There are a need for a range of different financial service providers, be it banks and non-banks (telecommunications companies or fintechs). Just like Uber and Airbnb, which transformed the transportation and hotel industries, innovation in algorithm-based credit risk assessment, psychometrics testing and crowdfunding platforms are bound to change the financial services industry.
Microfinance institutions and fintechs face similar challenges in building trust around new digital financial services, and ensuring reliable and stable service delivery takes time. The latter is often limited by poor telecommunications and energy infrastructure, especially in remote areas. Providers should establish communication channels and complaint resolution mechanisms which can address customers’ risk perceptions. Using approaches like assisted digitization (step-by-step demonstrations of processes that show transactions in passbooks or receipts) to help the client transition to digital financial services should also be considered.
Clients of new digital technologies may face new risks ranging from poor customer recourse mechanisms, fraud, data privacy and security breach, service unavailability, hidden fees, discrimination, insolvency to unauthorized ads. It will be critical for financial service providers to meet user expectations in order to achieve financial inclusion. Digital technology has emerged as an important driver of innovation, competitiveness and growth in microfinance. By leveraging the nearly ubiquitous growth of mobile phones, digitization can reduce cost, increase efficiency and allow financial service providers to reach new clients. By developing an inclusive and sustainable digital financial ecosystem through substantial investment, skilled resources, adequate infrastructure, agile processes, and a conducive regulatory environment, it can foster more widespread adoption and usage.
Over all these stipulated grounds the transformation of this sector in Tanzania like any part of the world is bound to adopt the digital transformative measure by applying to the systems that are developed to safeguard the operations of the Microfinance institutions in Tanzania. Amala App Suite servers even better than the expected purpose of digital transformations. For years now it is an outstanding solution towards FinTech issues in the Microfinance sector in Tanzania. Its reliability comes not only in its development but also a team of professionals and experts’ team that is 24 hours available to support the customers with the best service experience. Amala App Suite helps a Microfinance Institution to comply to the laws, rules and regulations that are the backbone of the sector.
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