Information and Communication Technology and Microfinance: Options for Mongolia
Recently, information and communication technologies (ICT) have emerged as a powerful tool to reduce operating costs, making it viable for financial institutions to expand into rural and low-income areas. Relevant ICT innovations include personal computers connected to the internet, mobile phones, automated teller machines (ATM) or point-of-sale (POS) devices located at a retail or postal outlet. Using these innovations may be less expensive for financial institutions than establishing branches located in rural areas and more convenient for customers. Unlike pure cash based transactions, ICT-based transactions can take place with less time or with no time required from a teller. Rather than hand over cash to a teller when making a deposit or loan repayment, a customer can give cash to a store clerk, swipe a debit card through a POS card reader, and input an identification number to authorize the transaction. The store’s account at the financial institution would be debited by an amount equivalent to the cash deposit, and the customer’s would be credited. Since the transaction is electronic, from the institution’s perspective, it is less costly to process.
It is this possibility of ICT solutions for expanding the rural finance frontier that has stimulated this paper. The main objective of the author was to review literature on the application of ICT solutions in microfinance and analyze the possible use of ICT solutions for expanding microfinance services to rural remote areas by looking at the challenges and issues in the case of Mongolia. Field work was conducted in September 2005 and focused particularly on XacBank, one of the leading microfinance institutions in Mongolia, to identify feasible and appropriate applications of ICT in rural areas. In the last section, the paper summarizes the key challenges and issues for microfinance institutions, donors and governments to consider in applying ICT for expanding the rural finance frontier.
The author concluded that the number of microfinance institutions that have gone beyond piloting ICT applications is still limited. They are primarily in countries which have economies of scale, a relatively developed financial services sector, and a more favourable communication infrastructure and regulatory environment. She also found that it will be a while until MFIs will be able to fully utilize all the potential of ICT. She thought it would be more realistic to take small steps in applying ICT in some functions of microfinance operations rather than make the full investment in complete ICT solutions. At least some of them may be able to invest in smaller-scale technology solutions that can result in concrete benefits worth the cost involved.
With regard to Mongolia, like in many other developing countries, there is a very poor connectivity in remote areas and a stable supply of power and reliable, lower cost connectivity are essential for ensuring uninterrupted transactions. Thus in order to implement any of the ICT innovations, a MFI must have addressed this issue. However, a wireless POS device using smart card does not require real-time connection. The smart card can store up to 1000 transactions offline. After that, the data has to be uploaded. This seemed to offer the best potential for Mongolia provided the potential scale of customers is large enough to ensure a critical mass for economic viability.