The new era of development finance is looking at ways of expanding financial services to all classes of people; rich or poor, urban or rural, literate or illiterate. The focus of providing financial services has moved from just defining a target but also includes a possible definition of making banking services accessible and affordable for all.
Microfinance methodologies have over the years targeted low income segments with broad range of financial services. These group of people were technically excluded from the formal financial services due to their peculiar nature or character that did not make them economically attractive to the traditional banks. The several positive stories recorded by effective application of microfinance methodologies has defeated the notion that was the basis of exclusion. Now the world has come to embrace the proven fact that banking to the poor can be commercially sustainable and economically profitable.
Microfinance methodologies enable the creation of new frontiers in finance, however there’s still unbanked and under banked populations in most developing countries. The challenge now is to fast track the process of ensuring that everybody everywhere can participate in the formal financial system within their countries economy. This is very important because of the enormous developmental advantages that can be accrued to an economy or country that is highly financially inclusive.
Financial inclusion is looking at delivering financial services to all financially excluded people with financial services and products by improving financial accessibility at a reasonably priced or affordable cost with the objective of addressing the financial needs of clients. Financial inclusion, therefore, is not only focusing on making loans or savings products available to clients. It also focuses on the cost of the products and services to the clients, their understanding of what has been offered and how to ensure that clients develop the needed trust in the entire financial sector so as to create the wiliness to utilize financial services.
Financial inclusion has a broader scope, however, the strategies for achieving financial inclusion cannot entirely be decoupled from microfinance methodologies. This is why there is the need for a deeper collaboration among key players working to address the challenge of financial exclusion. Particularly, there’s need to pay critical attention to the microfinance market development phases in a particular country or jurisdiction. For the purpose of giving meaning to this article, let me try to summarize the microfinance market development phases since this can be a critical success factor in achieving a composite financial inclusion.
The growth and development of the microfinance markets in every economy goes through 4 main stages. The market initiation stage which is characterized by the establishment of few MFIs and clients. With time, the market records an increase in the number of MFIs and there is exponential growth in the clients. This phase is the market development stage and it is characterized by less product differentiation. There is less use of technology. Additionally microfinance clients in the market development stage do not have options when it comes to the kind of products or services they actually require. In brief, the products available are not need specific. The methodologies used by the Microfinance Institutions (MFIs) in delivering products and services are all the same with not much innovation.
After the market development phase is the market expansion stage where there is significant growth in the number of providers (MFIs). Additionally, there are product differentiation. Clients of MFIs under the expansion stage have access to various products and services that specifically meet their needs and demands. At this stage, various innovative methodologies emerge and there is strong deployment of technology to effectively reach out to the clients. Majority of the clients as well, have options and can therefore choose to procure services from any MFI as a result of increased competition. At this stage, clients become much aware of the prices of services and therefore will “shop” around for MFIs that can offer them affordable rates on their loans. The market expansion stage is characterized by increasing growth in client numbers, borrowings and the total assets of the MFIs.
The market saturation stage is the final stage. This stage is not much different from the expansion stage. However, with this stage there’s growth in the number of the MFIs plateaus. There is not much significant growth in the number of new MFIs. However, clients’ growth is recorded due to innovative methodologies driven on the back of technology to improve outreach. At this stage, the microfinance market has no room for new MFIs.
With the stages in mind, I am not suggesting that financial inclusion cannot be achieved if a country’s microfinance sector has not gone through all these stages. A strong microfinance market, however, can serve as a good launch pad to fast track the process of achieving financial inclusion.
One approach that is being used to address the challenge of financial exclusion is the use of technology, particularly mobile and agency banking, also known us digital finance. Digital Finance as experimented can cut the cost of operations of MFIs by almost half (FINCA 2015). There is no doubt that alternative delivery channels especially mobile banking is the solution for addressing financial exclusion considering the high ownership of mobile phone handsets in Ghana.
Ghana as a country will need to put in all effort to achieve a financially inclusive economy considering the fact that a paltry 33 % of the population participates in the formal financial services. The following key points can assist to ensure an effective strategy towards financial inclusion on the back of digital finance.
INNOVATIVE FINANCIAL PRODUCTS AND SERVICES
One deficient thing about the Ghanaian microfinance sector is product innovation. The financial products on the market are generic. With many of them being copy pasted across different financial institutions. In brief, microfinance products in Ghana are limited to loans and savings. Microfinance products on the market all have the same terms and condition no matter the purpose of the loan. To reach different target groups with financial services, there must be products targeting the specific needs of the excluded population. Products developed through extensive research to understand the needs and aspirations of the users.
