Three forces have forever altered the financial landscape. The first of these is fi- nancial liberalisation, which releases market forces as government-imposed re- strictions on financial market structure and on transactions are relaxed or re- designed to increase efficiency. The second is the disaggregation of risk, which makes the pricing of financial assets and services more accurate. The third is communications technology, which expands the sources, volume and speed of information transmission. This part focuses on such technology: In a connected world, information transfer is rapid, cheap and dependable. But what about “the last mile,” the frontier beyond which these three global developments have not yet conquered? And what is required to meet the challenges posed by small volume transactions?
Remittances from richer countries to poorer countries amount to very large sums, although the individual sums sent are usually quite small. Remittances are commonly from workers in richer countries to their families in their countries of origin. While the senders have their own private agendas, the development com- munity is increasingly engaged in efforts to leverage the flow in ways that could reduce remitters’ costs and facilitate their efforts to build assets. Chapter 7 by Cerstin Sander deals comprehensively with these issues, exploring the opportuni- ties presented by remittances for the broader development of microfinance. Her perspective centres on financial sector development – integrating poorer clients into financial systems by designing new instruments for this purpose and by facili- tating conducive regulation.
Chapter 8 by Manuel Orozco and Eve Hamilton is an empirical study of remit- tances to Latin America. They deal with the large international money transfer networks and MFIs that provide retail services to recipients. They compare cost structures and the relatively modest extent, at the time of their study, to which their sample of MFIs used remittances as platforms for bundled or integrated ser- vices to their clients.
The focus of Chapter 9 by Gautam Ivatury is the use of technology to build fi- nancial systems capable of serving large numbers of low income clients. He finds that commercial banks in some emerging markets are pioneering technical solu- tions that reduce their costs to levels that make microfinance an attractive proposi- tion. In these cases, transaction volumes must be substantial for innovations to be viable. A variety of transactions can be undertaken using these technologies.
ATMs and POS devices are used, along with internet banking and mobile phone banking. Technological advances that provide convenient retail services increas- ingly involve a variety of providers other than banks.
In Chapter 10 Laura Frederick describes and addresses the magnitude of the challenges and complexities that arise in the provision and use of information technology. Her objective is to create and serve very large numbers of rural micro- finance clients. Realisation of this objective requires frameworks that enlist the collaboration of a large number of parties and a comprehensive understanding of all aspects of service provision. She describes and compares several models and explains the risks each carries.
Chapter 11 by Janine Firpo explores issues that confront efforts to design and deliver financial services for the poor. Her examples are based on pilot projects undertaken in Uganda. She concludes that the introduction of technology com- bined with business process change yields the greatest return; that innovative technologies that can be scaled up are essential for successful delivery in emerging markets; and that the costs of building the necessary infrastructure are beyond the capacity of individual MFIs. These three imperatives indicate that collaboration is essential, even among competitors. The introduction of credit card technology in the US several decades ago provides instructive lessons.
Mark Schreiner describes credit scoring in Chapter 12, applying it to microfi- nance. Scoring consists of giving weights to various characteristics in credit proc- esses, and using these to calculate probabilities. He argues that credit scoring, done correctly, provides more accurate results at lower cost than other risk evalua- tion techniques because it quantifies risks to a high degree. Credit risk can be specified to include, for example, probable losses and likely periods of delin- quency. The risks concerned extend beyond credit risk to include borrower behav- iour in general, such as the probability of the borrower’s not taking another loan.
In order to introduce credit scoring successfully, considerable attention must be devoted to dealing with loan officers and others suspicious of new techniques or who fear (often wrongly) loss of status or employment.
Chapter 13 by Christoph Freytag suggests that credit scoring is not a panacea.
Operational risks, described as inefficient systems or insufficient attention to in- formation and procedures, are common in many microfinance institutions: these factors cannot be corrected by scoring. Borrowers often fail to repay because of crises of large and small, including civil unrest. Fraud is also not predictable.
Scoring may lead to overindebtedness because the debt capacity of the loan appli- cant is not rigourously quantified. Scoring requires information infrastructure capable of handling large data bases and works best when behaviour is highly predictable, which is not necessarily the case in microfinance. However, scoring may help at the margin and may be useful as a guide, as Schreiner acknowledges.