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Microfinance–Is There an App for That?

By - Feb 11 2016

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From finding love, to meeting your neighbors, to livestreaming the African penguin exhibit at the California Academy of Sciences, there’s an app for just about anything these days. So could it be that there’s an app—or at least an application of information and communication technologies that can promote financial inclusion as well?

In our previous post “Financial Services at Your Fingertips, Yet Out of Another’s Grasp” we discussed how microfinance has helped meet the needs of low-income communities underserved by the financial sector. Microfinance institutions have been able to adapt and innovate, and have harnessed Information and Communication Technology (ICT) to reduce operating costs while improving the quality, variety, and scope of the services they offer. Examples of these improvements include risk analysis, mechanisms for interpreting and managing information, and the provision of services through new channels for visibility and distribution.

Aware of ICTs’ potential to spark transformative change in this space, the Inter-American Development Bank (IDB) and the Multilateral Investment Fund (MIF) have supported the use of innovative technology solutions to confront the challenge of limited access to financial services among low-income populations. A solid example is the Technologies for Financial Inclusion Program (TEC-IN). Financed by the IDB and Corporacion Andina de Fomento, TEC-IN’s seeks primarily to help financial service providers in Latin America and the Caribbean (LAC) improve efficiency, reduce operating costs, and extend their range of financial products through the testing and implementation of innovative technological solutions and services. From boosting financial inclusion in Jamaica through mobile money, to promoting microfinance or rural micro-savings accounts via mobile phone and prepaid cards in Peru, these projects are innovation come alive.

Separately, an effort to help build strong, sustainable, and accountable financial systems in the region inspired the IDB’s beyondBanking program, approved in 2011 with a line of credit of US$25 million geared towards improving access to credit for LAC’s micro, small and medium enterprises (SMEs). This funding is key because in a landscape of 34 million businesses, most of the region’s enterprises remain small and informal, with  limited access to credit and no reliable financial history or formal guarantees. This IDB mechanism provides loans, partial credit guarantees, and risk-sharing guarantees for up to eight financial intermediaries that implement a psychometric assessment tool, an innovative credit rating methodology designed by Harvard University’s Entrepreneurial Finance Lab.

Many of you might be wondering how this credit rating tool works. Well, this automated and low cost process prompts potential borrowers to answer a list of 150 questions that determine their ethics,  integrity, intelligence, personality, and business ability. This information generates a score that financial institutions use to assess how able these potential buyers are to repay a loan. Thus, financial institutions have an innovative tool that helps them expand their customer base by identifying MSMEs effectively and efficiently, and hence turn around the situation of limited access to credit. Entities such as Banco Pichincha (Ecuador), Caja Nuestra Gente (Peru), Financiera Confianza (Peru), Bank of the City of Buenos Aires (Argentina) and BANCREDITO (Costa Rica) have received financial support from the IDB for the application of the tool, which is streamlining their due diligence process while putting needed financing into the hands of those who once had no access at all.

There are many more examples of the use of new technologies for financing MSMEs. More are captured in the “Microfinance and ICT” publication (available in Spanish), the product of a collaboration between Telefónica Foundation, the IDB, MIF and Analistas Financieros Internacionales (Afi). In it you can learn more about the types of ICT that have contributed to the development and capacity impact of microfinance in the region or read case studies that show how the Latin American microfinance industry is at the forefront in the world order. I promise, you won’t be able to stop reading!

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One Response to “Microfinance–Is There an App for That?”

  • John Garrity :

    Very interesting post! Is the 150 questions answered directly by the microloan borrower? It does seem like a lot of questions, but I suppose in lieu of a formal credit rating it is rather low barrier (the # of questions) to overcome.

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