Could Mobile Banking be the innovative answer to the microfinance conundrum?

  

VSLA © CARE/Josh Estey

What do mobile phones and lendwithcare have in common?

The numbers are not conclusive but general web-consensus puts worldwide mobile phone usage at the end of 2011 at 5.6 billion. A number driven up significantly by developing giants China (>1bn) and India (>900m) but numbers are also growing in smaller developing countries like the Philippines (86m), Ecuador (15.9m) and Benin (1.6m). In fact, a Guardian piece found that two thirds of the mobile phones in use in 2009 were being used by people from developing countries.

The mobile phone boom is perhaps not that surprising since it is so visually evident. However, what is less evident and more of a recent revolution in terms of mobile technology is that mobile phones are now being used, on a large scale, to extend financial services to the poor. As electronics companies battle it out in ‘developed’ countries to provide mobile phones that function more and more like mini computers; across Asia, Africa and Latin America, where there are approximately one billion people who do not have a bank account but do have a mobile phone (according to a CGAP/GSMA study (CNN)), mobile phones are being utilised to enable the ‘un-banked’ to perform basic financial transactions such as making payments, receiving credit and sending remittances.  

If mobile banking reaches a greater potential (i.e. reaching the approximate one billion who have a phone but not a bank account) it could completely transform microfinance. Which is why, as a curious mind working in microfinance, I wanted to take a closer look at what is mobile banking? Why and how is it being adopted? And how may it transform the way people access financial services?

What is mobile banking (M-Banking)?

Mobile banking is a way to perform banking transactions using a mobile device like a mobile phone. By downloading or registering a mobile banking account onto their phone, M-Banking customers can send money, make payments and receive loans via SMS. Although M-Banking is predominantly used by its customers to make payments (Mobile Payments); cash deposits and withdrawals are also provided by some operators who train and accredit local M-Banking ‘agents’ – a local shopkeeper or a local microfinance officer for instance – to offer these extended services (full Mobile Banking). Mobile operators are working in partnership with other sectors (be it the formal financial sector or NGO/non-profit sector) to effectively create cashless economies in rural and poor areas by giving the people who live there access to full-service banking using their mobile phones.

Why and how is M-Banking being adopted?

Just as access to financial services incorporates a variety of services and products for us, so it should for poor people. However, for many people who currently live outside the formal financial sector, one of the most basic services they are excluded from is somewhere safe to keep/save their money. Since the poor do not have access to bank accounts and a large number of microfinance institutions, who have NGO status, cannot accept deposits, billions of poor people do not have anywhere to safely deposit their money and are instead forced to carry all their money around with them or hide it under their pillows at night. Security is therefore one of the biggest advantages to mobile banking since it creates in effect a ‘mobile wallet’ that can only be accessed remotely with a secure PIN.

VSLA Tanzania © CARE/Nicky Lewin

Another reason why so many people are adopting M-Banking is because it is a convenient way to complete day-to-day financial transactions. Instead of having to make the often arduous and time-consuming journey to a money transfer facility, a local bank or microfinance branch, M-Banking customers can send remittances at any time of the day and in an instant as well as receive and repay microloans simply by sending a text. Once the payment has been dispatched, all the recipient needs to do, if they so wish, is to convert their mobile payment into cash at a local M-Banking store. 

Lendwithcare’s microfinance partner in the Philippines, SEEDFINANCE, has begun incorporating M-Banking into some of their local operations and its success and popularity so far illustrates how M-Banking allows microfinance institutions and clients to process transations more efficiently. Through its  partnership with SMART Communications and ENCASH, one of SEEDFINANCE’s partner financial institutions (FCCT) has now been accredited to issue Smart Money Cards to its microfinance clients. In a recent report, SEEDFINANCE said about FCCT that: “It has successfully generated 4,103 Smart Money applications of members who are currently utilizing the cards to receive loans, transfer funds to their loved ones, reload prepaid credits and manage the financial aspects of their business.” Clavel Aves, Area Manager of FCCT said “clients no longer need to spend time and money to physically visit the MFI office … Mobile banking is secure, it eliminates the worries and anxieties of clients from robbery and hold-ups and provides services affordably and conveniently.”

