Unlocking the power of digital transformation

Our everyday relationship with financial services – their scope, their function, and how we use them – is constantly shifting in profound ways. These changes have been brewing, and as the world continues to mount an unparalleled response to an unprecedented crisis, they are accelerating at warp speed with no signs of slowing down. These transformations are driving financial inclusion forward.

In Bangladesh, the rural economy has powered the move toward greater prosperity. A sound and consistent policy framework – backed by substantial investments in technology, rural infrastructure, and human capital – has led to widespread gains across major socioeconomic indicators. Micro-finance institutions (MFIs), a key segment of the rural financial market, play a vital role in this story.

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The services and resources that micro-finance institutions channel to rural areas provide jobs for members of our low-income population, bridging the income gap, raising domestic consumption, and advancing inclusion

The services and resources that MFIs channel to rural areas provide jobs for members of our low-income population, bridging the income gap, raising domestic consumption, and advancing inclusion. MFIs are instrumental in supporting rural agriculture, which proved its mettle and helped support the country during a global pandemic.

With new employment generation increasing in non-farm sectors, and with villages becoming more connected to cities, the need for financing and its potential upside will continue to rise rapidly. Low access to formal credit among rural households and micro-enterprises means that MFIs will be the main conduits of this financing.

Case studies have shown that microfinance can boost income.

According to a study conducted in Bangladesh, households that diversified beyond farming via microfinance saw their income grow by almost 29 per cent when compared to those whose income remained exclusively dependent on farming. Better access to credit was key in enabling this income diversification.

Microfinance is also driving micro-entrepreneurs in urban areas. Take the story of Minara Parvin.

Minara grew frustrated at seeing her husband Nazrul Islam work six days a week in a factory for little reward. She approached the Adamjinagar branch of an NGO that we work with. With their help, Minara and Nazrul set up Tapoe Lone Enterprise to produce lace.

The business grew quickly and now employs 75 people. Tapoe Lone Enterprise has made it possible for the couple to house and educate their children, empowering them to lead better lives.

The microfinance sector in Bangladesh has seen significant growth in recent decades, but it is time for MFIs to address the key challenge of scalability, expanding social lending activities with lower incremental costs.

Historically, micro-finance operations have been human-intensive, making them inefficient. Operations ranging from disbursements to repayment collections remain dependent on physical cash. Client information continues to be captured through paper-based forms; monitoring, assessment, and training continue to be conducted through physical visits and meetings.

The solution to this? Digital transformation.

Driven by the government's objective to build an inclusive digital financial ecosystem and the emergence of numerous interesting pilot projects, it has become essential for the micro-finance sector to adopt increased and disruptive digitalisation.

The current state of digitalisation in Bangladesh's micro-finance sector remains nascent. Most MFIs have migrated to a real-time loan management system and centralised database (which provides a foundation for future automation).

Generally, MFIs have financial accounting software integrated with their loan management systems. A few leading MFIs rolled out pilot projects for cashless loan disbursements and collection repayments via mobile wallets during the pandemic. Given the success of and need for MFIs, the adoption of more advanced technologies may not be too far off.

Digital interfaces offer solutions, slash costs, and increase efficiency, and remove human contact from the equation. What the MFIs have, and what technology cannot replicate is their connection with customers.

Technology can enable automation, productivity, and standardisation in lending and administrative operations, but the nuanced and contextual insights that come from face-to-face interaction are crucial, especially for group-based lending.

Blockchain, cloud infrastructure, big data, and the likes are only as valuable as the value they bring to beneficiaries. MFIs need to balance digital and human aspects.

In today's world, the convergence of technology and data creates unique circumstances. New sources of data can boost access to finance and benefit previously unbanked populations. Usage and recharge data for mobile phones or even mobile wallets can be leveraged to create credit scores. As a result, personal data protection, data governance, and cybersecurity will become increasingly relevant and necessary.

Developments in the fintech (financial technology) sphere and current regulatory frameworks have created the perfect atmosphere for the introduction of a new generation of financial firms. Nimble and customer-centric, these firms will operate in spaces occupied by large financial institutions, in addition to spaces that aim to reach the unbanked and under-banked and they will do so profitably.

In a country that has proven to be a hotbed for inclusive financial innovation, these firms will join the fight against poverty. Each sector of the financial services industry will be impacted by these firms in the not-too-distant future. To keep up, MFIs will need to address these forces of disruption by becoming disruptive themselves.

The task ahead is to foster an ecosystem that fully captures the opportunities being unleashed across industries. The Microcredit Regulatory Authority (MRA) is responsible for promoting the sustainable development of MFIs. With a conducive regulatory system, digital financial inclusion ecosystems can thrive.

The potential of digital financial inclusion in enhancing economic growth, narrowing income inequalities, and reducing poverty is immense. By building a collaborative ecosystem and fostering innovation, we can lead transformation across this vital sector and drive sustainable and inclusive development.

Ultimately, in order to enable successful digital transformation, innovation and technology will need to blend with the core values, human capital, systems, and processes that define MFIs and the important work that they do.

The author is head of client coverage, corporate, commercial and institutional banking at Standard Chartered Bangladesh