Mobile Banking Perspectives for Microfinance

Financial services have typically been provided under a conventional brick and mortar setup, where clients physically visit service-centers.This approach however has high transaction costs, and has therefore resulted in financial exclusion of a majority who cannot afford them. For developing countries, where the cost of doing business is relatively high due to lack of physical infrastructure and institutions, and where income levels are low, this issue becomes even more acute.

For provisioning financial services to this low-income population, microfinance sector (which primarily caters to this segment) needs to leverage high levels of innovation in technology and process adoption. From ATMs (e.g. Prodem), to EFT-POS and smart cards (multiple MFIs in India), to Internet (e.g. Kiva), microfinance has effectively lived up to this challenge. Moreover, mobile phones are now envisaged to further revolutionize the way in which micro-finance is delivered. It promises to be transformational in primarily because it enables reaching out to people who would normally not be reachable (due to their remoteness and the associated high costs of delivery).

There is no universal form of mobile banking. Rather, purposes and structures vary from country to country. Most interventions however offer a bouquet of financial functions (micro-payments to merchants, bill-payments to utilities, money transfers between individuals, long-distance remittances). Currently however, different institutional and business models deliver these systems. Some are offered entirely by banks, while others are done by telecommunications providers, and still others may involve partnership between these. Regulatory factors, which can vary dramatically from country to country, also play a pivotal role in determining which services can be delivered via what institutional arrangements. (For example, some national laws stipulate that the stored value accounts be managed by a registered bank, which necessarily requires a bank partner). For all the reasons elaborated above, each model has therefore ended up having different set of actors and services.

However, most models can be categorized into the following three categories:

• Bank-Focused Model is one in which a traditional bank uses non-traditional low-cost delivery channels to provide banking services to its existing customers. This model is additive in nature and can be seen as modest extension of conventional branch-based banking.
• Bank-Led Model offers a distinct alternative to conventional branch-based banking in that customer conducts financial transactions at a whole range of retail agents (or through mobile phone) instead of at bank branches or through bank employees. This model promises the potential to substantially increase the financial services outreach by using a different delivery channel (retailers/ mobile phones), a different trade partner (Telco / Chain Store) having experience and target market distinct from traditional banks, and may be significantly cheaper than the bank based alternatives. Bank led model may be implemented by either using business correspondent arrangements or by creating a joint ventures between Bank andTelco/non-bank. In this model customer account relationship rests with the bank.
• Non Bank-led Model is where bank does not come in picture (except possibly as a safe-keeper of surplus funds) and the Non-Bank/Telco performs all the functions. This however tends to be more risky than a Bank-Led Model.

Key challenges & considerations in development of Mobile Phone Banking are highlighted below. Further, some possible steps to address these have also been suggested.

• Lack of interoperability -- May require the intervention of regulators, as this is not a technological challenge but driven more by competitive tendencies. Operators should also appreciate that the resulting cost reduction from the network economies of scale may then be past onto users in form of lower tariffs.
• Lack of documentation -- Some regulators (e.g. Reserve Bank of India) have taken proactive steps to simplify the KYC requirements for financially excluded sections. This goes a long way in addressing their lack of documentation / identity proof and limiting their access to formal financial services.
• Difficulty in using mobile phones -- It has been observed through field experiences that only number literacy is required for transacting on mobile phones ( which is a lesser problem than functional and language literacy). Therefore, if one is familiar with the use of mobile phone through its conventional use, all one has to do is memorize a few strings of numerical code to carry out the transactions. Biometric technology is also being used, especially at initial customer sign up to address the poor literacy levels of the target market. Finger prints or eye scanners are is use or being experimented with to capture identification data.
• Security concerns -- Mobile phone technology is a secure channel, and conventional belief is a misconception. Multi-level security authentication can be further enabled, with a minimum of two layers - sim & handset. Security of particular system can be augmented through choice of data formats and whether it can be encrypted or not. Technology choice should however bear in mind that not all options can work on all handsets. It may also be noted that considering low value transactions in microfinance, it is not necessary to have an elaborate, expensive security system as the risk factor is low. For instance, GPRS/WAP may not be suitable for a mobile banking platform targeting microfinance as they usually have the low-end handsets. However, it may be important to note that if mobile banking is perceived to be an unsecured channel, credibility risk and potential fall-out is high, regardless of the amount involved.

