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Microloans and Mobile Phones: Technology’s Impact on the Future of Microfinance

Without a doubt, the greatest advancement of the last 50 years has been the revelation of the internet. Paired with the rising tide of globalization, technology has linked the world like never before. With the increased spread of communication has come a world without barriers or boundaries, allowing people and information to spread freely. This international interconnectedness has revolutionized countless industries, including microfinance.

The global ubiquity of internet access has been paralleled by a rise in mobile phone ownership. Nowadays, no matter the region or economic circumstances, the first purchase any small business owner makes is a cell phone. Having a mobile allows anyone to be connected to the world as a whole, from anywhere at any time. In just the past few decades, advances in smartphone technology and availability have transformed the geography of business.

Banks no longer have roots in the ground or set locations. Mobile banking on smartphones has created a reality in which the only address a bank needs is its domain name. Greater accessibility to money and its movement translates directly into greater freedom and frequency of doing business. In Tanzania, 43% of all transactions done through FINCA, a fellow microfinance organization, are done on mobile phones. No longer do people in remote areas have to travel into town to complete a transaction—everything is done with the touch of a button.

In addition, advances in biometric technologies have made fingerprint identification cheap and universal, appearing everywhere from door locks to iPhones. In a remote setting, this technology can be used to avoid fraud and gain quick access to accounts. As a whole, microfinance has an extremely high repayment rate on loans. This is not achieved without a system of background checks, follow-ups, and loan collection. With fingerprint technology, loan centers can quickly confirm an individual’s identity, and, if taken a step further, can seek out any financial/legal issues in the public record, keeping the field task costs down and permitting interest rates to stay low.

In the future, technology will continue to decentralize loan sites and make receiving microloans easier and safer. Zidisha, a microfinance organization run in 8 African nations and Indonesia, is showcasing what the future could hold for the industry. Their operations are staffed by a grand total of two people, dealing out microloans electronically, without the use of a single office. Zidisha locates their loanees through a sophisticated algorithm, which, although cannot reach every applicant in the area, allows for them to drastically reduce their interest rates.

Microfinance was created in the early 1970s by Muhammad Yunus with the aims of affording the world’s poor access to capital at reasonable exchange rates. The goal was to help small business owners to break the cycle of poverty and avoid dealing with the predatory interest rates offered by loan sharks. Due to the fact that many microfinance projects operate in rural or remote areas, there are often high startup costs that translate into higher interest rates. Through the increased use of mobile banking, fingerprint identification, floating loan centers, and many other advancements that keep down background costs, microfinance can become the ubiquitous, low-interest rate capital alternative that Yunus had first hoped for over 40 years ago.