From Digital Adoption to Digital Advantage in Microfinance

For decades, microfinance institutions (MFIs) have occupied a unique position in the development landscape – reaching communities that traditional banks cannot or will not serve, building financial capability among first-time borrowers, and providing a pathway into the formal economy for many. This role remains as vital as ever, and microfinance is now on the cusp of a new era.  

Digitization done comprehensively across the financial value chain in an institution can unlock business value and efficiencies that increase the breadth of MFI client bases, as well as the depth and utility of MFI product offerings.

While the microfinance sector has had many successes, it has also experienced variable performance. On top of this, the financial sector has, over time, added a variety of new digital players and offerings. This includes digital banks like NuBank that provide accounts to lower-income customers, as well as fintechs offering new payment platforms and credit scoring approaches embedded in various e-commerce platforms.  

This begs the question – can MFIs seize the opportunity of digitization to reimagine their model, which has remained fairly static historically? Emerging experience indicates that this may well be the case. Digitization done comprehensively across the financial value chain in an institution can unlock business value and efficiencies that increase the breadth of MFI client bases, as well as the depth and utility of MFI product offerings. By expanding the evidence base on such phenomena, CGAP hopes to offer a vision of what microfinance institutions are capable of and spur investments into the needed transformations. Digitizing microfinance is not new, so what is different about this vision?  

Early days of MFI digitization  

MFIs at the forefront of digitization began seeking partnerships with institutions providing digital products, leveraging Mobile Network Operator distribution networks, and experimenting with automated nano-credit – though initiatives were few and far between. Guidance and support were not tailored to MFIs, and focused largely on digitizing paper-based processes and riding on mobile payment platforms. A trailblazer in the field was Musoni in Kenya, which launched cashless group lending as early as 2010. Musoni was able to do this by leveraging M-PESA’s mobile payments penetration and layering the use of tablets by field officers to register clients and collect their loan application information. Turnaround time for loan disbursements decreased from 72 to six hours on average, coupled with a 68% increase in caseload per loan officer, leading to significant cost savings as tablets removed the need for physical transfer of information. 

MFI digitization initiatives pick up steam  

In the wake of the COVID-19 pandemic, digital initiatives picked up steam. The value-add of digitization tended to focus on the successful development of add-on products and delivery channels. COVID-19 -driven digitizing of loan processes and payments proved cost-effective for MFIs, and benefited clients as well. Some MFIs ventured into automated loan renewals based on past repayment patterns and experimented with new credit scoring algorithms and products using data trails created internally. For example, Annapurna in India created the "Just-In-Time" emergency loan for existing microfinance customers, which they could apply for, qualify for, and receive within minutes.  

While there was a recognition by institutions like Accion that “the goal of digital transformation is not to achieve the same status as a digital-first company, but rather adaptability and an enduring culture of innovation and learning, so that institutions can respond rapidly to changes, challenges, and opportunities as they arise,” digitization proceeded piecemeal for a number of reasons. To name a few:  

• Customers were not digitally ready  
• Core banking and MIS systems did not support the types of analytics required for underwriting digital loans  
• Relevant data were not available to inform decision-making  
• Smaller MFIs could not justify the large amounts of investment required for digitization  

CGAP observed a number of recurring challenges amongst MFIs pursuing digitization, from underestimating change management to having insufficient capacity to implement technological changes.  

Looking ahead to transformational approaches

Having learned from these early experiments, and with rapid technological developments including AI, several progressive MFIs are today developing even more robust digital strategies with attendant impact metrics. They are forming new kinds of partnerships with specialized institutions in the digital value chain, and attracting investments from forward-looking, tech-minded investors. Business value propositions for digital transformation span innovation, data analytics capability to inform decision making, and deeper customer understanding.  

Comprehensive institution-wide digitization that can yield a lasting impact will require investor and governance alignment.

The core question is not whether digitization creates efficiencies for MFIs—the sector accepts this—but whether achieving higher levels of digital maturity by microfinance institutions can unlock transformational, rather than incremental, shifts in unit economics that enable expanded reach, more relevant products, better service quality to customers at the last mile, and, consequently, more impact.  

Comprehensive institution-wide digitization that can yield a lasting impact will require investor and governance alignment, something CGAP hopes to contribute to by studying some of the leading examples of digital transformation and offering a new vision for what microfinance can achieve.