The paradigm shift in micro finance – Role of information and communication technology (ICT)

Microfinance Institutions (MFI) currently service over 130 million clients worldwide (World Bank 2009), while potentially 3 billion people could benefit from the services offered by this sector. This huge base of clients, and the corresponding transactions which they generate, offer a significant potential for MFI operators to utilize Information and Communication Technology (ICT) based applications.

Over the last decade, innovations in technology have begun to revolutionize the way microfinance operations are conducted across the globe. With the use of technology, institutions can increase access to financial services for underserved poor population in faster and more effective ways. Technology benefits Microfinance Providers in many ways viz., more informed decisions, increased flexibility, lower operating costs, better reporting, increased deposits, and more rural customers.

As the microfinance industry continues to grow and reach more clients in more remote areas, technology becomes an essential tool in making information management and communications processes more efficient and effective. Technology can reduce transaction costs and improve transparency in delivering financial services, both of which can translate into increased access and lower costs for many lower-income clients. Streamlined and automated processes allow financial institutions to extend services to harder-to-reach and more costly clientele by replacing people and branches with point-of-sale (POS) devices and branchless banking strategies. Technology undergirds the management information and reporting systems that are essential for efficient financial service delivery.

Despite the appeal of advanced delivery technologies, relatively few financial institutions have successfully deployed them to reach poor and low-income clients. Developing a solid management information system still remains one of the most important tasks facing microfinance institutions, particularly those scaling up. Challenges include the high cost and limited availability of existing technological solutions, lack of widely available local technical support to support MIS software, consumer adoption rates of technology, lack of basic communications infrastructure in many countries, and inadequate policy environments.

ICT innovations such as a personal computer connected to the internet, a mobile phone, an automated teller machine (ATM) or a point-of-sale (POS) device located at a retail or postal outlet may be less expensive to establish than branches located in rural areas and more convenient for customers. ICT can help the industry address key challenges. There are of course huge R&D costs associated with these technologies, not to mention the expenses required in customer education and outreach. However the potential of technology – the potential it has to really revolutionize the industry and expand the banking services available to the poor – seems worth the cost. The MFIs are ultimately responsible for the relationship with their customers. The MFIs therefore have to provide the training and support needed to make sure members are comfortable with and trust the technology.

It is this possibility of ICT solutions for expanding the rural finance frontier that has stimulated this paper. The main objective is to review literature on the application of ICT solutions in microfinance and analyze the possible use of ICT solutions for expanding microfinance services to rural remote areas by looking at the challenges and issues.