When microfinance goes digital: opportunities, challenges and dangers for microfinance institutions and their clients

Amie Baldeh and Beatriz Tena de la Peña

This Research Paper was written for the International Master in Microfinance for Entrepreneurship at the Universidad Autónoma de Madrid, under the direction of Claudio González-Vega (Ph.D.). The research has attempted to answer the question: until what point and in what ways can microfinance institutions (MFIs) go digital, without losing the personal relationships which they have built with their clients?

The increasing use of digital tools has had an impact across all sectors of the economy. The financial sector has also seen itself driven into this new digital era, and microfinance is not an exception. As digital tools are introduced by MFIs, as new information-gathering and communication channels in order to interact with their clients and to deliver their services, the face-to-face long-term relationships between the clients and the MFI, which have been the main innovation in microfinance, may be affected. The key question is whether the new information and communications technologies and tools can serve as a substitute for these face-to-face human interactions or whether they should be adopted as a complement.

The research paper analyzes the importance of trust in microfinance, and how this trust has helped reduce barriers to financial transactions. Trust has assisted in reducing information asymmetries and in creating compatible incentives, which have helped MFIs to succeed in the provision of financial services, especially credit, to the low-income sectors of the population. It also analyzes the importance of information in efficient credit decisions and the delivery of other services. In microfinance, information has been collected and trust has been built through human contact. This research effort contributes to an analysis of how the new digital tools may interfere in the personal relationships MFIs have built with their clients and it evaluates if these tools may help or hinder in the development of trust.

Thanks to several interviews conducted with experts in microfinance and with experts who are closely working with information and communication technologies in the financial sector, the paper aims to assess the opportunities, challenges and threats for MFIs and their clients in this digitalization process.