Microfinance and Information and Communications Technology

From Mongol Studies Online Reference

Jump to: navigation, search

Several information and communication technologies (ICT) innovations have enabled various financial institutions to expand into rural and low-income areas without having to face the high costs of opening a new branch.

With the advent of the PDA, ICT applications began to be widely used with respect to microfinance as loan officers became able to gather customer and other pertinent loan information electronically. ATMs or POS devices, which are basically devices such as card readers, barcode scanners, or any technology that can identify customers and receive transaction information, are often considered on of the primary ICT applications as they are bale to conduct numerous banking activities, such as furnishing account information, accepting deposits, and transferring funds.[1]

Some of the more important ICT applications include:

  • Automated teller machines (ATMs) or Point of sales (POS) devices
  • Interactive voice response (IVR) technology
  • Internet banking
  • Personal digital assistant (PDA)
  • Management information system (MIS)
  • Credit scoring

The main problems that contribute to the providing access to financial services in remote areas are dependency on agriculture; high transaction costs; and limited access to health and education services.

Because of the risks associated with agriculture, such as its vulnerability to weather, foreign competition, imperfect information, poor infrastructure, seasonality, and outdated technology, investing in this sector is seen as riskier than investing in trade or industry.[2]

In Mongolia, economic activity has traditionally centered on herding and agriculture. While the sector forms approximately 18.8 percent of the country’s GDP, 39.9 percent of the labor force is employed by this industry.[3]

During Mongolia’s transition to a market economy, unemployment and wealth inequality grew. Furthermore, the dzuds that occurred between 1999 and 2002 destroyed over a third of the livestock. According to estimates, Mongolia’s rural poverty ratio increased from 33 percent to 43 percent between 1999 and 2003.

Since the late 1990s, the Mongolian banking sector, primarily the microfinance sector, has grown quite rapidly, though this growth has been concentrated in urban regions.[4]

Contents

[edit] Rural Activity

Of Mongolia’s major banks, only three— Khan Bank, Post Bank, and XacBank have a significant rural presence, and of the three Khan Bank has the largest rural branch network in the country.[5] Although the majority of the rural population live in the soum centers, branches, with the exception of three large soums, are generally established in aimag centers, due to limited economies of scale, high transaction costs, technical difficulties, and lack of qualified employees to serve as staff. Typically, to remain solvent a branch needs to operate in an area with a population of at least 10 to 20 thousand; however, the average soum population is 2500. To further expand its services, XacBank has begun to experiment with various projects.[6]

XacBank considered the idea of a franchise model to reach clients in soums. The Bank believed that the most feasible method to reach such clients was to use local savings and credit cooperatives (SCCs) as its franchisees. By doing this, they could use branch offices found in the aimag centers to monitor and supervise the SCCs and not have to establish branch offices in these areas. However, start up costs were high and a pilot program demonstrated that the model would not break-even in the short run. As a result, mobile banking is being used with the intent to eventually introduce franchising.[7]

The Bank has started a mobile banking program that has reached 137 of the total soums in Mongolia. Typically, the mobile bank crew consists of a driver and two credit officers (one for micro credit and one for SME loans) who travel to a soum center from the aimag once or twice per month. The crew then meets with the Loan Approval Committee (LAC) members, who are responsible for monitoring loan performance, collecting late repayments, and receiving loan applications, among other things. Together, the bank crew and the LAC members review the loan applications, make a final decision, and disburse the loans. While there, the crew members also collect repayments. However, because the crew only visits the soum once or twice a month, this can only be viewed as a temporary strategy. [8] The Bank still intends to develop a soum-based Savings and Credit Cooperative (SCC) that, other than technical and operational support from XacBank, is operated by the local community.[9]

In May 2008, the Technology Program of CGAP (Consultative Group to Assist the Poor) announced that it is providing technical assistance and funding for a mobile phone banking project. By providing banking services on mobile phones, XacBank will be able to assist approximately forty percent of Mongolians who use only cash.[10]

[edit] Mobile Banking

Mobile banking is an option that is being implemented by banks around the world. According to the Economist, worldwide payments using phones are expected to increase to over USD 3.7 billion by 2008, up from USD 3.2 billion in 2003. [11]

Because the developed world has fewer options for accessing financial services and communications infrastructure is often less developed, mobile banking is preferable to traveling to distant branches. Although mobile banking is more limited than either a personal computer or a POS device, comparing the high cost of developing broadband infrastructure in rural areas to the possible profits (especially once in sparsely populated areas) does not warrant the implementation of such a development, leaving mobile banking as the feasible option.

