Digital innovation is trending in the financial inclusion sector. Words like big data, mobile wallets, and digital credit are buzzwords at financial inclusion and microfinance conferences. Microfinance institutions (MFIs) in general understand that they need to “go digital” in order to grow, but they are not always clear on the steps required for them to achieve that. As a result, some choose to continue in their old-fashioned approach while others react too quickly and aggressively, resulting in expensive overhauls or ad-hoc process changes, which tend to be ineffective attempts at a long-term solution. MFIs would do best to tackle this challenge as a multi-layered project in the following manner.
Step 1: Digitizing Loan Products
MFIs should first digitize loan applications by replacing paper-based processes with a flexible digital platform. However, this should be done in a way that begins with existing processes so that employees are familiar with them and so that not too drastic a disruption is made to daily operations. This would also be the right time to begin instilling a data culture among staff, which is something that is often overlooked.
Step 2: Driving New Insights with Data
After the core library is built, MFIs will have the required data to complete the digitization of the loan cycle. In this step, lending and deposit processes are digitized, and MFIs are able to standardize data collection, analysis, and reporting onto a single platform. This improves functionality in areas such as scoring, where better data quality is invaluable. Shared knowledge significantly increases and drastically improves the decision-making process.
Step 3: Launching Digital Products
Once the MFI has digitized operations, it is time for the launch of digital products. A successful digital platform replicates traditional financial products such as loans and deposits. All digitized products are channeled through a single platform that can offer seamless integration and can reduce risk, enhance performance, and provide analytics.
Taking Microfinance to the Next Level
In the end, effective digitization should reduce operating costs and increase savings that can then be used to expand the product offering, such as by offering borrowers lower interest rates. Ultimately, digitization can pave the way for more effective funding to those who need it most and that has the potential to make a positive social and economic impact worldwide.