Some successful M-banking initiatives in developing countries are in South Africa (WIZZIT), the Philippines (Globe), and Kenya (M-PESA).

Green ICT Considerations by MFIs

It may be interesting to note that 240 kg of fossil fuel is used to produce one PC, which releases 700 kg of CO2 and that 50% of all hardware related costs are actually energy costs. Further, 2% of the world’s total CO2 emissions originate from the IT industry. However, if ICT is deployed efficiently and innovatively, it can have a much more profound effect in the reduction of the remaining 98% of emissions.

Environmental responsibility is emerging as an important consideration for corporate organizations and technology suppliers. Ironically though, we often find that businesses are rooted in delivering short-term benefits, without realizing that this may contribute to their own downfall – by increasing the rate at which customers begin to value a longer-term sustainable approach. Being accountable and responding timely to social pressures is therefore an important strategy tool to ensure business long-term viability. These organizations must use fewer resources more efficiently, to produce goods and services that benefit society and environment and still meet traditional demands.

The imperative for environmentally sustainable production and consumption builds on the principle of reduce, reuse & recycle. But it requires much more than that – in terms of innovative thinking and fundamental alterations in business models. It requires making the most of fast-changing regulations, leading-edge technologies and shifting consumer expectations and demands. Above all, this new imperative requires that sustainability be woven into the core strategies of companies and public sector organizations. Corporate IT will go totally green in the coming years, driven by a combination of cost efficiency, regulatory compliance, and corporate responsibility motivations. Some more immediate and obvious ways in which ICT can be leveraged are de-materialization and online delivery, as well as solutions and processes that result in reduced need for commute and transportation.

Green ICT can have a three-pronged effect:

• Optimization effect, by increasing efficiency (e.g.: reducing paperwork in MFI operations)
• Substitution effect, by re-engineering workflows to result in a reduced carbon footprint (e.g.: using GPRS for planning a loan officer’s routing, thereby reducing time and fuel wastage)
• Induction effect, by creating incremental demand, and possibly “increasing” the footprint in the process (e.g.: differentiated service and pricing leads to more collective travel)

The idea should be to not only offset the impact of increased footprint due to induction effects by the savings realized by optimization and substitution of process flows, but to go further and have an overall positive impact on carbon reduction levels.

Having said that, clean technology innovations will be successful only when embedded within broader transformed socio-economic paradigms, and technological change in itself will be a gradual. Clean technology implementation can however immensely help in addressing problems related to sustainable development and will further augment the social impact of microfinance. However, it bears reiteration that sustainable development is a social phenomenon with technological innovation being just one of the many enablers required for a transition to sustainability. Technology in itself is not a panacea for all problems, but it can most definitely offer successful and sustained solutions when applied in a contextual framework that comprises transformed mindsets, thereby encouraging active & collaborative participation from various stakeholders, and is supported by innovative funding models that have a broader mandate for strengthening social, economic and ecological capacities.

As the microfinance industry moves from being philanthropic to also being one of the most viable poverty alleviation approaches available in the developmental toolkit, it will also have to worry about environmental sustainability –in terms of not only how it manages its operations to also about how green is its footprint! On a more pragmatic level, MFIs that get greener - be it through reducing the carbon footprint of their business operations & technology deployments, or by financing greener micro-enterprises, will benefit not only through the environmentally sustainability imperative but also by making a positive impression on the minds of socially responsible investors.

ICT - BreakthroughTool for Development

Need for IT in Investment Management

Especially relevant during recent periods of corporate contraction, economic pressures and tight spending, evaluating where an organization should expend resources can be a business-critical
decision. This equally applies to IT investments, and includes not just estimating spends over the life of a system or initiative, but also an evaluation of potential business benefits, future options and relative risks. Evaluations based solely on cost can, and often will, lead to improper decisions with a questionable impact on organizational goals. Clearly, what is becoming increasingly important is not what is spent, but what an organization gets in return.

Subsequent analysis studies the impact of targeted ICT investment at various levels of aggregation (i.e. at the organization, industry & country level), with the primary aim of evaluating the role of ICT in a broader business transformation agenda. Further, focus is on highlighting approaches to strategically leverage technology for highly successful and effective delivery of business objectives, in the social sector context.However, as there is no direct and conclusive evidence with respect to the impact ICT can have on microfinance, the discussion in this chapter is more directed towards establishing this point by highlighting high social returns on IT investments in general.

