Ayesha (pseudonym) is a regular microfinance loan recipient. Using the loan, she opened a small tailoring business to support her family. She has to look after the house and two kids when her husband, a rickshaw puller, is working. Thus, she generally finds it difficult to leave the house.
After a mobile financial service (MFS) partnered with the NGO she takes loans from, she has been paying her loans using the app on her phone. She now saves the time to travel to and from the shamiti every month and has the freedom to pay her loans at any time of the day in a matter of seconds.
At present, over 35 million women in Bangladesh are aspiring to be economically empowered using microfinance. More than 740 NGOs are running these microfinance and savings programs, which are also called microfinance institutions (MFIs). They collect loan repayments through their collection officers daily.
MFSs such as bKash, Nagad, Rocket etc, have launched their own tools inside the app that allow microfinance beneficiaries to repay using their mobile phone. The microfinance institutions, with the help of MFS providers, teach beneficiaries to operate their mobile money accounts. Many microfinance borrowers -- predominantly low-income women -- are now part of the digital financial system. This allows NGOs to promote financial inclusion and digital literacy.
Undoubtedly, digital payment allows multiple benefits to NGOs and their beneficiaries. For the beneficiaries, it saves the time and cost of travel and wait time at the collection point of the NGO or the shamiti. It also helps them become more tech-savvy in digital finance and creates the opportunity to make independent financial decisions. The NGOs benefit in multiple ways, for example, from saving time and operating costs and setting up a transparent reporting system.
The core issue for NGOs in adopting MFS is the small fee associated with each transaction. So, who pays that transaction fee, the customer or the NGO? And do either of them find it worthwhile to pay the fee?
We interviewed some MFI representatives who offer MFS payment options to their borrowers and some who do not. While we cannot calculate if the benefits outweigh the cost of adoption (ie, paying the transaction fees), we can provide some insights about why the NGOs may or may not be willing to adopt MFS.
A recent study by the Institute of Informatics and Development (IID) followed BRAC’s microfinance loan collection officers (CO). It made a person-hour estimation of activities based on the number of group meetings in a month across all BRAC branches with a regular BRAC microfinance program.
They outlined all the activities throughout the day, including the CO traveling to a group meeting, receiving and counting the cash, collecting from absent borrowers, and submitting the money to the accounts officer. It showed that accounting the cash takes about 50 minutes of a workday on average. Similarly, if the CO does not have to travel to pick up money from any absent borrowers who can pay back using MFS, the savings would be over one hour (~68 minutes).
Assuming some borrowers start paying using MFS, the CO would save time in accounting, traveling (to absent borrowers), and collecting money from shamities (as fewer borrowers would come physically). Hypothetically, if all borrowers pay using MFS, these activities can be fully avoided.
Our interviews revealed that the key task of a CO, other than collecting money, is recruiting new borrowers for their MFI. Adoption of MFS in MFIs allows COs to save time and invest in new borrower acquisition. This, in turn, expands the number of borrowers as well as the portfolio of MFI.
The time and money saved by introducing MFS payment methods among borrowers can be broadly estimated. However, comparing it with the transaction cost of MFS is difficult. Still, some large and mid-tier NGOs have adopted MFS to their loan repayment system.
The decision to invest in a mobile payment method is not straightforward. There are understandable challenges in shifting to MFS. We asked a few MFI authorities who do not use MFS in their daily activities why they are sticking to the traditional method.
The most common answer was that the NGOs believe that the transaction fees of MFS, usually ~1% of the total, outweigh the benefits of adopting it. While they all agree on the impact of MFS adoption, they are uncertain about its long-term return on investment. Therefore, unless they charge it to their customers, NGOs are not convinced that the time and money saved by MFS is worth the transaction cost they have to bear.
Secondly, NGOs are reluctant to invest in teaching borrowers to use MFS and resolve their MFS-related issues. Many borrowers lack phones, internet, or the digital literacy to use MFS. Although MFS hotlines and service centers solve users’ account-related issues, NGOs feel their COs will have to spend a lot of time resolving queries and problems.
Finally, many are just uncomfortable adapting to new technology. The majority of MFIs continue to rely on manual record-keeping systems, making it challenging to embrace the necessary changes in their way of work. Many NGO authorities, especially veterans in this area, were not thrilled about the mass adaptation of digital technology.
Interestingly, one MFI representative confided that many NGOs prefer to avoid digitalization because it helps them under-report their microfinance transactions and revenue. Consequently, this allows them to brand themselves as a “small NGO” and ask for further funding from donor organizations, who prefer supporting struggling NGOs to the relatively self-sufficient ones.
Thus, MFS has the potential to impact women’s economic empowerment in many ways. In this regard, many MFIs are missing out on the potential to promote digital inclusion, financial literacy, and greater economic empowerment for women by focusing only on the immediate benefits of MFS adoption.
MFIs need to realize the intangible yet important benefits of MFS and consider having digital financial inclusion as part of their development agenda to promote women’s empowerment.
Mahamuda Sultana is pursuing her Master of Development Studies (MDS) at BRAC University and Rafsanul Hoque is a Senior Research Associate at the BRAC Institute of Governance and Development (BIGD), BRAC University.