In Africa, where CARE has been cultivating a savings-led microfinance movement based on Village and Savings Loans Associations (VSLAs) since 1991, M-Banking has been at the heart of a mobile revolution there. When M-Pesa (a mobile phone payment service) was launched by Safaricom in Kenya five years ago, its growth and popularity spread rapidly with over 20,000 people registering with the service in the first month alone. Today 15 million Kenyans use M-Pesa to access financial services[1] and in neighbouring Tanzania five million people were registered M-Pesa’s users in 2010. Predominantly used by individuals to make money transfers, most often between urban migrant workers and rural dependents, M-Banking, with help from CARE, is being transformed in some areas to specifically meet the needs of VSLAs by creating group mobile accounts. Since savings collected by VSLA members is stored in a metal cash box, usually in the home of one group member, security is one of the main benefits of using M-Banking for VSLAs. In March this year CARE, Equity Bank and Orange launched an innovative partnership that connects VSLA groups in Kenya to full-service banking through their mobile phones. Through this partnership, VSLA groups are able to open Equity bank accounts and access services such as interest-bearing savings accounts, withdrawal and payment facilities without visiting a physical branch. Helene Gayle, president and CEO of CARE called this “a pioneering partnership that has potential to conveniently and affordably offer high quality retail financial services to millions of previously un-served people across Africa.”

Will M-Banking transform microfinance?

Well it seems in certain countries and in certain regions it already has. For example lendwithcare, through its partnership with SEEDFINANCE, is now funding microentrepreneurs like Henry Bordoquillo and Lemuel Quinones who use Smart Money cards to receive/pay loans and send remittances instead of visiting their local FCCT office. By increasing financial security and the ease with which microfinance clients can access and use financial services, M-Banking is not only providing customers access to a variety of formal financial services but also extending them into more remote and isolated areas – two aims that those of us working in microfinance hope to achieve. M-Banking is also of benefit to the microfinance institutions since transaction costs are reduced and rural penetration rates are improved. Indeed, M-Banking could be the innovative answer to the microfinance conundrum: how can we affordably expand microfinance to those that most need it – the poor and the isolated?

However, like all things designed to help the most vulnerable in our societies, these things need to be set-up and adopted with care. There have already been a number of challenges identified with M-Banking, most notably that mobile money agents are experiencing cash flow difficulties and both agents and customers complain that there is often not enough cash to meet their needs/demands. Cash management challenges that are even harder to overcome in more remote areas. Although popular, M-Banking facilities have not succeeded in reaching those most at need. Gautam Ivatury, manager of CGAP’s Technology Program said after publishing a report on the early experiences of mobile banking in 2008 that: “Globally, we estimate that fewer than one in ten mobile phone banking customers are poor, new to banking, or doing more than payments and transfers.”

It seems to me that trust is an important barrier that needs to be overcome if mobile banking’s potential is to be truly realised. And trust is something, quite rightly, that takes a while to achieve, especially when working in poor and vulnerable communities. However, the potential of mobile banking to transform microfinance in terms of its cost and outreach is exciting and I for one will most definitely be watching this space …

By Nancy Thomas, assistant at lendwithcare.org  

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[1] http://www.thinkm-pesa.com/2012/03/how-m-pesa-is-transforming-kenyas.html

Microinsurance: A safety net for the poor?



© CARE/ Josh Estey



It is becoming widely acknowledged that the provision of financial services to the poor is critical in the fight to alleviate poverty. One such financial service, which has been implemented relatively widely and successfully throughout much of the developing world, is microcredit. However, access to credit alone is not enough to guarantee financial security or stability. After all, microfinance is not just the provision of small loans but the provision of a whole host of financial services and includes microsavings, money transfer and microinsurance as well.

As the recent destruction wreaked on the southern Filipino island of Mindanao reminds us, it is often the poorest groups in our society who are most exposed to risks and without the adequate tools to deal with disaster, the most likely to live perpetually in poverty. One effective tool is microcredit, however as a woman in Zambia explained to Richard Leftley, CEO of MicroEnsure, one tool is not enough: “My life is like this snakes and ladders board (game) … the loans are like ladders, they give me growth. But where are you when disaster strikes?” It is with this in mind that the microfinance community has started to pay a lot of attention to the benefits of microinsurance.