In order to register for mobile banking, a customer might open a bank account at a branch or accredited agent, or, possibly, if the customer already has a bank account, he or she would register for mobile banking by sending an appropriate text message to a particular number. The customer would then register for a personal identification number (PIN) in order to complete transactions. Through mobile banking, a customer will be able to complete transactions such as making payments, money transfers, and other transactions.

If a customer attempted to withdraw money, initially, the customer would launch the application from his or her phone. The customer would then be prompted to select a transaction, in which case he or she would select withdraw, after which the customer would be asked to select the account from which he or she would like to withdraw money, enter the amount, and the identification number (possibly a phone number) for the related branch or agent. Then, the customer would be asked to confirm the transaction by selecting OK or retyping his or her PIN. Both the customer and an agent at the branch would receive a confirmation, after which the agent would give the customer the money.

The major advantage of mobile banking appears to be that a customer is able to complete a transaction anywhere at anytime, as long as phone service is available.[12]

[edit] Other ICT approaches

Until XacBank is able to develop its SCC branches, it might consider using supermarkets, drugstores, or post offices to act as an agent in return for a share of bank fees.

Given the current ICT landscape of Mongolia, the following solutions could be used by XacBank or other banks to extend microfinance services to rural areas of Mongolia: (1) Use ATMs as “a stand-alone” service center (2) Place ATMs in a Post or Khan Bank branch (3) Equipping mobile banking crews with wireless POS devices (4) Place a wireless POS device in XacBank SCC

If the Bank were to use ATMs, the Bank would fully bear the costs of purchasing and maintaining the ATMs, as well as hiring one or two staff members to assist customers and building a structure to house the ATM. However, if it were to partner with a Khan or Post bank, it could share the cost if the Bank were to use ATMs or POS terminals. As there would be no cost sharing involved with equipping a mobile banking crew with wireless POS devices, this appears to be one of the more expensive options.[13] Furthermore, VISA and various hardware manufacturers have developed a battery-powered wireless POS device that can be used in rural areas, which costs around USD 125, while ones in developed countries cost approximately USD 700.[14] Also, communication infrastructure is not well developed in soum areas, which might present a problem for stand-alone ATMs. A feasible solution might be to use wireless POS devices that use a smart card, which does not require online connection.[15]

[edit] Issues

ICT initiatives appear to be more successful in areas with a dense population; however, Mongolia has the lowest population density in the world. It might be wise to implement solutions through regions. However, with regards to mobile banking, a CGAP study advised going for underserved areas in order to see an increase in total revenue, as mobile banking eliminates the cost of opening new branches or sending.[16] Also, it is worth noting that ICT solutions cannot address all of the problems of rural poverty, such as lack of collateral and seasonal income; other measures must be used in conjunction with ICT initiatives.[17]

[edit] See Also

Information communication technology infrastructure

[edit] References

  1. ↑ Ivatury, Gautam. "Using Technology To Build Inclusive Financial Systems." CGAP Focus Note No. 32. Washington, D.C.: CGAP. www.cgap.org. Retrieved on 2008-07-25.
  2. ↑ Hishigsuren, Gaamaa. 2006. Information and Communication Technology and Microfinance: Options for Mongolia. Asian Development Bank. Retrieved on 2008-07-22.
  3. ↑ The CIA World Factbook. Retrieved on 2008-07-25
  4. ↑ Hishigsuren, Gaamaa.
  5. ↑ Gutin, John. 2005. Khan Bank, The Agricultural Bank of Mongolia. USAID - U.S. Agency for International Development. Retrieved on 2008-06-24
  6. ↑ Hishigsuren, Gaamaa.
  7. ↑ Hishigsuren, Gaamaa.
  8. ↑ Hishigsuren, Gaamaa.
  9. ↑ XacBank. XacBank History. Retrieved on 2008-07-07
  10. ↑ "Mobile Phone Banking for Rural Mongolians: XacBank Selected as CGAP Technology Partner," XacBank (2008-05-31). Retrieved on 2008-07-21
  11. ↑ The Economist. 2007. “The Future of Money.” The Economist, 15 February 2007. Retrieved on 2008-07-25.
  12. ↑ Mas, Ignacio & Kumar, Kabir. "Banking on Mobiles: Why, How, for Whom?" CGAP Focus Note No. 48. Washington, D.C.: CGAP. www.cgap.org. Retrieved on 2008-07-25.
  13. ↑ Hishigsuren, Gaamaa.
  14. ↑ Ivatury, Gautam.
  15. ↑ Mas, Ignacio & Kumar, Kabir.
  16. ↑ Mas, Ignacio & Kumar, Kabir.
  17. ↑ Hishigsuren, Gaamaa.
Retrieved from "http://www.mongoliacenter.org/monreference/index.php/Microfinance_and_Information_and_Communications_Technology"
Personal tools