We can no longer afford to look at Mobile Network Operators (MNOs) as competitors, but collaborators. As MFIs, we shall need to partner and use the MNOs platforms to scale financial services in our markets. We have seen a number of successfully executed Mobile money deployments across Africa. In Uganda for-example, mobile money enables micro customers pay for anything using their mobile handset via mobile money. With a well-developed Mobile money eco-system, you start to see people going beyond just sending and receiving money, but paying for a lot more services such food, school fees, health e.t.c. This gives customers greater flexibility, convenience and significantly drives update and usage.
Digital finance must be able to give clients the option to use their mobile phones to transact their financial dealing at their own convenience. This when done, can help to reduce direct or indirect transactional cost incurred by clients in accessing financial services at MFIs with brick and mortar branches. If mobile banking can effectively target illiterate clients, MNOs should explore ways of developing voice added service in local languages to assist informal client in utilizing the mobile banking services and or continuously educate these customers on how the service works. Customer education builds confidence and trust, which can help to drive product uptake and usage.
FINANCIAL LITERACY OF CLIENTS
Building the capacity of clients to become effective users of financial services, is very paramount to microfinance methodologies. There is a direct linkage between having a solid fundamentals in microfinance to achieving financial inclusion. This is because, the very targets of financial excluded population have their characteristics similarly to the microfinance clients; rural, poor, low income, unbanked or under-banked. Mobile phone technology can improve outreach if it is deployed effectively. However, the challenge of the financially excluded is not only the lack of financial services but also the absence of non- financial services which include financial literacy that can help them to make economically beneficial financial decisions. The efforts aimed at achieving financial inclusion must not be built only around mobile banking. There must be strong institutions and policies that will help build the capacity of the clients patronizing the financial services. In this manner, the agents or people manning the cash points where clients can download cash must have some training to enable them interact adequately with their clients. There must therefore be a critical balance between outreach and helping to improve the capacity of the clients using the mobile banking services.
EFFECTIVE COLLABORATION
Nathan Were who has extensive experience in managing digital finance projects in Africa suggests that, in the wake of digital financial services, MFIs will have to collaborate with MNOs to survive in the future. To him collaboration, rather than competition is what needs to happen. Banks should stop looking at MNOs as a threat, but as partners to help them reach scale.
In addition to survival, there is also the need to ensure that both players in the industry keep to their core operations. The key players must complement each other to improve the quality of financial services. The mindset of MNO seeing MFIs as competitors or the opposite must give way to collaboration. The MFIs must design the financial products and MNOs must provide the platform to distribute the products. The MFIs can provide the training needed to the clients to enable them understand the services and products in a way to increase the trust of the clients in utilizing the mobile financial services.
In order to give more perspective on collaboration, Nathan Were made the following statements; “On the digital finance front, MNOs and Banks are in different playing fields. MNOs provide voice, data, SMS and now money transfer services. Banks are good at providing financial services. Each one of these two brings unique capabilities on the table. MNOs have ability to scale up very quickly and have robust systems to deliver efficiency. The two working together can achieve a lot. For example, Safaricom in Kenya partnered with CBA, a Commercial Bank in Kenya to deliver a mobile enabled savings and credit product called Mshwari. CBA was a very small bank then with just under 100,000 savers. It had built this customer base over 5 years. In 2012, when Mshwari started -– within 41 days, it had signed up a 1 million customers. CBA number of savings accounts shot from just 100,000 to 1 million in 41 days. Fast forward, CBA is the biggest bank in Kenya by number of active savers – 3 years later Mshwari has over 9.2m users and all accounts held in CBA”.
SUPPORT FOR THE MICROFINANCE INDUSTRY
Financial inclusion when achieved will benefit the state because the financially included society provide much ingredient for economic development. Client can have access to finance their micro enterprise business which may grow to become small enterprises and provide opportunity for employment. Clients can obtain financial services to pay for the cost of educating their children and therefore helping to improve on the human resource base of the country. From the perspective of the Banks and MFIs, financial inclusion is much more of a social good than for commercial purpose. To, therefore, get Banks and MFIs to pursue the objective of financial inclusion as a core activity, there must be incentives for these entities, especially the MFIs. This incentives must be able to influence their operations to focus on their core business of providing financial services to the low income earners. This can help them avoid the temptation of becoming an alternative financial service provider to clients who already have relationships with traditional banks.
If MFIs fail in targeting right, the vision of achieving a financially included society will be a mirage. The regulation of the microfinance sector must be able to propel the microfinance sector to do what they have been established to do. Technically, microfinance cannot be regulated in the same manner as traditional banks. Microfinance regulation must be able to propel the sector to focus on being the tool for targeting the poor and low income earners.
CONCLUSION
The effort towards financial inclusion cannot be complete without a strong financial system that collaborate effectively with MNOs. Depending only on the strength of either MNOs or MFIs will not enable the achievement of a quality financial system that can lead to improvement in the livelihoods of the financially included population. There must be effective and workable collaborations and appropriate regulatory structure to help drive the realization of a financially included society.
Author: Roderick Ayeh
