The microfinance sector is rapidly expanding especially in developing nations. At a summit in India on the challenges and opportunities
faced by microfinance and fintech companies operating in this space, several key areas were identified as challenges:
1. Financial Education
One of the barriers-to-entry facing many fintech companies is the lack of financial awareness and education in developing nations.
In India, it was reported that less than 35% of Indians were financially aware, meaning that they were less likely to consider taking out a micro-loan and to pay it back responsibly.
There have been several studies that highlight the correlation between financial literacy and the decline in the total number of days taken to repay a loan. The caste system has also traditionally excluded large groups of the population in India from financial services due to lack of financial literacy.
2. Market Caps
Market caps are set at 10% for large microfinance companies and 12% for medium sized lenders. Having a cap on service fees has placed pressure on microfinance companies to reduce operational costs significantly.
Rising to these challenges in the sector and giving more people access to microfinance solutions may be helped by technology.
India, as well as other developing nations around the world, have an extremely high penetration and adoption of mobile phone usage. India has the second highest number of mobile phones in the world and an exceptionally well-developed mobile phone network.
Reducing operational costs for microfinance companies means cutting down on the traditional brick-and-mortar locations that people traditionally use for banking, and using mobile phones as fully functional field offices. Trained field officers can perform all the operations needed via smartphone. This not only reduces costs but speeds up loan processing.
Technology can also provide a solution for financial education in remote regions. With fintech software, a microfinance company can educate consumers on different products and ensure that their responsibilities regarding paying back loans is fully explained. Fintech software and knowledge that is easily available to consumers at any time via mobile phone goes a long way in reducing the level of non-repayment of microfinance loans. Using online payment systems and educating people in how to utilize online payment channels also helps mitigate delays in repayments.
The microfinance industry has been at the forefront of financial education and literacy. General financial education and literacy helps people with budgeting, planning and emergency financial planning. It’s not just about ensuring that microfinance clients are able to pay back their loans, but about regulating the entire industry by ensuring that unscrupulous lenders are not preying on people who have little or no education on which to base their financial decisions.