IT Investment: Methodology

Discussion below draws up a framework for managing IT investments. Although this analysis is a synopsis of a more generic approach to IT investment management, this is very much applicable to the microfinance context. Any IT investment, from business planning perspective, will have three broad components : 6
6 Adapted fromwork of Giga Research, a wholly owned subsidiary of Forrester Research, Inc.
15
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
1. Impact on the organization, resulting in business benefits
2.Impact of IT enablement, broadly affecting business costs
3.Risk, manifesting itself as business uncertainty
Further, depending on the business aspirations of an organization, IT investments could be categorized
into three broad buckets :
1. That have the ability to change market structures and can open newproduct and service offerings
2. That are geared towards efficiency, lowering costs or enhancing productivity of existing functions
3. That simply ensure that organization does not fall behind in basic business enabling requirements
7
7 Adapted from IT Investment Management, Framework for Process Maturity -US GeneralAccounting Office
Figure 4: Fundamental Phases of IT Investment
Source: US General Accounting Office
Investments in all three paradigms are important. But ratio of spends under projects that fall in respective
buckets will be determined by the thinking cap management puts on while running the business. Broadly
put, the first kind of investment is more strategic in nature and instills rapid growth to win new markets,
second mostly catalyzes consolidation, while the third type of investment just maintains the status quo
and will mostly be viewed as a cost to the organization with no appreciation for the transformation role
that IT can possibly play.
Fundamental phases that objective IT investment management decision making should undergo are that
of selection, control and ongoing evaluation. During the selection phase, organization identifies and
analyzes each project's risks and returns before committing significant funds to any project and based on
that analysis, selects those IT projects that will best support its mission needs. This process should be
repeated each time funds are allocated to projects, reselecting even ongoing investments. Subsequent to
selection, each project needs to go through a control phase where it is ensured that projects are
implemented as planned and they continue to meet mission needs at the expected levels of cost and risk.
If the project is not meeting expectations or if problems have arisen, steps should be quickly taken to
address the deficiencies. If mission needs have changed, the organization is able to adjust its objectives
for the project and appropriately modify expected project outcomes. During subsequent evaluation,
actual versus expected results should be compared after a project has been fully implemented. This is
done to assess the project's impact on mission performance, identify any changes or modifications to the
project thatmay be needed and revise investment decisions, based on lessons learnt.
The investment process does not however end here. A project can be active concurrently in more than
one phase of the select/control/evaluate model. After a project has been designated for initial funding in
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
16
Figure 5: Five Stages of IT Investment Process Maturity
Source: US General Accounting Office
Further, as outlined in the above schematic, IT investment management process in an organization
undergoes various stages of maturity – starting from building awareness for the need of an objective
approach to IT investment decisions, to getting to a stage where it has mastered the selection, control &
evaluation, with the result that IT is consistently leveraged for strategic outcomes.
the select phase, it becomes the subject of evaluation throughout the control phase for the purposes of
reselection. Reselection is an ongoing process that should continue for as long as a project is receiving
funding. If a project is not meeting the goals and objectives that were originally established when it was
selected, or if the goals have been modified to reflect changes in mission objectives—and corrective
actions are not succeeding — a decision must be made on whether to continue to fund the project.
Ultimately, de-selection, even though difficult to implement, may be necessary if funds can be better
utilized elsewhere. Once projects are operating and being maintained, they remain under constant review
for reselection.
As pointed out earlier,we nowdiscuss possible benefits that targeted IT investments can result in,
at each level of aggregation, so as to put the above discussion in context.
We take up a specific case of Latin American retail banks , and observe howIT can be successfully
leveraged for enhancing operational productivity. This is particularly relevant from microfinance
perspective, which also needs to gear up for provisioning financial services in an operationally
efficient manner, especially given that these expenses form major bulk of costs that MFIs
have to bear.
Over a period of time, these financial institutions have been able to increase their revenues without
increasing their cost-to-income ratios. Even though this has in some measure been driven by
generous spreads between average borrowing and lending rates and greater uptake of banking
services by the middle-class population, sustaining those levels are difficult as financial markets
mature. Hence banks have had to evaluate their productivity metrics - by streamlining back office
operations, reducing channel costs, and capturing more value from IT investments.
Centralizing back-office operations (such as loan processing or opening / closing accounts) has
proven to be the greatest contributor to cutting costs. However, results of such activities can vary
8
2.2 Organization Level Imperative: Case of improving Operational Productivity
using IT
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Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
greatly – withworst performers spending nearly six times more per transaction on their back-office
operations than the leaders. Also, as should be obvious, simply centralizing IT and operations will
not reap desired benefits if reducing staff levels and infrastructure expenses in branches are not
curtailed in parallel. To add to this, if responsibilities between branches and central office are not
clearly articulated, then the motive of centralization is defeated aswell.
Technology also needs to be more meaningfully
employed to reduce unnecessary errors or reworking.
For example, by deploying work-flow-management
software, managers can track activities and spot
bottlenecks and thus ensure consistent service. To
maximize productivity of back-office personnel across
branches, process consistency is of paramount
importance, so as to reduce or eliminate variability and
errors.Top banks alsowork closely with their IT vendors
to ensure that they got the most from the available
