Fintech throws up new possibilities, challenges  for microfinance banks

 

The conventional approach to microfinance business is gradually giving way to technology, with the growing interest in Financial Technology (Fintech) and adoption of alternative channels such as agent banking.

This implies that micro deposit mobilisation; loan disbursement and other financial transactions done in the sub-sector are now delivered using technology.

It also means that the 991-microfinance banks, for which total assets declined by 25.06 percent in the second half of 2016, will have to invest massively in technology in order to remain competitive.

But a good number of microfinance banks are already partnering some Fintech companies for improved financial service delivery.

PiggyBank.NG, a Fintech startup, is partnering with a microfinance bank to help individuals save towards a target. It has automated the savings process, making it easier for individuals to save just by uploading the card details.

There are however many other Fintechs without affiliation to microfinance banks, disrupting the way financial services are delivered to retail customers, especially those outside the formal banking system.

Lidya, a stand-alone Fintech platform, allows small businesses to build credit scores and access finance to grow their businesses. It already has more than 20,000 small businesses registered on its platform, able to access small amounts of working capital to support their businesses.

Some of the leading Fintech brands in the space include; Paga, Vanso, Flutterwave, Paystack, Aella Credit, and Venture Garden Nigeria.  The biggest edge Fintech offers over traditional banking, say players in the space, is the capacity to significantly cut operating costs, while at the same time expanding the number of people that can be reached.

But many microfinance banks are also adapting to the new challenge by adopting technology to drive their operations.

“We are at the point of engagement with one or two technology companies to support our service delivery,” Godwin Ehigiamusoe, managing director and CEO LAPO Microfinance Bank limited, told BusinessDay in an interview.

Ehigiamusoe said microfinance institutions need to invest in training and re-training of their workforce, and that as a result, there is need for investment in capacity development of microfinance banks.

He also advocated for partnership with technology companies that have the capability to deliver financial services.

The LAPO managing director called on microfinance bank operators to brace up to the on-going disruptions in microfinance business models brought on by Fintech, which are changing the way millions of people across the world, bank their money, make payments and remittances, among others.

Dennis Omenuwa, head credit and marketing, Suisse Microfinance Bank limited, said most MFBs are keying into digital advancement, taking advantage of the Federal Government’s financial inclusion 2020 strategy.

The Federal Government’s current target is to lower financial exclusion to 20 percent of the adult population by 2020. However, projections based on current trends indicate that it could take up to 2030 before this target is achieved, according to Access to financial service in Nigeria 2016 survey by EFInA.

Seeing the opportunity in the space, some Fintech firms have also developed specific technologies to drive microfinance-banking operations.

Instafin, the flagship banking software from Oradian, a company headquartered in Croatia and operating from offices in Nigeria, Ghana and South Africa, is one of the Fintech products positioned to help Microfinance banks cross the digital divide.

Instafin enables microfinance institutions (MFIs), cooperatives and credit unions to serve the most rural clients affordably and effectively. In Nigeria, the platform is said to have supported the growth of 22 microfinance institutions which together serve 650,000 clients.

LAPO is one of the Microfinance banks that have adopted its technology to deliver microfinance services in the country.

The Central Bank of Nigeria (CBN) financial stability report for the second half of 2016 shows that total assets of microfinance banks (MFBs) decreased to N341.68 billion at end-December 2016, from N455.96 billion at end-June 2016, reflecting a decrease of 25.06 percent. The shareholders’ funds also decreased by 42.91 per cent from N135.09 billion to N77.12 billion at end of December 2016.

The decrease in share holders’ funds was largely attributed to losses by the microfinance banks, resulting from increased provisioning for non-performing loans.

Total deposit liabilities and net loans and advances also decreased by 13.05 and 20.96 per cent to N166.29 billion and N183.96 billion at end-December 2016, compared with N191.25 billion and N232.73 billion at end-June 2016, respectively.

Reserves also decreased by 24.39 percent to N16.80 billion at end-December 2016, from N22.22 billion at end-June 2016. The decrease in reserves was as a result of operational losses.

 

HOPE MOSES-SHIKE