Making Microfinance Mobile

July 20, 2010    

Mobile banking services are beginning to revolutionize the way people in developing countries manage their money, creating opportunities for microfinance institutions to substantially improve their services. Although widespread m-banking services are currently only present in a few countries, a new CGAP Focus Note, Microfinance and Mobile Banking: The Story So Far shows how microfinance institutions (MFIs) can link into existing m-banking services to make it more convenient and cost-effective for customers to borrow and repay loans. Still, for those MFIs located in countries without an existing m-banking service, most will find it too expensive, time-consuming, and complex to develop a service on their own.

The study, which examines the intersection of mobile banking and microfinance in countries both with and without existing m-banking services (Bolivia, Cambodia, Kenya, Malawi, Mongolia, Pakistan, Tanzania, and the Philippines), found that giving customers the flexibility to make loan payments and deposits using their mobile phones typically shortens group meetings and decreases cases of theft and fraud.

“Using mobile phones to automate payments can offer significant operational cost savings for an MFI if there is a large gap between technology costs and labor costs in their market, enabling them to lower interest rates for their customers,” says Kabir Kumar, co-author of the study.

Working as an agent in an m-banking system can also enable an MFI to learn more about how m-banking works without high investment costs, while helping them differentiate themselves from others in the market, and bringing greater liquidity to their branch locations.

Kenya offers some of the best examples of how MFIs are building on an existing m-banking service. In December 2009, MFI Faulu Kenya launched a service to link Safaricom’s successful M-PESA mobile money transfer service with Faulu savings accounts. Four months after the launch, about $60,000 was transferred between the two institutions each week and 30,000 customers were using the service.

Smaller MFIs can also work together to leverage an m-banking service. One such program is the Rural Bankers Association of the Philippines–Microenterprise Access to Banking Services (MABS) program. This USAID-assisted program organized a group of 60 rural banks, using their ties with more than a thousand small business customers to serve as resellers for GCash, a mobile payments solution developed by GXI, a subsidiary of Globe Telecom.

Going it alone?

In countries that lack existing m-banking services, the study concludes that in most cases an MFI will not be able to build a large-scale m-banking service on its own. Only MFIs with significant managerial, technical, and financial capacity should consider this option.

“Today, MFIs and successful m-banking businesses occupy different worlds,” says Claudia McKay, co-author of the study. "The MFI world is largely focused on credit, while the m-banking world is focused on transfers and payments. MFIs tend to use unsophisticated back-end systems, while the m-banking operations use some of the most sophisticated bank-end systems we know today. And while the MFI world focuses on creating low-cost, human-driven infrastructure, m-banking uses payment systems infrastructure. It is not surprising then that these two worlds haven’t yet aligned.”

The study says that this gulf may narrow as more MFIs experiment with m-banking and as more technology vendors develop off-the-shelf solutions at lower prices.

A handful of MFIs, such as Opportunity Bank of Malawi, have launched their own m-banking services. To do so, they have had to integrate their own banking software with an m-banking platform. Opportunity Bank had to do an entire systems upgrade—a process that took a year and cost more than $100,000 to complete. It then developed a USSD interface to mobile handsets, followed by middleware between the management information system (MIS) and a customer-facing application.

An m-banking service also needs a means to convert cash to electronic value and vice-versa, which is usually handled by a network of retail agents. Mobile operators often use their existing airtime distribution networks. But Opportunity Bank partnered with a major agricultural supply store that has shops in most Malawian towns.

As more m-banking services emerge, there will be further opportunities for MFIs to make their services more mobile, convenient, and cost-effective. “MFIs and their customers will receive valuable benefits through the intersection of m-banking and microfinance, and these benefits will be greatest for MFIs who prepare strategically and consider carefully how and when to jump,” says Sarah Rotman, co-author of the study.