obel Laureate Muhammad Yunus is credited as the initiator of the concept of microfinance. According to a quartz article in October 2017, Professor Yunus advocates for a new paradigm of wealth distribution. According to him, the problem of inequality is not about wealth distribution but wealth concentration. He says that inequality is due to too much wealth being concentrated in the hands of too few people.

His solution to this problem is outlined in his book, A World of Three Zeros. The book introduces the concept of social business which is meant to unlock the entrepreneurial spirit of the masses and harness the spirit of community to mobilize capital that would be used to provide solutions to the social problems in form of enterprises. This in his vision is the heart of microfinance.

According to a report by BNP Paribas on the Microfinance Barometer 2017, there were over 123 million customers globally served by microfinance institutions (MFIs) in 2016 with a loan portfolio of $102 billion. India, Vietnam, Bangladesh, Peru and Mexico were the top five countries leading in microfinance at that time. In Kenya, it is estimated that there are over 10 million customers being served by MFIs.

The Central Bank of Kenya is tasked with developing a vibrant, efficient, stable and sound microfinance sector through the regulation and supervision of microfinance banks (MFBs). The first MFB was licensed in May 2009. To date, there are 13 licensed MFBs by CBK; eleven are nationwide and two are community-based.


The CBK identifies several operational challenges that affect microfinance banks in Kenya, among them are:

• Need for resilient and viable business models;

• Better ways of handling credit risk;

• Low visibility of microfinance banks which hinders the mobilization of deposits;

• On-demand customer response mechanisms owing to growing consumer complaints;

• Emerging financial technology (Fintech) which has created new opportunities as well as new risks that need to be understood and mitigated.

The entry of mobile lending platforms has posed a challenge for both MFBs and MFIs. Some analysts claim that these lenders could be facing an early death altogether due to this disruption just like Kodak did. The reality is that the once risky lending space that was almost a preserve of MFIs is now open to newer, nimbler players who are almost entirely without a physical address. Borrowers have not shied away from trying out these new entrants. According to reports from credit reference bureaus, 19 million Kenyans have mobile loans. By the same token, 40% of this number has loans from at least six out of ten mobile money lenders.


In the recent past, innovations in the MFI space have been on the rise. In Kenya for example, the “virtual MFI” is one such innovation. This is a platform that manages loan disbursement and repayment digitally. The m-future platform provided by Musoni was launched in 2009 – a 100% mobile microfinance institution. In 2013, MFI FINCA Tanzania introduced a mobile banking channel – FINCA Mobile – in partnership with three mobile network operators namely: Vodacom, Airtel and Tigo. By adding mobile banking, FINCA Tanzania aimed at reducing its operational costs, growing its customer base and expanding outreach.

Letshego, an MFI, introduced its agency banking model, LetsGoBlueBox, in Mozambique in 2016. This model is designed to enhance inclusive financial services in rural areas for low-income populations that are either ignored or underserved by traditional banks and other financial services providers. LetsGoBlueBox incorporates a smart phone and a tablet for agents, which can be charged by solar power.

It is evident that the customers that are targeted by traditional MFIs also enjoy digital benefits in other aspects of their lives like bill payment and airtime activation. This seamless and frictionless experience has made customers more inclined to lending and deposit taking experiences that reduce their need to mediate between internal MFI processes and therefore subject to some form of friction.

There are many opportunities that exist for MFIs to modernize their operations. However, modernization is fraught with challenges of choice. As earlier stated, the rate of change in the digital world is itself faster than ever. Not so long ago, digitization centred on what we call SMAC or Social Media, Mobility, Analytics and Cloud. To some organizations, digitization is about incorporating SMAC in their operations. However, newer frontiers of what we call BRIM or Blockchain, Robotics, Internet of Things and Machine Learning have come forth.

Looking at SMAC and BRIM in the MFI space, this is a mouthful of options for the traditional institution. In a typical case where an MFI has a rudimentary core banking system that it is trying to connect to mobile and automated teller machine (ATM) channels to provide an array of service options for the customer, the key questions would be to protect the security of the data in the core and the connectivity with internal and third party channels. Issues of applications’ integration, database security and secure network connection would be of priority to that typical MFI.

