Knowledge

Author: MacDonald Gomo

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Date: 17 January 2019

Financial Inclusion through Technology: The Investors’ Perspective – European Microfinance Week 2018

 

The 9th European Microfinance Award in 2018 titled “Financial Inclusion through Technology” intended to highlight how technology assists financial services providers in reaching unbanked and under-banked segments and essentially financially including those segments which do not have access to formal financial services. As published in September 2018, Advans Côte d’Ivoire, ESAF Small Finance Bank and KMF were selected as three finalists.  During European Microfinance Week in Luxembourg – the winner of the award was announced. KMF, a microfinance institution in Kazakhstan, one of the most remote regions of the World, won the award.  To reach clients and improve efficiencies in this challenging context, KMF uses in-house developed tablet software – called Mobile Expert – that communicates remotely with its core banking system to ensure that loan officers, management, loan recovery and internal control teams can schedule loan officers’ work, capture loan applications, make loan approval decisions, monitor and recover late loans.

During the same event, the flagship panels included a discussion on the key aspects of financial inclusion through technology, which featured panelists:  Edmund Higenbottam (Verdant Capital), Emilie Allaert (LHoFT), Lonneke Noteboom (FMO) and Radhika Shroff (Accion).

Radhika Shroff said that Financial technology (“Fintech”) helps Microfinance Institutions (MFIs) reduce operating costs and improve operational efficiency while gaining knowledge which can be applied to more established MFIs and banks. Lonneke Noteboom supported this statement and said that she believes that investors have a big role to play in the digital transformation of the financial sector.

According to Edmund Higenbottam, Fintech has made it commercially viable for MFIs to introduce smaller transaction products as it allows institutions to change their operating model. Although Fintech reduces operating costs, it is not reflected in the prices charged to clients and Edmund Higenbottam believes that this is due to lack of funding which can be resolved by additional capital into the Fintech sector thus bringing in competition while Radhika Shroff believes that a more data driven dynamic approach to pricing would also assist.

Radhika Shroff stated that Fintech assists MFI’s in becoming more solution-orientated through advanced algorithms. Lonneke Noteboom said she believes that implementing and integrating technology internally is a great challenge due to its complexity while Emilie Allaert said the main challenge is finding the right partner for technical support and funding.

Funding remains scarce and expensive for the smaller MFIs. Emilie Allaert mentioned that this is due to investors targeting experienced and established MFIs. Lonneke Noteboom’s solution to this is for investors to consider the ability of an MFIs product to be tweaked in order to enter the Fintech sector.

Experience and getting the right partners is important to help ensure start-up Fintech entrepreneurs navigate their regulatory environment effectively with Lonneke Noteboom stressed the importance of understanding the regulatory environment as well as involving regulators in proposed solutions. Edmund Higenbottam advised would-be entrepreneurs to consider environments which are most suitable to the desired strategy and technology and to be well informed as there are severe costs and penalties if there is a breach of regulation.

There is fear that overreliance on technology has reduced human interaction to microfinance loans and Edmund Higenbottam said that he believes that this is inevitable. However, Lonneke Noteboom said that the use of tablets to open and process transactions has enabled loan officers to extend their reach far from their traditional offices with the availability of data allowing MFIs to better serve clients.

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