technology and rigorously monitor the performance of
their employees by using incentives and penalties to ensure accountability.
Some banks have managed to migrate 68 percent of
their transactions to alternative channels over several
years. Moreover, the tellers of these top banks are highly
productive, conducting up to 250 financial transactions a
day as opposed to around 100 for tellers at some poorly
performing banks. The leaders achieved these numbers
by optimizing processes and using technology where
possible—for example, confirming a client’s identity by
scanning a debit card rather than visually validating a
physical signature.
Channel operations have proven to be the next opportunity for improvement. Using IT, staffing
levels can be objectively evaluated, which can then feed into a managerial push for reducing costly
paper-based transactions in branch banking and diverting a larger proportion of low-income
consumers to alternative channels.Over a period of time, teller-to-customer ratios should be driven
to lower levels, while encouraging customers to move transactions to other channels (for example,
by using education and incentives to spur ATM usage), as has been successfully tried in
conventional banking.
IT/ITES industry has contributed to the growth and development of the country in terms of various
economical and social aspects through both“for-profit” aswell as“not-for-profit” activities.
9
2.3 Industry level Imperative: Spillover Returns from Growth in IT sector
9 Content has been adapted from NASSCOM & Deloitte report in “Indian IT / ITeS Industry, Impacting Economy &
Society, 2007”. Also, all quantitative indicators are from the same report.
Financial Institutions that adopt mechanisms to get more from their IT spends, will
generally do better than their peers. Further, these IT related spends should be geared less
towards just keeping current systems running and up to date, but rather more to fund new
projects that might generate revenues and growth. For example, some European banks
commit up to 60 percent of their IT investments to such undertakings. One way to do this
is by taking advantage of scale—for example, consolidating data centers and
standardizing equipment, so as to free up funds for new projects. Once these measures
begin to take shape, investments should be made towards relevant IT projects, while still
maintaining critical evaluation standards to avoid wasting money on projects that have no
value for the business and in enforcing fiscal discipline. Wider and more open discussions
between CIO’s and COO’s further promises to foster a culture of ongoing operationalperformance
improvements.
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
18
Figure 6: Socio-Economic Contribution of the Indian IT / ITeS Sector
Source: NASSCOM
Role of the IT/ITES industry in India’s economy is well established and the sector is proving to be a
major growth catalyst within the services sector, which in turn drives several economic indicators
of growth in the country.A fewkey indicators of direct contribution are:
:The sector’s contribution to the country’s GDP has been
steadily increasing from a share of 1.2% in FY98 to 5.2% in FY07.
: Export earnings in FY08 stood at
approximatelyUSD40.0 billion with a growth of 36%.
: Direct employment in the sector is expected to be 2.0 million by end
of FY08, growing at a CAGR of 26% in the last decade, making it the largest employer in the
organized private sector of the country.
Growth of the sector and its resultant contribution to economic growth and development has also
resulted in certain wider impacts, which in many cases has a rub-off effect and sets benchmarks for
other sectors, while boosting the image of India in the global market. Some of these are as follows:
: The indirect employment generated at the rate of four
additional jobs created in the economy for every one job created in the sector, is even more
socially relevant as nearly 75% of the workforce employed in those additional jobs are
SSC/HSC or less educated.
: Apart from contributing to the growing
income of its direct stakeholders (promoters, shareholders and employees), the IT/ITES
industry has had a multiplier effect on other sectors of the economy with an output multiplier
of almost two through its non-wage operating expenses, capital expenditure and consumption
spending by professionals. Studies showthatUSD15.85 billion spent by the IT/ITES industry in
the domestic economy in FY06 generates an additional output ofUSD15.5 billion.
Growing share of the country’s GDP
Boosting the foreign exchange reserve of the country
Employment generation
Additional employment generation
Driving growth of other sectors of the economy
•
•
•
•
•
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Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
Figure 7 (a): (Top Left Graph): IT Industry - Contribution to Indian GDP
(b): (Middle Left Graph): IT Industry - Export Earnings
(c): (Bottom Left Graph): IT Industry - Direct Employment
(d): (Right Chart): IT Industry – Employment Multiplier Effect
Source: NASSCOM
The industry has made a beginning, and it is on track to set an example that would encourage
others to emulate and help change the face of India.
Empirical findings on IT and economic performance have established a positive correlation
between some proxy for IT investment and some proxy for economic performance at each level of
aggregation (i.e., plant, firm, industry, and country). Furthermore, there is evidence suggesting that
complementary investment in IT-related labor and organizational factors that provide supportive
work environment for maximizing returns on IT investment also contribute to improvements in
productivity growth.
10
2.4 Policy level Imperative: Social Returns on IT Investment
10 This chapter has been adapted from the research paper on “Impact of Investment in IT on Economic Performance:
Implications forDeveloping Countries” by Rouben Indjikian&Donal S. Seigel
• : By gradually spreading their business
operations to smaller Tier II/III cities, the IT sector (besides generating revenue and
employment) is also assisting in improving the supply of talent pool and development of
physical and social infrastructure, either directly by themselves or by spurring the Government
to action.
Encouraging balanced regional development
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
20
However, the most interesting finding that research seems to suggest is that social returns of IT
investment might exceed private returns, which provides a compelling argument that
governments should explore all possibilities to support investment in IT. Evidence further suggests
that this dissemination will have a sustained, long-lasting impact on productivity and economic
growth, provided that policymakers implement policies that facilitate a faster rate of diffusion and
better allocation of resources. In developing countries, the characteristic impacts of IT investments
could however be different from those in developed countries, even within the same industry.
Developing countries have relativelyweak risk management systems in place and fewer resources
