Conclusions

While microfinance has been embraced as an effective poverty reduction strategy, many poor people in rural areas have still been left behind with limited access to financial services. The main problems include poor infrastructure, low density, remoteness and dependency on agriculture, all of which increase transaction costs and make them less profitable. The rapidity with which advancements of information and communication technology are taking place presents many unique opportunities in expanding access to financial services in rural areas.

In terms of recent experience in Mongolia both stable supply of power and reliable, lower cost connectivity are essential for ensuring uninterrupted transactions. In Mongolia, like many other developing countries, there is a very poor connectivity in remote areas, though it is improving in more urban areas. In order to implement any of the ICT innovations, a MFI must have addressed this issue. However, in the case of our suggested ICT solution, 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.

Even if the infrastructure is ready, the obvious question would be whether the potential scale of customers is large enough to ensure a critical mass for the economic viability of providing ebanking. XacBank needs to find ways to build up volume using the POS device in its franchise. One solution is perhaps building in additional services, such as allowing members of SCC to use their cards for purchasing goods and selling their produce through the POS device placed at the SCC. Also, allowing non-members to conduct transactions using the POS device will help increasing economies of scale. Partnering with other financial institutions and merchants in the local soum would also be desirable.

The success of implementing the suggested ICT solution is dependent on the institution’s ability to develop and institute a marketing plan which will attract sufficient numbers of users to justify the new system. There must be a clear understanding of who are the potential users. In the case of the proposed solution, the direct customers will be small scale herders and microenterpreneurs who live in and around soum centers in the rural areas of Mongolia. Other users will be merchants, partners and other financial institutions.

More generally, while ICT offers considerable potential in delivering financial services in rural areas, the number of microfinance institutions that have actually implemented ICT solutions is still very limited. This raises the question why MFIs are not taking up ICT applications as rapidly as expected? Our analysis suggests a few basic lessons for MFIs, donors and governments:

• ITC is worth the investment only or for A critical mass. Initiatives have emerged and are more or less successful in countries with dense population (India, the Philippines). Countries with lower density may need to look for other options, or seek partnerships both within the country and within the region.
• Regulation matters. In order to make full use of ATMs and POS devices, an institution must have a license to accept deposits. For savings, if a merchant is not allowed to accept deposits, then the merchant can not act as the intermediary for placing POS of MFIs.
• Careful cost benefit analysis is necessary. To assess whether or not investment in ICT will be worth the investment, it is important to analyze costs and benefits and compare with other alternative strategies.
• Financial education will make a big difference. Initially, customers have a psychological barrier in using a new technology. Even merchants have a fear and try to avoid serving people with a payment card. If the printer gets jammed and does not produce the receipts, they do not know how to fix it. Education and training is critical to make it easier for customers and merchants learn how to use new technologies in financial services. It is important to remove the fear that it is complicated. Promotional campaigns should demonstrate that it is simple to operate the POS terminals.
• Technology cannot be a complete substitute for a delivery mechanism. It can work as a supplement to delivery mechanisms by reducing cost, fraud and improving staff productivity. Customers, especially at the lower end market, still prefer human interaction. Also, there are some functions such as a loan appraisal and approval that still need to be conducted by staff.
• Appropriate ICT solutions are context-specific. ICT applications that have been successful in other countries do not necessarily work in any country. The importance of the enabling environment cannot be underestimated.
• Increase the network of points for using the card: If all traders and service providers introduce a card system, all customers will buy the card. It is because not all merchants and retailers accept cards, there is less incentive for customers to use card as a means of payment.
• ICT is no panacea: There are many services poor people in rural areas need in order to move out of poverty. ICT solutions cannot address all the challenges that contribute to rural poverty. For example, poor farmers and herders lack collateral and suffer from a systematic risk due to their dependency on agriculture and seasonal income generating activities. These are not fully addressed by the use of ICT. Other supplementary measures are necessary to comprehensively address rural poverty.

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Comment(s)

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1. Pratyush Agarwal
   (posted 12 June 2009 / 03:20:06 PM)
   
   A very good paper! It recognizes and abridges the technological usage for the bank. But, It has not dealt on the possibilities of using land-line phones, a prevalent technology in rural areas.