Expanding Microfinance With Digital Technologies

Micro-loans in their modern form were pioneered by the Grameen Bank to provide a source of credit for poor people in Bangladesh. Today more than 1,000 microfinance institutions offer micro-loans of between $150 and $500 to five million clients in poor rural communities or urban slums spread across Africa, Asia, and Latin America. Most such loans go to women to enable them to expand small businesses. A track record of remarkable repayment rates and success in helping recipients climb out of poverty have made micro-loans a favorite of development agencies. 

Yet relatively few poor people have access to micro-loans -- about five percent of an estimated 500 million potential borrowers worldwide. Major reasons are inefficient practices and the resulting high costs of processing loans and keeping records. Few if any microfinance institutions are profitable, so they cannot tap banks or capital. 

What may change this picture is the advent of digital tools to automate transactions and increase efficiencies. Imagine a loan officer travelling from village to village, equipped with a mobile data entry device similar to that used by FedEx delivery personnel and transmitting loan data over wireless links to a central computer. Microfinance institutions operating in Mexico are now testing the use of Palm Pilots equipped with simple accounting software for their loan officers, and many such groups are introducing computerized accounting systems. 

PRIDE AFRICA operates in six East African countries where half the population subsists on less than $1 a day. PRIDE links its base of 100,000 clients to financial services, information, and markets. It has developed its own banking software to manage micro-loans and small savings accounts and to automate administrative tasks. The group is now experimenting with magnetic cards and information kiosks that allow even illiterate clients to access their accounts and check loan balances, while cutting costs. PRIDE is developing software that will enable it to bundle together loans from tens of thousands of its clients and resell them to commercial banks, opening up capital markets to finance expansion. 

PRIDE Founder Jonathan Campaigne points out that microfinance can benefit from the same emerging Internet-based technologies that are forcing retail bankers everywhere to rethink their business models. These include tools like data mining, customer service and support software, and customer relationship management applications. PRIDE, for example, hopes to work with partners to build an Internet-based virtual "back-office" and provide tools that are easier for poor clients to use -- all with the intent of making access to financial services as widespread as the traditional African drum.