How FinTech can be used to support microfinances in developing countries

Amal Malik explores the adoption of digital banking and microfinancing and their contribution to achieving a greater degree of financial inclusion within developing countries.

In countries like the United Kingdom, where 97% of the population has bank accounts, we can observe the increasingly significant role of artificial intelligence, algorithms and data collection in determining credit decisions. However, in countries where a vast percentage of citizens lack a bank account and have a limited tech infrastructure, how can fintech be used to streamline things?

First and foremost, 1.7 billion adults across the globe lack access to a bank account. In Emerging Markets and Developing Economies (EMDEs), most people work from paycheque to paycheque, unable to capitalise on basic – but costly – financial services, including credit and insurance. However, there is an increasing effort throughout Africa and the Middle East to increase public access to financial services.

Within African countries, evidence suggests that there is an unmet demand for fintech adoption and there is an emerging trend in increased fintech adoption due to an expanded reach of financial services. For instance, given that roughly 66% of the Egyptian population does not have a bank account, conventional credit-scoring metrics discriminate against them. However, the Commercial International Bank in Egypt is creating a new software to determine a person’s ability to fulfil loan repayments, so that they can reach a greater percentage of the population while diminishing their risk of default payments.

Another case within Kenya is M-Pesa, a mobile cash transfer system introduced by the Kenyan telecom provider Safaricom in 2008. M-Pesa now has over 32 million users and is functional throughout North and East Africa as well as South Asian countries. The public’s need for essential payment platforms and digital money transfer services has prompted payments offerings throughout South Asia in countries like Pakistan and in Latin America.

Microfinance lenders find that authorising small loans for low-income earners can be quite costly – but technology seems like a compelling gateway to reaching more people without incurring additional costs. In Uganda, for instance, less than 33% of the population has bank accounts, yet microfinance lenders equipped with the American software First Access can analyse user data and internal records to assess customers’ needs and match them with appropriate financial services.

In several developing countries, the main hurdles that prevent the growth of digital banking remain poor digital infrastructure and a lack of standardized processes within financial institutions. Nonetheless, some lenders and tech developers attempt to work around the roadblocks.

What fintech, apart from analytics software, can be implemented in the developing world?

Abas is developing a cloud-based artificial intelligence product that will introduce greater systemisation and security for financial institutions in developing countries. Blockchain technology (including sites like LocalBitcoins.com) has also proved to be appealing in nations where there are greater fluctuations in local currency values. Several online platforms allow users to convert their cryptocurrencies into their local currency, but most microfinances struggle to adopt blockchain infrastructure due to high costs.

Experts from Opportunity International, an organisation which enables poor inhabitants within low-income countries to gain access to financial services, suggest that interactive voice bots programmed in local languages could be useful. These bots would enable institutions to acquire illiterate customers and satisfy their needs. This seems particularly promising within African countries where over two thirds of customers are illiterate. Furthermore, the ease with which microfinance transactions can be carried out outside of offices or banks and within small shops has created spots for Opportunity International to test out their interactive voice response systems.

In Ghana, those that used the system felt as if the microfinance bank cared about their financial needs, which further incentivised them to take out loans and use other financial services.

Although several developing nations have a long way to go in terms of fintech optimization and digital banking, these technologies have demonstrated a promising start and could prove themselves to be effective for developing countries to leapfrog into the fourth industrial revolution and create greater financial inclusivity for the global population.

Further reading

The Fourth Industrial Revolution, by Klaus Schwab

How developing nations use tech to reach the ‘underbanked’

The economic forces driving fintech adoption across countries

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