Introduction

The Millennium Development Goals call for reducing the proportion of people living on less than $1 a day to half the 1990 level by 2015 i.e. from 28.3 percent of all people in low and middle income economies to 14.2 percent (World Bank, 2003). Yet, there are still an estimated 1,000 million people living on less than $1 a day. One way of making progress in achieving the poverty reduction goal is by providing financial services to the poor. As Jonathon Morduch, the Chair of United Nations Expert Group on Poverty Statistics, stated, “Microfinance stands as one of the most promising and cost-effective tools in the fight against global poverty” (Daley-Harris, 2005). Furthermore, in their article, “Is Microfinance an Effective Strategy to Reach the Millennium Development Goals?” Littlefield, Murdoch & Hashemi (2003) conclude that microfinance services reduce poverty and its effects in multiple ways. Access to financial services forms a fundamental basis on which many of the other essential interventions depend. Moreover, improvements in health care, nutritional advice and education can be sustained only when households have increased earnings and greater control over financial resources (Littlefield, Murdoch & Hashemi, 2003). As of December 31, 2004, 3,164 microcredit institutions have reported reaching 92,270,289 clients, 66,614,871 of whom were among the poorest when they took their first loan (Daley-Harris, 2005). Assuming five persons per family, the 66.6 million poorest clients reached by the end of 2004 affected some 333 million family members.

Despite this success, about half a billion poor households remain without access (Ivatury, 2005). The gap is even larger in rural areas. One of the main factors that prevent microfinance institutions (MFIs) from going to rural areas is the large geographical spread, low population density and small volume of transactions, which makes it more costly to operate there. MFIs face a challenge to explore creative approaches to cut down cost while serving poor people, especially in remote rural areas. Because it is too costly to set up a physical branch, traditional bank branches, alone, do not seem to be the answer for reaching small rural depositors and borrowers (Hirschland, 2003). Alternative delivery systems need to be examined for their merits.

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. ICT innovations such as a personal computer connected to the internet, a mobile phone, an automated teller machine (ATM) or a point-of-sale (POS) device located at a retail or postal outlet, may be less expensive to establish than branches located in rural areas and more convenient for customers (Ivatury, 2005). 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 is 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.

The data is drawn from an extensive literature review of both electronic and printed material. In addition, primary data was collected during a two-week fieldwork in Mongolia in September 2005. The main data collection method was an in-depth individual interview with key stakeholders, such as in the major financial institutions, internet service providers, private sector entities that supply ICT hardware, the government agency in charge of communication infrastructure, the Bank of Mongolia, and customers. In all cases, a snowball sampling technique was used.¹ In total, 25 individuals were interviewed (see Appendix 1 for the list of interviewees). The paper focuses on the case of XacBank, one of the leading microfinance institutions in Mongolia, for demonstrating feasible and appropriate applications of ICT in rural finance. 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 literature indicates that ICT innovations have an exciting promise to improve the efficiency of microfinance operations and expand outreach by lowering transaction costs and bringing services closer to clients. However, many of the cases that used as examples of ICT application are either still in the pilot phase or are not really financial institutions whose main mission is to serve the poor and reduce poverty. The latter refers to cases of ICT application in mainstream financial institutions, which may not be necessarily serving the poor. 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 favorable communication infrastructure and regulatory environment. It is also found that it will be a while until MFIs will be able to fully utilize all the potential of ICT. It may be more realistic to take small steps in applying ICT in some functions of microfinance operations. For example, MFIs in many developing countries are not ready to make the full investment in complete ICT solutions. Rather, 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. This suggests the importance of detailed cost benefit analysis. There is no such analysis available to date. In the absence of a more rigorous cost benefit analysis, an examination of feasible ICT solutions based on a given context and institutional factors may be a good starting point. This paper presents an analysis of four possible ICT solutions in the case of Xacbank in Mongolia.

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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.