The microfinance sector has been looking for ways to bypass the ‘branch infrastructure problem’ and mobile phones may be the answer to reaching rural clients, says Gautam Ivatury.
Hi-tech devices are already very much a part of poor people’s lives. In Africa alone, the number of mobile phone subscribers has reached 76.8 million, growing by an astonishing 58% annually in the past five years. Yet, despite being connected to a vast, efficient communications network, most of the world’s poor lack access to a more crucial system – a system of formal financial services.
Some poor people have already come up with their own systems. In Egypt and Kenya, pre-paid mobile subscribers buy and transfer airtime to loved ones. Cross-border money transfers from expatriate workers to their home countries account for $93bn a year in the formal sector alone. Add to that the billions sent home through informal channels, such as hawalas (money brokers), and remittances easily exceed the total of all foreign aid to the developing world.
Even so, basic financial services such as money transfers, savings and loans are unavailable to most people living on less than $2 a day. At least part of the problem stems from the products themselves. Making microtransactions costs much more than making the relatively large retail transactions that mainstream financial institutions typically manage.
Yet given the resources and branch networks of banks in many developing countries, mainstream financial institutions may be the best hope for reaching the estimated three billion people who lack access to financial services. Enticing them to get in the game may seem like an uphill battle but, with the help of technology, microfinance services may be as lucrative as banks’ traditional retail business.
Lack of infrastructure
Microfinance may seem prohibitively expensive, but not because of the products themselves. There is another, even more practical problem: poor people’s dependence on cash.
For poor people to bank effectively, banks must be able to collect and dispense cash in villages and in slums. Bank branches, with their high costs and staffing requirements, are clearly not the solution. Even if they were, many rural areas, where most potential microfinance clients still live, lack the kind of infrastructure it would take to open and maintain a bank branch. Electricity is in short supply, as are safe, passable roads to transport money.
That is why many in the microfinance sector have been looking for ways to bypass the ‘branch infrastructure problem’. It is not that safe roads and reliable electricity are unimportant, nor that the poor do not deserve face-to-face banking; it is that microfinance does not have to wait for those things.
Back to mobile phones. Mobile customers in the Philippines and South Africa can already open ‘transaction banking’ accounts through their phone operators, depositing and accessing money through a few buttons on their handsets.
Here is how it works. Mobile operators, such as Globe Telecom in the Philippines and Vodafone’s Safaricom affiliate in Kenya, partner with small merchants in rural areas and even mobile top-up outlets. These shops take cash from customers and immediately transfer an equivalent electronic value to the customer’s ‘mobile banking’ account. Customers can make deposits, loan repayments and even transfer money through this system.
Sector regulation
Could rural shopkeepers all become banking points and make bank branches obsolete? It is hardly a rhetorical question. There are huge obstacles to forging these types of partnerships and proving that mobile banking can work even in the most remote areas.
One key concern is regulation. “We’ve spent much of the last year-and-a-half in meetings with the banking regulator,” says Joey Mendoza, head of business development at Globe Telecom and the president of GXchange, Globe’s mobile banking subsidiary. “The regulator had to be convinced that we weren’t creating a new currency and that we would meet the country’s reporting requirements for any suspicious account behaviour.”
Mr Mendoza’s experience echoes what mobile operators and banks in other countries are saying: reaching the poor with mobile banking is only possible with the right regulation. Several issues must still be sorted out, such as how to ensure that shopkeepers do not defraud customers when they take their cash, and whether mobile operators, rather than banks, should be the record-keepers for millions of accounts.
With the right regulation in place and with mobile technologies already abundant in the developing world, lowering the cost of financial services to the poor no longer seems like a pie-in-the-sky proposition. The good news is that getting there will take more imagination than money.
Gautam Ivatury works for the Consultative Group to Assist the Poor, a consortium of public and private development agencies and other donors working to expand financial services for the poor.