from which to invest. They also cannot afford to put their limited technical, financial, and human
resources on IT investments that do yield relatively lower social returns. To make the wisest
IT investment decisions therefore, businesses must rely on the support of their public
authorities and financial intermediaries, as well as on various kinds of international public–private
partnerships (PPP) .
These evidences provide important lessons for developing economies. Firstly, developing
countries should not lose sight of the big picture with regard to payoff to IT investments. These
countries should hence focus on implementing technology policies that foster long-run economic
growth.
More specifically, the key deficiencies that policymakers in developing countries must address, in
order to stimulate higher social returns on IT investment, are:
1. . By establishing an investment friendly
environment, policymakers will enable firms in establishing their own IT investment priorities.
2.
(that is low-cost, high-bandwidth, reliable & secured). Further,
this is also essential for building trust while participating in transactions.
3. . One approach is to provide training & skill
development or encourage state-run educational institutions to shift their priorities
accordingly. Another avenue is to provide incentives to firms to engage in such training
themselves, through tax policy or subsidies.
4. . Governments could foster an
improved understanding on the best methods of using IT by local firms in their respective
sectors, so that optimal choices can be made regarding most efficient use of technology in a
given context.
However, the public sector alone cannot effectively overcome all the challenges discussed above.
This is especially true for smaller, developing countries.Wide range of collaborative arrangements
(such as PPP, alliances&consortia) should therefore be leveraged to address these market failures.
These partnerships would be useful for providing better access to financial capital so as to
encourage investment in IT, enhance human capital development to facilitate implementation of
new technologies, stimulate development and extension of networks, which in tandem can work
towards augmenting returns to both private sector and society at large, and allaying concerns
regarding sharing of proprietary information.
11
Even in the developedworld, where organizations encounter substantially more favorable
institutional conditions and better technological and physical infrastructure, it has taken several
decades for benefits associated with ICT investment to result in substantial improvements in
economic growth.
Under-investment in IT-related technology
Inadequate support for development of infrastructure technology geared to provision
greater access to connectivity
Shortfall in (IT-related) skilled workforce
Lack of knowledge of ‘‘best practices’’ in the use of IT
11 Refer AppendixA
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Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
National governments, the
private sector, society at large,
and especially the R&D
community in developing and
transition countries must also
realize that IT should not be
treated as a homogenous
phenomenon. Antecedents
and consequences of IT can
actually vary according to the
t y p e a n d q u a n tum o f
investments made, project
choices and exe c u t i o n
effectiveness. Still, there is
empirical evidence that
potential for investment in IT to
generate substantial productivity gainsmay actually beworth the push.
Further, the roadmap towards establishing an information economy in the developingworld should
be streamlined (Refer Figure 8: this is an broad framework developed by Center forTechnology in
Government, of howshould public investments in IT be guided), thereby presenting an opportunity
to catch up through adoption of latest IT technologies (such as wireless and mobility solutions) to
leapfrog infrastructure bottlenecks, or rendering support to the open source software movement,
so as to improve low cost access to IT mediated information flows. It is however prudent to
mention that the vast potential of IT cannot be exploited very effectively without devoting
considerable attention to understanding specific characteristics related to a given market
structure, state of supply chain, and resources available to support businesses.
IT and its applications however still remain a costly investment for firms in developing countries,
because of the need to achieve far more than simple connectivity to global networks. IT
intermediation must therefore be embedded within organizations in ways that do not yield
substantially increased costs of coordination – both within the firm and between buyers and sellers
whose collaboration is being facilitated by it. Analyzing the experience of IT usage and various
implementations of E-commerce by firms in developing and transition economies and relating
them to the best practices in a given field, might help in the identification of key bottlenecks and
critical success factors in a particular country.
Itmay therefore be appropriate to conclude that IT will generate high social returns in countries that
invest in these technologies and use them wisely.The pace of technological progress in IT goods
and services is showing no signs of slowing down. As a result, these products are becoming more
affordable to businesses and households in countries with lower per capita incomes. Bottom line is
that there exists a critical opportunity for developing countries striving to improve their global
competitiveness and enhance economic growth through IT-related investments. Thus, it is
incumbent upon policymakers in these countries to ensure that domestic firms encounter an
environment that is conducive to such investments and that they have sufficient incentives to
undertake them.
By appropriate prioritization in channeling investments in public goods, including IT investments,
another major argument related to the opportunity-cost issue can also be possibly addressed (e.g.;
criticsmay argue that other forms of public support such as increasing access ofwomen to primary
education might generate higher social returns, as opposed to investment in IT infrastructure).
Figure 8: Public ROI Value Proposition
Source: Center for Technology in Government
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
22
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Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
Even if it is impossible to absolutely refute the existence of such competing social priorities, it
should be noted that it is more likely that IT infrastructure complements rather than competes with
other social initiatives, when it comes to realizing returns on these investments. India, for instance,
has demonstrated that focused IT infrastructure enablement – both by private sector (e.g.; growth
of mobile telephony & the IT sector) and public sector (e.g.; NeGP project) - can help developing
countries successfully compete with their more advanced peers, by leveraging breakthrough
innovations in technology.

