research and advisory firm Financial Insights, an IDC company, has
announced the release of a new report examining the growing use and
effectiveness of innovative technology solutions in microfinance
Abhishek Kumar, senior research analyst, Asia/Pacific Banking Advisory
Service, notes, “Banks in Indonesia and India have emerged as leaders in
deploying innovative technologies to grow their microfinance businesses.
These banks have shown that technologies like biometrics and smart cards
can be successfully deployed to target previously under-served customer
segments, providing business benefits alongside poverty reduction. ”
Historically, the perception of microfinance has been one of being a
resource-intensive and generally unprofitable business venture. Concerns
over high administration costs and especially the fear of default rates
with the lack of conventional risk management tools (such as credit
histories) have often dissuaded financial institutions from entering
this field. However, in recent years, banks with microfinance experience
have been able to prove that a well-run microfinance program can
maintain low levels of loan default. As shown in Figure 1, Bangladesh’s
Grameen bank’s portfolio-at-risk (PAR) ratio between 2002-2005 remained
below 3%. Grameen bank has been providing microfinance services since
1976 and has grown proficient at ensuring low levels of loan default. In
June 2007, the banks stated that its loan recovery rate was at 98.61%.
Another example is Indonesia’s Bank Rakyat Indonesia (BRI) whose goal is
to establish itself as the largest bank in the region serving the
microfinance and SME sectors. In 2006 the bank attributed more than 60%
of its total loans to these sectors with more than 40 million clients by
the end of the year. In addition to year-on-year double-digit growth in
microfinance loans, the bank has been able to maintain NPL ratios of
approximately 5%. BRI’s microfinance strategy has attributed to its net
income growth in excess of 11% from 2005 to 2006.
In light of such successes, banks in India and Indonesia are actively
growing their microfinance operations.
Indonesia’s Danamon bank and India’s ICICI bank are relying on biometric
and smart card technologies to alleviate the high cost of microfinance
administration as well as the expansion of microfinance distribution
The use of such technology is proving to be quite attractive to the
unbanked population. Biometric authentication systems are particularly
useful in areas with low literacy rates. Customers no longer have to
rely upon signatures or filling out documents -ÂÂ they can simply provide
their fingerprints to authenticate themselves and access their accounts
through specialized biometric teller machines (BTMs). In addition to
this, smart cards are used to track customer interactions to build
real-time credit histories and bolster know-your-customer initiatives.
Ultimately, the use of biometric and smart card technology makes it
easier for the masses to access financial services.
*About Financial Insights, an IDC Company*
Financial Insights provides independent research, custom consulting, and
detailed multiclient studies on the technology issues and challenges
facing the financial services industry. Our global research covers
topics of strategic importance to corporate and retail banks, insurance
carriers, asset management firms, securities and brokerage firms. Our
local practices in Asia Pacific, Europe, Latin America and Canada add an
in-depth regional viewpoint. Financial Insights, an IDC company, is
headquartered in Framingham, Massachusetts, USA. IDC is a subsidiary of
IDG, the world’s leading IT media, research, and exposition company.