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Impact of Innovation on Microfinance Risks

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Technology and Innovation have the power to transform any industry’s risk factors including Microfinance. Hence, for various microfinance institutions it is crucial to adapt quickly to the changes that are shaping the industry so as to comply with the subsequent changes in the regulatory requirements and to also relay the benefits to the customers.

Technology has shown to play a  crucial role to cut staff costs, making the business less labor intensive, and to foster outreach (with mobile banking, computerized data bases for credit scoring, back office efficiency with proper computerized bookkeeping, etc.).

Innovation has driven towards an increasingly cashless society, where people are likely to exchange money mainly with electronic devices, such as M-banking, ATM, etc. Transactional components of the e-payments, along an increasingly automated value chain, are now becoming commodities, supplanting traditional bank intermediation. All this is also shaping the developing economies. With technology and innovation becoming more accessible it is no longer the case where only the developed world is able to benefit from new innovations.

Here are some of the risks that are being mitigated through embracing technology:

  • Credit Risk: IT technology can have a significant impact in detecting and monitoring credit quality, with credit scoring and sharing of information.
  • Reputation: Friendly and accessible technology can improve reputation.
  • Competition: Technology creates digital divide between haves and haves not; competition increases with comparability, speediness and other innovative products and processes. Early innovators get competitive lead and may disrupt older players.
  • Management Quality: Technology increases skills and productivity.
  • Staffing: Staff competencies change; Staff is more productive but more expensive.
  • Mission Drift: Temptation to reach wealthier and more technological clients may increase.
  • Profitability: Technology and digital procedures may strongly contribute to making the business model more scalable, cutting variable costs (with an increase in fixed IT costs, which may raise the break-even point) and easing monitoring; productivity should also improve.
  • Back Office: The “dirty job behind” is likely to be profoundly changed by technology and computerized systems of recording; it may also be centralized and dematerialized, with economies of scale and experience.
  • Transparency: Written and recordable IT procedures are a key starting point for transparency and softening of information asymmetries.
  • Strategy: Technology and innovation may have a deep impact on management, reshaping and rethinking strategies, reconsidering the whole value chain, target products and clients, etc.
  • Liquidity: Technology improves awareness and accountability, with a potential impact even on liquidity, which may be better handled and foreseen.
  • Fraud: Fraud is linked to (lack of) transparency and may be more easily detected with IT procedures, allowing for better monitoring.
  • Product Development: New products and especially innovative product delivery (e.g., M-banking and its endless by-products) may be conceived as a result of innovation.

At the end of the day it is up to the microfinance institutions whether they are able to mold themselves according to the changing technological trends and innovation or their failure to adapt would mean that they will be left behind; trying to catch up with others and exposing them to risks that should really be mitigated if not totally overcome after embracing innovation and technology.

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