Microfinance

In most of the emerging nations like China, India, Brazil and Bangladesh there are people who could not get loans through normal banking channels. In these countries, FinTechs have emerged in the last 10–15 years, that are running their business as a profit/nonprofit organization, with a motive to alleviate poverty. Recently this has become a lucrative business opportunity for large banks as well and they are planning their own ventures in this market segment. Microfinance start-ups are getting the unbanked into financial systems, thus encouraging financial inclusion. Before microfinance companies existed, the poor would usu-ally take the loan from moneylenders and would be left at the mercy of the mon-eylender for the interest rate and the collection frequency. What microfinance companies do differently is they have a standard process for lending and there is only a certain amount that they prefer to lend, thus ensuring lower default rates. Some of the microfinance companies would increase the amount being lent based on the repayment capacity of the borrower. In developed nations, primarily the United States and Canada, most of the microfinance companies are nonprofit organizations and they help the unbanked. Microloans in the United States are categorized as microfinance or microcredits and are loans up to $50K.

Most of the microfinance companies involved are not only dealing with micro-credit and finance, but also are helping crop insurance and other micro-savings. In fact, some of the microfinance companies have ensured limited default by lending against micro- savings. Though on one hand, this principle has helped poor people save and build a kitty for themselves for a rainy day, it has been misused by some to buy household utility items like televisions, refrigerators, etc. than saving or bor-rowing for emergencies. Thus, this has increased poverty instead of reducing pov-erty. There are technology solution companies that have been providing platforms/ solutions for microfinance companies to use.

One such company in China provides microfinance solutions to other micro-finance institutions (MFIs). There are financing companies that have also played a key role in making capital available for MFIs. Since MFIs in most countries are private institutions, their funding is usually perceived to be a high-risk debt mar-ket. Therefore, big FIs are not willing to put a lot of capital into MFIs. There are companies acting as intermediaries that have created financial products enabling the funding of MFIs. The products thus created are creative enough to reduce risk weightage of high-risk debt through stringent audit and risk management features, consequently increasing the inclusion by enabling MFIs to give loans to unbanked creditworthy customers.

Microfinance institutions have various challenges to overcome, specifically in the developing nations. One of the most common challenges faced by microfi-nance companies globally is to identify a user and prevent frauds from false iden-tity creation. Most of the microfinance companies have built a team, culture and trust between its customers and within its employees which prevents such frauds. Additionally, some of the microfinance companies have used biometrics, usually fingerprinting, to ensure frauds in the space is prevented.

In some sections of society, gender bias is quite prevalent, especially in rural areas. The bias is prevalent even in the homes where women are the only bread earners for the entire family. Therefore, it is very important that MFIs as a social cause should help women get loans to overcome emergency and financial needs. Unfortunately, in most of these cases, there are very little documented evidences that indicate the earning or repaying capability of women. This becomes one of the key challenges for lenders to lend to women. Social restrictions in rural areas in some countries do not allow agents to talk to women. Therefore, in such cases it is difficult for a field agent to have an in-person discussion with the women borrowers.

There are multiple such problems that FinTechs globally are trying to resolve including:

  1. High default rates owing to fraudulent practices.
  2. Complexities in reaching out to the eligible borrowers due to the vast geo-graphical spread of the prospects and low-technology penetration in these areas.
  3. The high operation costs arising out of the need to have face-to-face interac-tions with the borrowers.

FinTechs in emerging nations like India and South Africa, are trying to make cus-tomer onboarding free from frauds using their mobile platforms. The platform captures all the customer details like business income, livestock holdings, any sec-ondary income, etc. digitally. It also helps the field agent with any previous loans taken and default history by the customer. There are checks and balances built-in as part of the platform itself. The platform indicates if information provided by a borrower is correlated or not. In case the information is not correlated, there is a high probability that the borrower is a fraud. This coupled with other informa-tion is used to analyze if the loan sanctions can be provided to the customer. In most of the cases, the loan approval/denial decision is provided to field agents very quickly. The timing is of essence here because a field agent may visit a rural area possibly once a month or once a week. Usually the loan requirement is urgent and of a small amount. Some of the MFIs have been enabling loan provisions in excess of $1 million. The interesting fact in some of the FinTechs’ financial models is that they charge the customer based on a success fee model and not a license model. In this model, the FinTech bringing in the platform gets paid only if the loan has been given to a customer, rather than just on the usage of the platform. This is another example of how FinTechs are using technology to bring in social reforms through financial inclusions. They are also betting big on the success of their business model and implementation, rather than just being a technology company.

Some of the other FinTechs in African countries and Indonesia are run by vol-unteers with no offices and a handful of permanent staff. Again, most of these FinTechs run using an entirely digital platform and helps microlending to low-income entrepreneurs in these countries. A large number of these platforms work like a less complex P2P lending platform, wherein once an applicant is registered and puts across his/her business case or borrowing need, the lenders lend the money at very low interest rates. The lenders are safeguarded for non-repayment to some extent through a reserve fund created either by charging the borrower at the time of getting the loan and/or charging a service fee to cover conversion costs. Since these companies are run by volunteers, consequently the operational costs are really low. Therefore, the end loan offered to most of the customers is at rates that are comparable to secured debt interest rates and is way lower than the 35% to 70% interest rates typically charged for such debts globally. Similar to other FinTechs in other domains, a large number of Fintechs in MFI domain also filter out fraudulent applications using machine-learning algorithms.

A large number of these FinTechs are nonprofit organizations and some of them besides helping individuals are also building platforms that help minori-ties, low income entrepreneurs and students globally. These FinTechs, besides providing technology platforms, are also helping connect people and facilitate lending to the needy, thus attempting to alleviate property. A large number of FinTechs are either themselves MFIs or they have partnered with another FIs to facilitate lending. Therefore, FinTechs who have partnered with other FIs get their loan processing done through field partners. The field partner can be a MFI, social business, school or a nonprofit organization. There are also FinTechs that are primarily a digital platform that enables loan facilitation using digital platforms like PayPal or mobile payments. It is a platform that brings both the borrowers and lenders together wherein lenders charge very low interest rates or sometimes no interest at all from the borrowers. The borrower puts his/her story/business case on these platforms and then the lenders, including MFIs and charitable institutions, help these people get a loan at a very low or sometimes 0% interest rate.

Post Author: newfintech

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