Microfinance & ICT – Catalysts for Change

Role of Technology in Social & Economic Development

Recent times have seen substantial economic growth of the world order. Despite this, ours is a world that is still plagued with many divides – from economic to socio-political & cultural to digital, and these are largely a result of uneven and inequitable access, benefits and choices that citizens are accorded with. Further, these may manifest themselves in as varied contexts as disparities that exist between rich&poor, rural & urban areas, men & women, skilled & unskilled citizens or large & small enterprises.While there may be many reasons that create these divides, if we are to ensure that these do not negatively affect the overall agenda of sustained social and economic growth, adequate measures will have to be taken for appropriately and timely addressing these issues.

Amongst these, technological divide is a particularly critical disabler to a nation's growth, as it reinforces itself by further aggravating the negative impact on socio-economic structures and other disparities plaguing our societies. However, it is equally true that technological advancements have also been amongst the most prominent growth vehicles for economic leapfrogging, as they facilitate efficient and productive use of resources and can be critical drivers to overall development, if applied in the right context. Information technology has actually been accepted as being the most significant force of modernization in the last 20 years. Still, with technological advancement introduced in a linear rules-bound approach, efforts weren't very successful - in the sense that the anticipated economic trickle-down effect did little to alleviate poverty, or to establish a platform on which sustained economic growth could occur. Also, modernization has been successful only in part because of the erroneous assumption that scientific, technological and economic growth equaled development in an absolute sense. Using technology as a development tool, with a predominantly technical focus has therefore often resulted in failure, as multi-faceted and multi-disciplinary considerations relating to people, such as organizational structures and behavioral parameters, got neglected.

