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Digitalisation of microfinance: Barriers to digital adoption

Digitalisation of microfinance: Barriers to digital adoption

By Samuel Koranteng, ADJEI

Microfinance is a distinct type of lending that has been practised for a considerable period of time. As defined by the Central Bank of Nigeria (CBN) in its 2005 policy document launched to mark the United Nations International Year of Microcredit, microfinance is basically providing financial services to the poor, who are traditionally not served by conventional financial institutions. Nevertheless, similar to the industry itself, the definition has undergone changes over time. According to the Revised Microfinance Policy, Regulatory, and Supervisory Framework for Nigeria (2011), microfinance banking refers to the offering of various financial services, including savings, loans, payment services, money transfers, and insurance, to individuals, households, and their small businesses who are poor or have low incomes.

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Microfinance banks are typically differentiated from traditional deposit money banks based on their range of products and straightforward operational processes. The latter characteristic has undergone changes in the past few years. Microfinance banks, particularly commercial ones, have had to implement digitalisation in order to remain operational and adhere to regulatory mandates. In order to engage in seamless inter-bank transactions through the Nigerian Inter-Bank Settlement System (NIBSS) platform, every microfinance bank must establish a direct integration with a proprietary Core Banking Application (CBA) or an indirect integration through a third-party solution provider. Integration is necessary for all electronic banking channels, including the issuance of debit cards and the deployment of mobile apps. Undoubtedly, the process of digitization brings an additional level of complexity and potential risks to microfinance banking. Nevertheless, this trade-off is the means by which microfinance institutions can connect with and take advantage of the digital financial services ecosystem in Nigeria.

Digitalisation of microfinance

Microfinance has made progress in incorporating digital enablers, such as computers and internet connectivity, into its operations. As a result, it is well-suited for digitalisation, which involves using digital technology to transform a business model and provide new avenues for generating revenue and value. The process of digitising microfinance is continuous and may involve several corporate operations. While some businesses may partially digitise their processes, others may fully digitalize their operations in a comprehensive and integrated manner, utilising more modern technology such as enterprise resource planning (ERP) or customer relationship management (CRM) software systems. The digitization of microfinance operations enhances the efficiency of delivering products and services, as well as expanding the reach of the business. Furthermore, the process of digitising microfinance allows it to actively engage in the digital financial ecosystem by offering digital financial services.

Digital financial services

Cruz (2024) states in Digital Opportunities in Africa, a research series by the World Bank, that the increasing number of mobile cellular subscriptions in Sub-Saharan Africa has facilitated the reduction of digital disparities in countries and the flourishing of digital financial services. These services encompass various financial transactions conducted electronically, such as money transfers, savings, loan disbursements and repayments, insurance, and more. Financial services provided through digital platforms create ecosystems, which play crucial roles in supporting and stimulating economic activities. They also serve as a means to achieve financial inclusion, which involves providing inexpensive financial services to enable the economically marginalised to participate in the formal economy in a sustainable manner. The system supports the stability and integrity of the established financial system. The key elements of a digital financial services system consist of the digital financial service providers, the users of these services, the infrastructure (also known as digital enablers) that facilitates the provision of these services, and the regulations that ensure their accessibility, affordability, and safety. It is the goal of digital financial services to make the benefits of financial equality real. On the other hand, financial equality (inclusion) helps achieve the SDGs of ending extreme poverty, increasing employment opportunities, boosting agricultural output and food security, and empowering women economically. Microfinance banking has traditionally revolved around these admirable goals.

Barriers to the digitalisation of microfinance

The economic value of digitalized microfinance cannot be overstated. Digitalisation brings speed and transparency to the financial transactions of its users, including those with higher incomes. Electronic transactions have a shorter processing time compared to cash transactions since they are easier to verify, trace, and preserve digital records of. Service users can securely store and manage their monetary worth using the digital platforms. Furthermore, digital financial services decrease the expenses associated with transactions and expand the reach of remittance transfers, enabling the viability of sending modest sums of money. In addition, remitters can use digital financial systems to send money straight to savings, healthcare, or school fees, which guarantees that the money is going where it should.

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Several constraints hinder the digitization of microfinance, such as unpredictable electricity, expensive technology, inadequate human capital, limited access to finance, and excessive regulatory measures. Energy, in its several manifestations, continues to be the fundamental support for economic activities at the global, regional, and national levels. In the absence of a consistent and reliable supply of electricity, businesses are forced to depend on expensive alternatives. The lack of reliable electricity hinders the transition from manual to digital operations, particularly for microfinance businesses operating in remote areas with geopolitical challenges, as digital tools require energy to function.

Moreover, the costs associated with the technology (including equipment and software) necessary to operate a digital microfinance platform are exorbitant. Cruz (2024) observes that the prices of digital equipment and software are higher in Africa compared to other regions, which discourages enterprises from adopting them. An effective core banking application is typically expensive, particularly in the absence of competition in the market. The inclusion of ancillary services and integrations necessitated by Application Programming Interfaces (APIs) from third-party sources contributes significantly to the overall expense of technology. The combination of these factors, along with the expenses associated with creating and implementing mobile or web applications, renders digitalisation impractical.

Furthermore, inadequate levels of human capital and business capabilities serve as an additional obstacle to the process of digitisation. Microfinance enterprises face challenges in attracting the skilled personnel required for efficient functioning and expansion. Given that the most valuable resource of a firm is its workforce (human capital), anything less than the best would result in reduced economic capacity. In the industry, it is seen that employees frequently switch from one institution to another in order to have the chance to make extra money, a trend that is worsened by the harsh economic conditions of today. As a result, the high attrition rate hinders the progress of digital solutions and their implementation because firms struggle to retain their skilled employees, particularly those in information technology.

Microfinance banks, like other businesses, encounter difficulties in obtaining financial resources. According to Section 6.1 of the Guidelines for the Regulation and Supervision of Microfinance Banks (January 2020), microfinance banks are only allowed to obtain funds from specific sources. These sources include shareholder funds (paid-up capital), deposits, debentures/qualifying medium-term loans, grants and donations, foreign borrowing, intervention funds from CBN and others, fees and commissions, as well as interest and investment income. Section 1.14 of the Prudential Guidelines of Microfinance Banks in Nigeria is significant as it enforces a limit of 20 percent of shareholders’ funds that are not affected by losses on the acquisition of fixed assets. This constraint impedes the ability to invest in digitalisation and innovations, particularly unit microfinance banks (Tier 1 and 2).

Ultimately, the current attempt to impose a 0.5 percent levy on digital financial transactions, in addition to the existing Electronic Money Transfer Levy (EMTL), is seen as excessive regulation that goes against the trend of digitalization. Low-income individuals, who are being introduced to the formal economy through digital financial services, may choose not to participate in the digital financial ecosystem because of the high costs involved. In the absence of users in the market, a product is destined to fail, as is the entire production process, particularly in the context of digitalisation.

Microfinance has developed to play a substantial role in the economic development of the nation. Its reach is virtually limitless as a result of its involvement in the digital financial services ecosystem and the digitization of financial services. Nevertheless, digitalisation may be a distant fantasy due to unreliable electricity supply, high tech costs, financial constraints, human resource constraints, and regulatory excesses.


Samuel Koranteng, ADJEI is a certified microfinance practitioner.