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Digital money: The promise of access to finance and the risk of over-indebtedness From service to a profitable industry

Access to finance is considered as one of the main elements in empowering entrepreneurs and pulling the poor out of poverty. However, banks and formal financial institutions do not venture into this business due to the inherent risks associated with lending to the poor. Those without access to formal financial institutions have to deal with informal moneylenders and their usually high rates.

Mimicking the moneylenders, nongovernment organizations (NGO) provided financial services to the poor people who were not served by formal financial institutions. What started as development programs later on proved to be a sustainable and very profitable endeavor. From these NGOs rose the microfinance industry that currently dominates the ‘informal sector’ or those that are considered ‘unbankable’. Microfinance institutions are considered ‘hybrid’ institutions because they observe a double bottomline. While the banks’ bottomline is only net profit, microfinance institutions have two – financial sustainability and social mission of helping the poor. From a development program perspective it has transformed into a more encompassing ‘financial inclusion’ making access to financial services available to all. With a large portion of the population considered unbanked, microfinance institutions are expected to serve more. Expanding outreach and to have more impact on the lives of the poor became their mission and it also became the indicators for socially-oriented financial service providers. Microfinance services proved to be a profitable enterprise to the point where it attracted private capital. In the 90’s microfinance operations became commercialized as private investment replaced most of the funds from development and donor agencies. Microfinance in Myanmar was formalized with the passage of the Microfinance Law in 2011. It has bypassed the period where microfinance was a social service in the late 80’s to the commercialization of the industry in the 90’s. The law passed has the elements of a private-led microfinance services. The industry also benefits from favorable policies like allowing 100% foreign ownership of microfinance  institutions. After seven years of the law, there are now 168 licensed microfinance institutions, 1.45 million clients and total loan portfolio of more than $200 million (as of July 2017). Of these figures, only 29% of women have access to formal financial services. On the part of the banks, of the people between 18-34 years old, only 7% have bank accounts.

The emerging digital finance

The low penetration rate of clients particularly those in the rural areas is a concern for financial institutions. It is not because of not having reached more poor, but because there is still a huge market segment that has not been served, which means foregone profits. The current brick-and-mortar infrastructure of financial institutions is unable to reach to the nooks and crannies of the communities where most people live. While most communities are relatively near, connectivity is a problem. The sorry state of infrastructure particularly roads and bridges has limited the capacity of the field staff to reach these places.

Alternative measures were thought of, and cellphone connectivity was considered as the answer to the challenge. Myanmar has 95% mobile phone penetration rate. Leapfrogging from analog to digital connectivity and the affordability of individual cell phones allowed people to own a phone and be connected to the internet.

Several financial technology (fintech) providers are already operating offering a variety of financial services like money transfer and payment services. Among the most prominent are Wave Money, OK$, True Money, EasyPay, MyKyat and others. The biggest among these service providers are owned by banks.

Fintech and digital money is considered as an answer to the low penetration rate of microfinance institutions. Savings, loans and repayments can be done through fintech. Borrowers can get digital money which they can exchange for hard cash and or they can use it directly to business establishments that are also wired to accept and use digital money.

The financial services can now possibly be provided through an application where physical intervention of a microfinance Loan Officer is not necessary. Credit investigation and monitoring which cost much will be minimized as transactions will be through the phones of the borrowers.

Lessons from the first movers

Providing financial services through digital money is not a new phenomenon. The first movers were microfinance institutions in Africa, where members extensively used them mostly due to the weak banking system. In an article published by the Consultative Group to Assist the Poor (CGAP) (http:// www.cgap.org/blog/its-time-slowdigital-credits-growth-east-africa), the following observations were made:

  • Digital loans are small — in Tanzania, an average of just $15; n Even so, almost 50% of digital borrowers in Kenya and 56% in Tanzania report that they have repaid a loan late, and 12% in Kenya and 31% in Tanzania say they have defaulted;
  • Most digital loans are used to cover consumption, including ordinary household needs, airtime, and personal or household goods. Only about 33% of borrowers report using digital credit for business purposes, and less than 10% use it for emergencies;
  •  Wage employees are among the most likely to use digital credit to meet day-to-day household needs, which could indicate a payday-loan type of function; n 20% of digital borrowers in Kenya and 9% in Tanzania report that they have reduced food purchases to repay a loan;
  •  20% of digital borrowers in Kenya and 9% in Tanzania report that they have reduced food purchases to repay a loan;
  • 20-27% of digital borrowers say they did not fully understand the costs and fees associated with their loans, incurred unexpected fees or had a lender unexpectedly withdraw money from their accounts.

The report reflected the reality that there are segments of the borrowing population caught by the ‘debt trap’ rather than liberated from the quagmire of poverty. This is the very problem that microfinance institutions hoped to address, but have created instead.

Throwing caution out of the window

For Myanmar, the lessons of East Africa are early warnings not only for the borrowers but also for the government. Easy access and unbridled credit are temptations too hard to resist. It does not help develop financial discipline for the borrower. Credit through digital money takes away the human touch. The poor does not need only money to improve his lot. Mindset has to be changed and changing of habit has to be monitored and sustained. This explains the need for financial literacy training and for group activities to be done, much like a support group to motivate the peers to follow on. With digital money, these things will be gone.

The concern is the tendency of financial institution to focus on the outreach, the large number of borrowers and the profit that goes with it. The check on the impact will be gone, or if it will remain, it will be done as a token rather than an imperative in improving the lives of the borrowers. We hope we do not end up much like the credit card business where clients are pushed to purchase more through credit.