Further, while financial inclusion primarily aims to deliver financial services to all the people in a fair, transparent and equitable manner at affordable cost, equitable technological access is also a prerequisite for overall development of our country. Technology has become the driving force for change in the modern world and has not only transformed the way we communicate, but has also altered our economic structures. Technology - even in small amounts - is helping communities overcome convention and tradition to take huge forward leaps. As technology – particularly Information & Communications Technology (ICT) – becomes advanced, better understood, cheaper and more accessible, its innovative and newuses are being constantly devised and discovered.

Despite this, a vast majority of people living in socially deprived areas actually remain excluded from the purview of technological advancements that have taken place, even after 60 years of independence.There exists an acute digital divide (disparity between “have’s” and “have not’s” of technology), which describes the fact that a certain section of the society don’t have access to - and capability to use - modern technology so as to drive individual economic development. There is therefore a need to bridge this digital divide by ensuring equitable access for all.

The emergence of new technologies has however challenged theoretical and practical assumptions about the role of technology in socio-economic development. Arguments abound as to whether these new technologies can shape development, are appropriate to local culture and fit with the development approach used.The link between technological growth and socio-economic development is generally based on historical facts that abound in western industrialized world experiences.

While popular development dialectical reasoning points to the promise of significant economic and social transformations, little effort has so far been made to understand the changes enabled by the new technologies and how they could be usefully applied to a particular developmental context, which in the present report is about financial inclusion (more commonly referred to as microfinance).
The Microfinance Imperative
We avail the services of a range of people in our daily lives – from drivers, house helps, support staff at offices, grocers, vegetable vendors, tailors and small shop owners – who constitute what is popularly known as the BoP (Bottom of the Pyramid). All of whom have financial needs – requiring a safe place to deposit their savings; a source of credit to finance their consumption
needs;working capital to augment their income; health & life insurance; as well as a mechanism to make and receive payments. Inclusive growth is then about ensuring the financial needs of these people.These are no different from the more conventional bank clientele, in terms of wanting convenient, affordable, flexible, and reliable financial services.

However, this can become a reality only if financial inclusion efforts increase their outreach exponentially. Once the domain of socially motivated initiatives and development finance institutions, the industry has, over the years, transitioned into an important player addressing a crucial missing market at the base of the economic pyramid, and has tried to develop structures to achieve that in a financially viable manner. It has actually transformed into a serious financial service that is now increasingly perceived as an emerging, double bottom-line asset class having the potential to generate attractive returns vis-à-vis existing traditional investment options, while also satisfying essential developmental objectives of financial inclusion.

One of the most efficient channels to build inclusive financial systems is Microfinance, a tool that enables people to “help themselves to increase incomes, acquire capital, manage risk and work their way out of poverty” . Formally, microfinance is defined as the provision of a broad range of financial services (deposits, loans, payment services, money-transfer, insurance) to poor and low income households and their micro-enterprises.
Microfinance is provided by three types of sources:

• Formal institutions, such as rural banks and cooperatives;
• Semiformal institutions, such as non-government organizations;
• Informal sources such as money lenders and shopkeepers.
• Further, MFIs (Microfinance Institutions) are defined as institutions whose major business is provision of microfinance services.