The core of lending is in the ability to assess the customers’ creditworthiness quickly and to make a decision based on that. This is one area where fintechs are leveraging on data to make decisions and quickly

advance credit. Archaic technology that is largely reliant on offline bulk data loading and assessment of credit for applicants will perpetuate friction in the lending cycle. These are areas that MFIs should consider as candidates of integration with credit reference bureaus (CRBs) and mobile network operators (MNOs) for better and quick assessment that is perhaps more interactive with the customer.

As mentioned earlier, the modern day customers are used to self-service. They can login to Jumia and shop for an item, compare prices and make a decision on their own. MFIs must therefore provide solutions that enable the customer to self themselves either on a mobile app or the internet or through virtual assistants. The group lending process can all be originated and completed on a mobile app without talking to a physical agent. This would require a robust and extensive data about product, pricing and customer in order to help in the customer journey.

Proliferation of public Wi-Fi networks that are considered “free” are a threat to the unsuspecting MFI customer. The digitization of microfinance services faces the dilemma of convenience versus privacy. Vulnerability of customers latching on insecure public networks can expose them to hackers who potentially steal vital information that is transmitted via this network. MFIs that consider digitization must find mechanisms to continually educate their customers about measures to take when accessing their accounts remotely.

Digital transformation

The onus is on MFIs to transform themselves to be future-ready. But transformation must be – not revolutionary. The pressure to modernize must not overshadow the need to remain sustainable. Building around the legacy core would be a great start through deepening strategic partnerships with both enablers such as MNOs and competitors like fintechs. As MFI matures, sharing a common set of resources to enable information sharing would help in rapidly building and deployment of additional services.

The banking industry has developed a BIAN (Banking Industry Architecture Network) reference model which has a set of standards and resources for digitization in the sector. MFIs in future should consider something similar. In an era of APIs (application programme interface) which are a set of software solutions to enable interoperability, no player is an island. An MFI customer in institution A is probably a MNO customer in institution Z etc. Customers interconnect both enablers and competitors. The players have no choice but to find ways to make these experiences frictionless.

In future for example, once the government has implemented the huduma number, how would the various players in the lending cycle make use of that number in serving a potential borrower? Perhaps building a private blockchain network that manages the lifecycle of the borrower using that as a unique number would create better visibility of borrowers uniquely and help answer questions of spend, default and repayment better, using a context that is bigger than just a single core banking system.

The possibilities are limitless but what is critical is to have a digital transformation strategy that creates and anticipates this journey. There are five Cs that need to be considered in the strategy, namely:

• Customer – The focal point of why MFIs must transform;

• Context – The backdrop of transformation which includes players, regulation, market, pricing, risks, etc;

• Culture – The impact of transformation on how MFIs make decisions, interactions between them and their customers for better results;

• Cogs – The systems and technology infrastructure that must be replaced, introduced, or upgraded to achieve this transformation;

• Course – The approaches and methods required to achieve transformation in an evolutionary rather than revolutionary manner and how to measure incremental benefits.

In conclusion, it is worth nothing that the journey of digital transformation can be painful or pleasurable. It is the desire of every organization to minimize or eliminate pain while maximizing pleasure. In some quarters, it has been noted that 70% of digital transformation initiatives end up in failure. These initiatives don’t come cheap. The implications of failure have far reaching consequences on the respective organization. Yet none of the organizations that experience failure start out hell-bent on doing so. There has never been a kick off meeting with a milestone date that says, on such and such a date, we expect to have sunk so much dollars and nothing to show for it. Failure is subtle in most cases and it is a combination of all or some of the 5Cs cited above. Having a solid plan, a great and dynamic team and the right budget is therefore vital.

I finish by referring to the motivation of Yunus. If we are to achieve wealth distribution effectively and efficiently, there is need to minimize the frictions that exist within the microfinance enterprise. Some of these frictions can be eliminated through the right technologies and processes.



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