CARE International UK has decades of experience in both microfinance and microinsurance. CARE India, for example, works with Bajaj Allianz to provide comprehensive, affordable insurance policies to over 300,000 people in the state of Tamil Nadu, India. Unlike other microinsurance products sold to poor communities in India, and around the world, Bajaj Allianz – and CARE are offering bespoke, rather than off-the-shelf products, to this vulnerable group of people and the communities themselves are involved in designing the new policies. These policies include a wide variety of cover from death to paying wages during illness.

In addition, CARE has shown that microinsurance does not need to take the shape of formal policies. CARE works with local community groups around the world, helping them organise and finance their own Village Savings and Loans Associations (VSLAs). VSLAs are groups formed by communities that begin by pooling the savings of those involved and ultimately use these savings to make loans to individual members. Last year, CARE helped more than 17 million people improve their household income through village savings and loan associations, access to services and new work related skills. At each meeting, group members pay tiny amounts into an informal social fund, which gets paid out should a member hit hard times – such as covering the costs of funeral and medical bills.

A study conducted on the landscape of microinsurance in the world’s 100 poorest countries discovered that although the world’s poorest were most at risk of financial disruption (whether this is due to illness (including death), property damage (including crop damage/loss) or job loss) they were the least protected against these consequences and that although microinsurance for the world’s poor was growing rapidly, just 1.96% of the potential market were being served. In addition, as Richard Leftley states, this 1.96% is limited to simple credit life protection, which does not always meet the complex needs of a poor household (click here to read Richard Leftley’s paper in full). Health and agricultural microinsurance have been identified as the most pertinent to low-income households, yet these are being dwarfed (particularly agricultural microinsurance) by life protection that is often linked to the provision of microcredit.

© CARE/Josh Estey

However, microinsurance is a new field that is still in its experimental stages and although it is right for the microfinance community to identify a need, we must be careful not to implement it too hastily. Insurance is complex and there are a number of barriers that need to be overcome, not least how it is regulated and who distributes it to the poor, before it can be implemented on a large scale. It is important that microinsurance schemes which set out to aid the poor do just that and do not become too focused on their own expansion in a vast untapped insurance market. The right balance needs to be achieved of creating a good quality product that is affordable. After all bad insurance in the hands of the world’s most vulnerable can only have catastrophic results.

One such way that microinsurance is being delivered trustworthily is through local Microfinance Institutions (MFIs) that are already working with large numbers of low-income households and are often trusted by the individuals and communities they deal with. Lendwithcare’s MFI partner in the Philippines, SEEDFINANCE, is an example of this increasingly common relationship between commercial insurers and MFIs. A year ago SEEDFINANCE started a project called SEADASSURE in partnership with CLIMBS, a leading microinsurance provider in the Philippines, to provide life and non-life (typically property and casualty) insurance coverage to SEEDFINANCE’s clients. Since this project was launched it has provided coverage to 1,138 clients, with a total coverage of 36,525,954.98 Philippine pesos (approximately £540,000).

Microinsurance, like that provided by SEADASSURE, works in a similar way to normal insurance, where clients pay a premium (in the case of microinsurance this will be a low premium to reflect their low incomes) and when/if the client suffers a loss the insurers will compensate him or her a proportion of this loss. So for example, if a farmer’s crop suffers a loss of $100 as a result of flooding, the insurance policy s/he has may cover half of this loss. However, not all MFIs are currently in a position to offer crop insurance and in instances of natural calamities MFIs will often employ their own internal policies to help their clients cope with the effects of disaster. Our MFI partner in Cambodia for example, to deal with the effects of the floods in September last year, suspended any loan delinquency penalties for those who had been affected by the floods and reworked repayment schedules to manageable and realistic ones.     

Like SEADASSURE a number of the microinsurance schemes that are being introduced around the world are still in their infancy and as they start to grow in number and coverage they will need to be monitored closely to make sure that protecting the poor remains their overriding goal. If this goal is achieved then, like microcredit and microsavings, microinsurance can be and will be a powerful safety net for the poor.

By Nancy Thomas, assistant at lendwithcare.org