The ICT Paradigm
ICT is defined as technology that facilitates collection, transfer and transformation of data and knowledge, and hence collaboration across entities, in a manner that is more efficient, faster and productive than whatwould have been possible otherwise.
Developments in ICT and drastic reduction in its costs has spurred an unprecedented expansion. Introduction of wireless phone service and internet are transforming lives in ways unimaginable only a decade ago. Further, ICT provides tremendous opportunities for economic and social development, and has become a key medium for communicating information and ideas and conducting business. It promotes education through distance learning, facilitates scientific advancements through sharing of research, and expands the reach of health care through tele-medicine. It has changed thewaywe live, learn andwork, and it will continue to transform our lives. These new technologies have the potential to connect previously isolated villages and populations, while giving businesses a chance to operate on a global scale, previously unimaginable. Internet has also opened up new prospects for economic activity in trade, retail and investment.
Electronic commerce, one of the most positive outcomes of ICT, has its genesis in the banking sector. It has truly propelled some developed nations into what is generally called the “Information Economy”. Banks here have moved from paper-based processes to fully-integrated ICT-enabled paper-less offices. Cash has also almost been eliminated from the system – making transactions much more convenient, safer and cheaper. Even the smallest of transactions are being replaced by a payments service that is enabled through mobile phones or prepaid cards.
From the microfinance point of view, the more relevant question to ask is whether the same impact can be replicated in lesser developed countries.The answer probably is in the affirmative, although the challenge is in finding innovative uses of existing ICTs and redefining processes, policies and perceptions around its applicability. ICT innovation is infact a key strategy to take microfinance to the next level in terms of outreach and sustainability. Roll-out of ICT-enabled microfinance services therefore represents a paradigm shift for the sector. It may fundamentally change the business processes and methodologies that microfinance practitioners so religiously pursue (we are already observing this in certain ways, with disruptive microfinance business models being built around innovative technologies).
With renewed interest in reaching out to financially excluded market segments and the role that technology is proven to be capable of playing in addressing business productivity, cost efficiency & risk management issues, it is not surprising that ICT is being looked upon as an extremely viable option to circumvent the all too evident problems that have traditionally inhibited meaningful intervention in the area of microfinance. All of this makes the subject of microfinance and ICT application quite central to the poverty reduction & financial inclusion agenda, irrespective of whether one is a microfinance or an ICT practitioner.
Further, Indian technology companies have been pioneers and preferred partners for global entities in business transforming technology initiatives, given high quality of human resources, policy support and cost arbitrage that India provides.While India has become the brain and the back-office of theworld over the last decade, it is time to nowutilize the same expertise and learning in our own backyard, and better leverage ICT interventions to enable financially sustainable developmental interventions in general, and financial inclusion intermediations in particular.

Why is Technology Important to the Inclusive Development Agenda?

With renewed interest in reaching out to financially excluded markets and the transformational role that technology is proven to be capable of playing in addressing key business themes of outreach, efficiency and risk management, it is not surprising that Information and Communications Technology (ICT) is being looked upon as a viable option to address very similar problems that have traditionally inhibited meaningful interventions in the area of microfinance. This therefore makes the subject of technology interventions in microfinance quite central to the poverty reduction and financial inclusion agenda.

As MFIs struggle to growto the next level, they are challenged with multiple hurdles. On one hand is the issue of increasing outreach through scalability. Cost efficiency and productivity play an important role in achieving this. Relationship management & customer retention, as well as product innovation are also relevant in helping the business grow. On the other hand however, the challenge is to avoid getting plagued by uncontrolled growth that can eventually become difficult to manage.This requires a high degree of process implementation & adherence, reporting structures for effective control, risk management frameworks, professional human capital and strong business model execution capabilities. ICT has a role to play in all of these!

However, given that there are tremendous economic pressures and tight spending that MFIs have to grapple with, it warrants that a critical evaluation be done of where their IT investments are focused on.This includes not just estimating spends required over the life of a system or initiative, but also an evaluation of potential business benefits, future options and relative risks. Clearly, what is important is not what the money is spent on, but what the organization is getting in return. Therefore, MFIs that focus on technology innovation to achieve sustainable scalability of their operations also need to develop internal management capabilities to not only manage IT, but IT investments as well.
The objective of leveraging ICT for microfinance delivery has to be thus geared towards actualizing specific projects that are cost effective, productivity enhancing and sustainability sensitive. Specific technology concepts that have been proven to have tremendous impact in other industries – such as modular IT architecture design, standardization approach, business continuity infrastructure, open-source software and outsourcing – therefore need to be evaluated in the microfinance context.

Known ICT concepts and approaches, when applied in the manner outlined above, establish the fact that skill-sets and approaches required by the IT industry to service other sectors, are equally applicable and relevant to the social sector in general, and microfinance in particular. This, when coupled with the sizing of the microfinance opportunity, will make a compelling business case for the IT industry. Further, it will encourage IT firms to provide impactful solutions geared towards meeting challenges and opportunities of the microfinance sector.