Friday, March 29, 2024 | Ramadan 18, 1445 H
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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

New trends in micro-credit and financial inclusion

Stefano Virgilli
Stefano Virgilli
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The unfortunate scenario in current fintech trends, is that financial inclusion solutions are developed in air-conditioned tech-incubators located far away from where poverty is rooted, often on large monitors that tech developers can afford, but will never represent what the target audience would see as a user experience. Hence the solutions are tailored with “first world” mindset for emerging countries that have already proven to be able to leapfrog on technology.


In Uganda, a country with one of the lowest amounts of bank accounts pro-capita, the number of mobile money transfers tops some of the Asian countries. This is the new normality in technology evolution.


Over the last two centuries, free markets and globalisation have had a positive effect on aggregate economic growth, contributing to better living conditions and the reduction of extreme poverty across the world. Yet this is far from the only important socioeconomic change and moreover, the last two centuries have not been all about ‘free-market capitalism’.


Based on current projections, the world will not end poverty by 2030. Poverty will likely be lower by about 200 million people, but 438 million people, or 5 per cent of the world’s population, will still live in extreme poverty. This is because there is a high likelihood that the pace of poverty reduction will slow down markedly in the coming years.


Financial inclusion is on the rise globally, accelerated by mobile phones and the Internet, but gains have been uneven across countries. A new World Bank report on the use of financial services also finds that men remain more likely than women to have an account.


Globally, 69 per cent of adults  — 3.8 billion people  —  now have an account at a bank or mobile money provider, a crucial step in escaping poverty. This is up from 62 per cent in 2014 and just 51 per cent in 2011. From 2014 to 2017, 515 million adults obtained an account, and 1.2 billion have done so since 2011, according to the Global Findex database.


To ensure that people benefit from digital financial services requires a well-developed payments system, good physical infrastructure, appropriate regulations, and vigorous consumer protection safeguards.


And whether digital or analog, financial services need to be tailored to the needs of disadvantaged groups such as women, less fortunate people, and first-time users of financial services, who may have low literacy and numeracy skills.


Financial inclusion allows people to save for family needs, borrow to support a business, or build a cushion against an emergency. Having access to financial services is a critical step towards reducing both poverty and inequality.


The microfinance movement is vital to the development agenda. The success of the movement in a country like Bangladesh, where there are a staggering 20 million micro-borrowers, has shown that microfinance can lift millions out of abject poverty.


In the context of financial inclusion, fintech holds boundless potential. Fintech players, who use software and digital platforms to deliver financial services to consumers, are helping in making financial products and services more attainable than ever.


Microcredit is an effective catalyst in alleviating poverty. People need access to capital to grow their informal and formal businesses that offer them a regular income and enable them to lead decent lives.


While most tech companies are focusing on how to improve credit score assessment and figuring out new ways to give access to credit to unbanked and underbanked, the main struggle remains is providing ways to pay back loans.


At the end of a loan duration terms, there are only two possible scenarios. Either the borrower pays back, or he/she does not pay back. In the former, everyone is happy. In the latter, only two options are applicable: either to extend or not extend the loan terms. When the loan duration cannot be extended, the application ends within the usual credit recovery procedures. But when the terms can be extended, here is when possibilities begin.


A borrower who defaults a loan, defaults “today”, not 30 years down the road. Given enough time (assuming good will) everyone is able to repay any loan.


New startups are now focusing on micro rewarding borrowers by providing them with tasks to complete on behalf of large MNC. For instance answering surveys, watching ads and auditing billboards, can generate a valuable data monetisation that the borrower can then use to pay back their debt.


The future of financial inclusion will be more about empowering borrowers with ways to pay back the loan, rather than merely providing access to credit.


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