A couple months back, we highlighted the inability of Indian Microfinance Institutions to accept deposits as a major roadblock to their growth and sustainability model. A litany of roadblocks stand in the way of passing the Micro Finance Institutions (Development and Regulation) Act, with deposit taking appearing to be a deal breaker.
With the RBI taking a hardline approach on their stance, methods of improving MFI profitability have begun to take an interesting turn.
While most efforts to date have been focused on increasing the revenue side of the profitability equation for MFIs in India, the lack of progress from a policy level is forcing the hands of MFIs to act in other ways. There have been recent calls for compensation levels to be checked, but more importantly, to reduce operational costs within MFIs.
In the absence of political and institutional support, MFIs must begin to look inward for areas to trim fat. While I do not believe this is the only action that must be taken to improve the financial outlook of these organizations, I do think it is one that has a major upside in terms of innovation and technology.
Operational costs need not only be addressed through compensation adjustments, however beneficial that may feel.
For example, some MFIs in Lagos, Nigeria are combating fraud with new Point of Sale terminals designed to prevent loan officers from (mistakenly) entering in incorrect information into the logs. This product is aimed at not only reducing operational costs spent on combatting fraud, but also providing the sense of security among potential borrowers that might do its part to attract more business.
The adoption of mobile money is another application of technology that has benefits on both sides of the table. By reducing transaction overhead costs, mobile money has the potential to save MFIs on a consistent basis. Yet, mobile money provides another benefit that could help generate revenue through the convenience factor – something that borrowers value.
Technological innovation can and should be applied at the Bottom of the Pyramid, and microfinance is not exempt. How can technology continue to enhance the solutions provided at the BoP? There seems to be an interesting market here.