European Microfinance Week plenary. Photo credit: e-MFP
"Adapt or perish," was the resounding message for MFIs at the closing plenary of the 2016 European Microfinance Week, where 400 professionals from financial institutions, investment firms, donors, and academia gathered to discuss relevant topics ranging from financing agriculture and education to assessing social performance of MFIs and promoting innovation in digital finance.
The closing plenary, “Digital Finance: Full inclusion or empty promise?” featured an open debate moderated by Greta Bull, CEO of CGAP, and included plenary members Vicki Escarra, CEO of Opportunity International, Dave van Niekerk, founder and CEO of MyBucks, and Graham Wright, Managing Director of MicroSave.
The debate underlined the need for microfinance institutions to adapt to the rapidly changing landscape of digital financial inclusion or risk becoming irrelevant. The discussion also stressed the importance of transparency and client protection in building trust in digital financial services (DFS).
1. Digital finance represents an existential threat to microfinance if MFIs don’t leverage it appropriately
The financial inclusion landscape is changing rapidly and MFIs can no longer afford to “watch and wait.” As smartphones become increasingly available in remote communities, opportunities for delivering low-cost financial services are expanding. Microfinance institutions can leverage digital financial services to increase client outreach and deliver a wider range of financial services beyond credit.
There are several approaches that MFIs can take. They can develop their own digital finance strategies, use their existing outreach to create agent networks, leverage payments systems of DFS providers to improve the quality and speed of payments to clients, and use technology to improve loan origination and assessment. If MFIs take a more deliberate approach to digital finance, DFS can only enhance rather than threaten their work.
2. Digital financial services still have a long way to go in delivering full financial inclusion
The advantage of DFS is that it allows providers to deliver a full suite of financial services to clients at much lower cost than traditional banking. Yet the range of digital financial services offered today is still very limited, and the cost for clients remains high. With few exceptions, most DFS transactions are limited to person-to-person payments, bill payments, and airtime top-ups. Furthermore, the effective annual interest rates on loans remain very high, even as providers gain better access to data that can be used to assess risk more accurately. In most cases, better data does not translate into lower interest rates for clients; it only enables them to borrow more at the same rate.
3. Increasing complexity of DFS calls for greater focus on client protection
The use of smartphones is enhancing the digital footprint of clients, which will enable DFS providers to make smarter credit decisions. A larger digital footprint can also make clients more vulnerable, especially if they are not aware how their personal data is being used or shared by DFS providers.
Greater transparency and better information disclosure are necessary to enable clients to make informed decisions and prevent cases where only negative data is reported and used to punish clients. The recent example in Kenya, where over 400,000 clients are blacklisted by the Kenyan credit bureaus for loans of less than US$2 should serve as a lesson on how digital financial services can result in financial exclusion rather than inclusion. Given the fragile nature of the system, client protection is critical to build and deepen trust in DFS.
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