In recent years, society has experienced a growing need for Microfinance as a powerful tool for sustainable development. While traditional Microfinance has been serving its purpose for decades, the industry faces the challenge presented by digital technology, which has simply accelerated the shift. As the global economy shrinks and the energy costs have skyrocketed, due to the war between Russia and Ukraine, the Microfinance business digital challengers may now reach the low-income segment of the population with the same kinds of services in every corner of the world.
Microfinance includes lending and sometimes accounts and relates to a category of financial services that help the world’s ‘unbanked’ (from a financing point of view) and most vulnerable segments of the population get the financial access needed, either for personal prosperity and financial inclusion, or for professional financing. The main goal of Microfinance is to provide easy access to financial services, equally, to all layers of social class by helping them to become self-supporting, promoting at the same time social change among certain community segments.
What is a Microfinance Institution?
Like a financial institution (bank), a Microfinance institution is a provider of credit, however the size and the volumes of the provided loans are smaller in comparison with those offered by traditional financial institutions. These small loans are known as Microcredit and target clients that are often micro-entrepreneurs in need of economic support to launch or to help their business grow. The profile of this client is considered too risky by traditional financial institutions because, on the one hand, they cannot provide real collateral and on the other, they tend to work in the ‘informal’ sector of the local economies.
Microfinance institutions have existed in various forms for many years, the popularity though of modern-day Microfinance surged upward in the 1990s and the 2000s, while in 2018 alone, the global Microfinance industry helped 139,9 million clients through savings, loans, insurance, and transfers.
Microfinance institutions empower the retail segment with financial tools, offer more choices, and enable small businesses with great potential to grow, so during the past years, many countries enacted or modernised laws in favour of Microfinancing operations, which led to a significant increase in the licensing of Microfinance institutions.
Microfinance & Small businesses
A Small-to-Medium Enterprise (SME) is defined as any business entity with fewer than 250 employees. In many countries, SMEs usually represent a whopping 90% of all enterprises and it is estimated that they account for more than 60% of jobs in local economies.
The importance of SMEs to local communities is emotionally rooted in buying and selling with friends and neighbours, while in rural areas and big cities, they offer key economic benefits as well. In general, SMEs present new employment opportunities, serve as the building blocks of any country’s operation, and strongly impact/support local economies, because:
- They are more adaptable to the ever-changing economic climate.
- They keep national exchange in the country by employing local workers and supporting other businesses.
- They support the local government through taxation.
- They do not always stay small; they can grow to corporations.
A major barrier, though, to the rapid development of the SME sector and particularly those that are considered small and very small businesses, is a shortage of both debt and equity financing. Accessing finance has been identified as a key element for small businesses to succeed in their drive to build productive capacity, compete, create jobs and contribute to poverty alleviation in developing countries.
In Western economies, the major reason why small businesses cannot easily access loans, offered by traditional financial institutions and commercial banks, is that they cannot provide collaterals, or that their loan applications are subject to complex and disproportionate evaluation criteria.
In other economies, small businesses in general can rarely meet the conditions set by financial institutions, which see them as a risk, because of poor guarantees and lack of information about their ability to repay loans. Without finance, these entities cannot acquire or absorb new technologies, nor can they grow to compete in global markets or even local markets. Also, they cannot create partnerships with larger firms.
The technology factor
Today, Microfinance tries to bridge the gap between the financial service providers and the ‘unbanked’ population, benefiting from technology, innovation, and analytics that drive knowledge, which are the key factors and the drivers for economic growth.
Digital technologies are rapidly spreading across the world and making significant impact on human life. Digital innovation creates new channels of engagement, expands opportunities, and increases the efficiency for individuals, and businesses.
The Microfinance industry is fast adapting itself to technology changes in the banking and finance sector as well, so smart connectivity, technological innovation, and digital inclusion offer various benefits that relate to growth, new opportunities, improved service delivery, and financial inclusion through micro-financing.
The key features of technology’s contribution to the operation and growth of MFIs are:
- Customer Centricity
Digital technology, data, and 360° digitised services allow MFIs to efficiently reach and serve the ‘unbanked’, through a ‘customer-centric’ and friendly approach.
- Reduction of Operational Risk
Through digital technology, clients can repay loans through various automated digital services, avoiding the risks of cash-based transactions.
- New Business Models
The mobile-first concept supports new business models, by utilising mobile technology and data analytics, credit scoring, decision and underwriting processes.
- Partnerships & Collaboration
Partnerships and collaboration among banking and finance institutions, fintechs, and technology providers help to change and evolve the financial services industry.
- Big Data
New sources of data and new ways to evaluate and process data for credit scoring can level the field for borrowers, by lowering the cost for borrowers to assess creditworthiness.
The next day in technology for MFIs
Invest in flexible solutions
Most MFIs have IT systems that are cobbled together, with no efficient integration among them, as well as no capabilities to easily get connected with external systems and applications. MFIs should invest in modern IT systems that have the flexibility to grow with the business into the future, embracing key technology concepts such as cloudification, containerisation, microservices, data analysis, prediction models, etc.
Access digital infrastructure through Partnerships
MFIs are probably not going to be prominent banking and finance players like the traditional financial institutions (banks). However, this reality cannot prevent them from leveraging their digital infrastructure through partnerships. The most critical assets of MFIs, their license and dedicated customer base can assure efficient partnerships with alternative technology providers and orchestrators, to build strong and innovative microfinancing ecosystems, assuring that these initiatives will, always, be driven by technological and business trends.
How Profile Software can help
With Finuevo Suite, our dedicated solution for banking and finance institutions of any size, we can address efficiently the needs of MFIs. Finuevo Suite is an end-to-end plug n play solution for MFIs that fuses the robust capabilities of Finuevo Core and the unique digital experience of Finuevo Digital. The Suite delivers innovative functionality that follows international banking standards, while offering intuitive usability for organisations and their digital clients, paired with state-of-the-art tools for exceptional day-to-day operations.
MFIs can benefit from:
- Rich, out of the box and robust cross-channels functionality
- Themeable capabilities for more powerful branding
- Complete front-to-back offering
- Highly-automated operations
- Modular and scalable platform
- Flexible delivery and deployment models
- Cloud enabled cost-effective operations, resulting in low TCO & quick ROI.
1 10 years already! A look back at the trends in Microfinance [Microfinance Barometer, 2019]
2 The power of small: Unlocking the potential of SMEs [International Labour Organisation, 2019]
3 Small businesses, job creation and growth: Facts, obstacles and best practices [OECD]