MFIs tap technology as the bridge to reach unbanked millions
July 19, 2010 by Microfinance Africa
Filed under News
President Mwai Kibaki visits stands at the Africa-Middle East Micro-Credit summit in Nairobi last April. A recent research by CGAP on banking in developing countries found typical transactions cost an average $2.50, yet it would be only $0.50 if automated, say using a mobile phone. Photo/LIZ MUTHONI
Kenyan microfinance institutions have for a long time served the unbanked segments of the population despite several obstacles in their quest to access this niche.
It is estimated that micro-enterprises contribute about 18 per cent of Kenya’s gross domestic product and 25 per cent of non-agricultural GDP.
It is thus not surprising that many MFI’s have taken to using technology, especially mobile phone platforms, to cut on high operational costs and reliance on commercial banks while increasing focus on core functions.
Early this year, during the opening of the Africa-Middle East Regional Micro-Credit Summit in Nairobi, President Mwai Kibaki affirmed the central role micro-finance plays in national development by striving to address the challenge of providing financial services.
“The sources of funds and the cost of providing financial services as well as the technology and infrastructure available to this sector remain real challenges,” the president said.
Worldwide, it is estimated that $20-30 billion is currently on loan to more than 50 million microfinance borrowers.
Here in Kenya, a massive 62 per cent of the population has no access to conventional banking services, leading to the enthusiastic market response to the nascent mobile banking and money transfer services.
“Mobile banking has fast become an important part of financial services in Kenya and microfinance institutions are not lagging behind on this,” said PesaPot CEO Michael Asola, whose firm provides mobile loan technology to MFIs and the Sacco industry in Kenya.
PesaPot recently joined forces with RedCloud Technologies, an international developer of cloud computing financial services platform, to help it come up with mobile solutions that will enable its clients gain real-time insight into their loan portfolios as well as dramatically reduce their costs.
Some of the MFI and Sacco’s that have partnered with PesaPot include RiverBank Credit, Wasili Sacco and Umande Trust.
Other applications include end-to-end transaction features that connect the borrower directly to his bank account over the phone, using any mobile service provider that has a money transfer service, and a feature for loan officers to vet and get loanees directly into the organization’s system while in the field, cutting on unnecessary paper work.
Microfinance’ institutions that have taken advantage of these technological advancements have been able to reach the mass market after vetting borrowers, which enables them to reduce their portfolio-at-risk levels.
Other services that are being provided using these latest technological advancements include micro-insurance, characterized by low premium and low coverage limits, designed to service low-income people and businesses in developing countries.
Insurers such as Cooperative Insurance Company (CIC) have partnered with microfinancers such as K-Rep Bank, Faulu Kenya and others, to offer composite insurance products in rural areas by utilizing mobile money transfer systems to collect monthly premiums of as little as Sh10 per day.
Others include Kenya Orient with their ‘Bima Safari’ insurance, that charges Sh30 a day for travel insurance bought through the mobile phone; and Apollo Life assurance with a life and credit policy for micro-finance borrowers that will cost between Sh200 to 400 per year or Sh7 per per week.
“Micro-insurance has the potential to help low-income families cope with these and other risks for the cost of an affordable premium,” said Mr Moses Banda, the country manager of Microensure, a micro-insurance intermediary in Africa and Asia.
With ICT based applications, cases of graft have been reduced significantly; while cutting operational costs and the time taken for each transaction to be complete.
Whilst all these are happening MFI’s are able to monitor the activities of their borrowers on a real time basis and leveraging on these technological advancements to draw additional customers into their clientele by offering credit facilities at lower and affordable interest rates.
Cash related costs, such as distribution, insurance and administration, mean that money transfer fees and micro-finance interest rates are so high.
In addition, with cash there is no possibility of data, audit or control for regulators and it involves a high risk of theft.
On the other hand the advantage is that everyone understands how it works and therefore any replacement with electronic money would have to be simple to use to avoid rejection by the mass market.
Compared to developed markets, emerging markets have shown a tremendous ability to leap-frog those ahead in terms of technology adoption and regulatory reform in the financial sector. Kenya is at the forefront of these with Safaricom’s M-Pesa being one of the world’s best models.
It is estimated that there are three times more mobile payments and mobile banking initiatives in emerging markets than in developed markets.
A recent research report by CGAP Group on branchless banking, which studied Kenyan among other developing countries like Afghanistan, found that typical transactions through banks cost an average of $2.50, yet it would cost only $0.50, if it were automated using a mobile phone.
Another stumbling block for most MFI has been access to software’s that can serve their operations well while customised to diverse needs.
Offer solutions
“Software has been a challenge to many MFI’s as off the shelf types do not offer solutions to their needs,” said Mr Asola, adding that their partnership with RedCloud will open new horizons for the MFIs, SACCOs and CBOs (Community Based Organizations) to run their financial services on a shared and most secure cloud computing platform for free.
Software’s that are meant for the MFI markets include Temenos T24 for Microfinance, Community Banking and Octopus Microfinance Suite, but have been found to be very expensive to local organizations.
In Kenya, the Finance and Microfinance Bill of 2008 requires all MFIs to be open to mandatory audits from the Central Bank of Kenya, ensuring that these systems are not vulnerable to manipulation.
Before this bill was enacted, over 200 MFIs operating in Kenya were unregulated, which created a big risk for both financiers and clients.
For example, some player like Akiba Micro-Finance Limited took advantage of this lack of regulations to fraudulently accept deposits from the public.
With the bill in place CBK has been moving to streamline the microfinance sector in the country to allow operations in a better regulated environment.
Faulu Kenya and Kenya Women Finance Trust, have already been licensed as depository financial services while eight applications are still undergoing due consideration by the regulator.
