On 26 Jan, I was very privileged to be invited to present at the Career Women’s Forum’s annual WAVE conference. The topic I was given was “microfinance, women and technology” and below is a short summary of my talk.
How big a problem is financial exclusion?
There are 7.3 billion people in the world. Of those, roughly 4.8bn are adults. However, only 2.2bn adults have access to financial services. That is, more than 1 in 2 adults do not have access to financial services.
As with so many sources of deprivation, the issue affects some groups much more than others. For example, the young, the poor, the poorly educated and people living in rural areas are all disproportionately affected.
There is also a clear disparity between developed and developing economies. In mature economies such as the US, the percentage of adults who do not have a checking account with a regulated financial institution is about 8% (source: Five Degrees). However, if we look at Latin America, the number jumps to 60%. And, the highest proportion of unbanked people is in sub-Saharan Africa, where 88% of people do not have access to basic financial services.
Why does this matter?
While we sometimes love to hate bankers, a well-functioning banking system is critical for sustainable economic growth and wealth creation. People need a safe store for their savings. And a banking system is needed to match these savings with the needs of borrowers who need credit to build income-generating assets. Those assets can be tangible such as livestock, or intangible such as education.
This is why the microfinance industry was born: to provide small amounts of finance to those who would otherwise be excluded from financial services, and so foster economic development.
Why can’t financial services be offered to everyone today?
The issue is very much on the supply side. People want financial services, but financial groups aren’t able to offer them across the right channels and at the right price point to meet that demand.
There are demographic factors for this, chiefly around low population density and large rural populations, that make it difficult for banks to build profitable branch operations to service these needs.
Another major challenge for banks centres on the size and frequency of transactions. If I borrow $10,000 to buy a new car and the bank’s administrative costs are $100, or about 1%, that is not that material. If, however, I borrow $100 to pay for feed for my chickens and the administrative fee is $100, then there is a problem. Typically these types of loans tend to have much shorter durations, raising distribution costs further. So interest rates tend to be high and formal banking becomes prohibitively expensive for billions of people.
Why are women worse affected?
Globally, 55% of men have access to financial services compared with 47% of women. There are many reasons for the disparity, reflecting longstanding social disadvantages facing women in the emerging world.
First, men typically have control of assets and can use them as collateral for loans; women often can’t.
Second, women customers are often constrained by household chores, making it more difficult for them to meet loan officers or travel to a branch.
Third, the provision of education to women is often inferior and this translates into lower levels of financial literacy, so for example affecting the ability to make a business case for credit.
There are a number of other contributory factors such as the huge discrepancy in the level of male loan officers compared with female loan officers. The fact is that men are often more likely to grant loans to other men.
Women can make a bigger contribution to society
But lending to women can have a very significant impact on society. They are thought to be more important agents for change than men since they spend a larger proportion of any credit on items such as education that boost family and broader societal welfare.
And microfinance institutions (MFIs) really like lending to women because many studies have shown that they are more likely to repay loans than men.
This is why, beginning with pioneers such as Grameen Bank, MFIs have typically targeted women and why today around 70% of all microcredits are made to women.
How can technology help the unbanked to bank?
Modern software can lower operating costs. By enabling financial groups to automate processes, to consolidate multiple systems, to eliminate errors and so on, modern software enables financial services companies to lower IT costs and to extract economies of scale from technology as they grow. In my experience, modern software can reduce IT costs by around 60% for MFIs, translating into lower total operating costs of around 10-15%. That, in turn, lowers interest rates.
Meanwhile, mobile helps to overcome distribution challenges while also lowering costs. Mobile technology enables banking to take place anytime and anywhere. You can still get access to banking services if you live in a rural community miles away from a branch. And, happily, mobile penetration rates are high across the whole world: in sub-Saharan Africa, 88% don’t have a bank account but only 31% don’t have a mobile. Further, as more banking transactions become self-assisted, mobile-originated transactions, where the marginal cost of processing is practically zero, will drive down total costs.
Cloud also offers infinite scaling with low overheads. By enabling firms to share IT infrastructure costs, the cloud lowers costs for all. The use of cloud in microfinance is still fairly nascent. But based on experience and projections we have made, we estimate that a public cloud deployment can shave another 25-30% from IT costs, translating into another 3-4% off operating costs (assuming the bank already runs modern software).
Big data – the simultaneous explosion in data and the capabilities to draw insight from it – can make a massive impact, for example, in being able to determine creditworthiness in the absence of credit or economic activity.
Peer-to-peer platforms can play an important role in democratising finance, putting borrowers and lenders in direct contact, and helping to enforce the right behaviours.
Some examples of technology making real, demonstrable difference
- Kenya Women’s Trust: thanks to modern software, it has the efficiency and flexibility 1) to make very small loans and hold small deposits (its average outstanding loan is $250, the average deposit is $170); 2) to handle a wide and relatively complex portfolio of products e.g. education loans, clean energy loans, agricultural loans etc; and, 3) to offer multiple channels such as debit cards, ATMs and mobile banking.
- Zidisha: a peer to peer platform that puts borrowers directly in contact with lenders. By cutting out the intermediary, it reduces the cost of borrowing and the return on saving. But it also incorporates a number of social features. Ratings, for instance, help lenders to identify people who may be more creditworthy in the absence of other credit scoring techniques (and can remove an existing barrier to financial services)
- RenMoney: a fast-growing start-up which is adding about 1,000 customers a month in Nigeria, RenMoney has all its IT operations in the cloud. As a result, it operates with high efficiency and complete scalability. The companyhas just one IT guy!
- Lenddo: an MFI which developed an algorithm to crunch the huge amounts of data that people share about themselves on social media channels. It looks at their friends, their recommendations and so on to develop a sense of creditworthiness. And it really works. The algorithm is such a good predictor that Lenddo is now going to stop lending and just work on its algorithm, selling to other financial institutions.
- M-Shwari: a mobile-only banking service offered to existing M-Pesa customers in Kenya. M-Shwari grew to 3 million customers in 5 months after launch. Now, 16 months after launch, it has 9.3m customers which is roughly half the adult population in Kenya. It shows how quickly banking services can be adopted when the channel and the price point is right. The service is now being taken to other African countries, starting with Tanzania.
It seems clear that technology can play a massive role in overcoming the historical barriers to financial inclusion – and is already beginning to do so. With wider adoption of new technologies, especially if they can be layered on top of each other, it is entirely possible that we can bring financial services to everyone on the planet, and within our lifetimes.