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Integrating microfinance with ICT in Bangladesh

May 25, 2010

Linking up and Reaching out in Bangladesh: Information and Communications Technology for Microfinance presents a new idea of introducing a centralised technology platform for the microfinance industry to usher greater efficiency and ameliorate current constraints.

Linking up and Reaching out in Bangladesh: Information and Communications Technology for Microfinance

The microfinance market in Bangladesh emerged in the early 1970s out of the now-famous Jobra experiments of Dr. Muhammad Yunus and a number of other, government-led initiatives.

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These pioneering efforts led to the proliferation of institutions that we see flourishing in the country today. Bangladesh is generally considered to be a mature microfinance market, with a multitude of players that together employ around 150,000 people (CDF 2006).

According to data provided by the Microcredit Regulatory Authority (MRA), as of December 7, 2008, there were 374 licensed nongovernmental microfinance organisations in Bangladesh—out of 4,236 organisations that applied for licenses.

The potential number that could qualify, given the major criteria of having 1,000 borrowers or Tk 4 million in principal loans outstanding, is 452. Data from MIX, the Web based microfinance information platform (Microfinance Information Exchange) and Credit and Development Forum (CDF), a non-profit microfinance network in Bangladesh, indicate that 77% of the market is currently served by the three largest microcredit programs: ASA, Bangladesh Rural Advancement Committee (BRAC), and Grameen Bank.

Together, the three institutions serve more than 18 million borrowers. The remainder of Bangladesh’s estimated 24 million total microfinance borrowers are served by institutions classified as medium, small, or very small.

While the figures seem to indicate that large institutions serve the vast majority of microfinance clients in Bangladesh, a mapping exercise carried out by the microfinance apex funding institution Palli Karma- Sahayak Foundation (PKSF) found that there is an overlap of about 33% (PKSF 2004).

More recent PKSF studies indicate that the overlap rate has increased to 40 percent. In other words, borrowers receive loans from multiple lenders, either to fulfill their investment needs or to pay back the loans they have received from other institutions.

Given the overlap incidence and the absence of a robust credit bureau, totals on an institution-by-institution basis might grossly overestimate the number of borrowers served and therefore underestimate those that have absolutely no access to finance.

This leads to what is widely believed: that despite the large number of (sometimes duplicated) borrowers currently served and despite the many years of experience in microfinance by the Bangladeshi operators, about 50% of the country’s poor have not yet been reached (PKSF 2006).

Although microfinance organisations in Bangladesh do not yet see this as a problem, it has become a troublesome issue in many other counties, as it can lead to unacceptable levels of debt that would eventually adversely affect the poor. The 2008–09 international financial crisis provides incentive for Bangladesh to be cautious about such an occurrence in its microfinance sector.

Current Constraints in the Microfinance Industry

Microcredit organisations in Bangladesh face a number of constraints in trying to serve the majority of the poor. Many of these constraints can be linked to insufficient availability and use of technology. Major concerns include the following:

  • There is no reporting mechanism that correctly captures performance data. Information on the financial and operational performance of microfinance institutions (MFIs) is paper-centric and not timely, while data are not complete and cannot be independently verified. This situation is detrimental to MFIs, microfinance clients, and microfinance industry regulatory bodies.
  • Paper-based operations consume a significant amount of loan officers’ time. There is not, in most MFIs, a timely connection between the head office, the branch offices, and the loan officers in the field due to lack of, or incomplete use of, appropriate technology applications.
  • Due to non-use of appropriate technology applications, there is a lack of holistic, sector-wide data on MFI borrowers and outstanding portfolios. MFIs are unable to share useful information about clients with each other. This contributes to the persistent client overlap seen in the microfinance sector.
  • Adoption of technology is expensive for MFIs, while use of currently available technology does not always correspond to gains in revenue or increases in productivity in the short term.

The Proposed New Microfinance Paradigm

This book presents a new paradigm for introducing technology in the microfinance Industry of Bangladesh that could help ameliorate current constraints. Under the new paradigm, a centralised ICT platform would be established to serve the microfinance industry of Bangladesh and technology would be deployed more rapidly to MFIs in all parts of the microfinance value chain, from the head office to branch offices, loan officers, and clients. Unlike in the traditional paradigm, the technology needs of all MFIs would be pooled together in one central office. The central office would offer technology tools, services, and know-how to MFIs throughout the country. Several benefits would be achieved under this new paradigm:

  • Because all technology needs would be pooled in one place, the central office would be able to exploit economies of scale and offer technology services to MFIs at a lower cost.
  • Because their technology needs would be outsourced, MFI staff would no longer need to devote as much time and effort to learning new technologies. The central office would provide all technology-related training and support.
  • Because technology would be deployed throughout the microfinance value chain, all parts of the MFI would always be connected. 
  • Because all MFIs would be connected with one another through a central office, they would be able to learn useful information about clients from one another.The new paradigm goes several steps further. If the central platform were connected to the formal financial sector, MFI activities could become integrated with those of the formal financial sector, namely through increasing MFIs’ access to capital from commercial banks and financial intermediaries. In turn, the formal financial market would be able to reach out to individual MFIs and their clients, who live in remote, rural areas.

Similarly, if the central platform were connected with the government, MFIs could more easily comply with government regulations and grant the government access to selected MFI information. In turn, the government could design better-targeted microfinance policies and regulations based on complete and accurate information.

In the long term, the government could opt for lighter regulation, intervening strategically only when there is a need. With the new platform in place, the cost of regulation would also be lower than in the traditional paradigm, since information about MFIs would be readily available and interventions would be more strategic.

Introduction of the centralised ICT platform also would open the door to new products and services, such as mobile banking, branchless banking, and electronic remittances.

Because MFIs would transact business electronically, through the central office, they would be able to store information and offer services electronically. Offering clients financial services over mobile phones would expand MFIs’ outreach by allowing them to exploit the full breadth of the national mobile network.

By providing their loan officers with electronic devices, MFIs would gain the ability to provide a full range of financial services otherwise available only at a branch office.

Since the entire microfinance value chain would be managed electronically under the new paradigm, remittances would also be channeled electronically, enabling clients to send money to (and receive money from) a person who is a client of another MFI.

Source : World Bank
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