Microfinance and IT: Glass Half Full or Glass Half Empty?
Optimists often cite microfinance as a “development success story,” but realists know the truth – it suffers from high interest, misrepresentation of repayment rates, poor risk management, and insufficient scale. (More on the “dirty little secrets” of microfinance at the excellent MicroCapital blog.)
Similar unrequited optimism is often true for information technology – there’s a lot of talk about the benefits of computers, PDAs, cell phones, the Internet, etc. when it comes to development. Take off the rose-colored glasses, however, and you’ll notice a slew of defunct telecenters and failing IT-for-development projects, where the absence of business plans/models couldn’t overcome the innovative application(s) of technology.
Don’t get me wrong – there ARE a lot of legitimate success stories in both microfinance and IT for development. But I think each sector could learn a lot from the other in order to scale up successfully and attain the kind of development outcomes to which they are often attributed.
This intersection of microfinance and technology hasn’t been explored enough, but it got a start last Tuesday when about 50 people attended a Microfinance Technology Fair organized by USAID, Chemonics, and QED here in Washington. Attendees saw first-hand how technology is being applied to microfinance. Demonstrations of a cell phone transfer system (G-Cash), hand-held POS device (RTS), PDA loan software (PortaCredit), and an open-source MIS (MIFOS) highlighted the afternoon. (Full disclosure: the organizers were kind enough to invite yours truly to help introduce these presenters.) While I loved seeing the technologies in action, I have some reservations about their ability to take microfinance to the next level without additional work:
- MFIs getting loan officers to use technology (like PDAs or POS devices) probably isn’t worth it, especially when you have to re-train the loan officers and loan groups to use the technology. The cost of hardware, software, support, and training is probably greater than the savings gained from increased efficiency and transparency (this was a primary conclusion of our case study on the Remote Transaction System.)
- Cell phones are probably the best technology for MFIs and banks to use. Phones offer value as a communication device as well as a financial instrument. BOP communities increasingly have access to cell phones. They know how to use them, and trust the companies and agents who sell pre-paid minutes. Cell phones are easy for “agents” – shop clerks or gas station attendants – to use, expanding access without building freestanding networks of bank branches or loan officers. (SMART Communications does this well.) These are enormous advantages over POS devices, PDAs, and even computers.
- All technology platforms for microfinance, cell phones included, face major obstacles in terms of getting cash into the electronic system. Microfinance clients often make money in the informal economy, and cannot use payroll direct deposit to get their assets into the electronic banking system. MFIs looking to use technology must work on electronic deposits in addition to their ongoing success on the withdrawal and transfer side of things. (Gautam Ivatury of CGAP spoke eloquently about this problem).
I came away from last week’s seminar very impressed with G-Cash, PortaCredit, the Remote Transaction System, and MIFOS. My comments here are not meant as a downer – rather, I hope that the microfinance and IT-for-development communities will put aside the cheery rhetoric and work together. There’s potential for real outcomes – BOP communities with access to real financial services using next-generation technology – but only if the optimists want to roll up their sleeves and get down to work.