Iryna Shmanenko

The post-pandemic world has poised the microfinance industry for change. On one hand, due to the high demand for funds from small and medium enterprises (SMEs) and households, microfinance institutions (MFIs) have experienced growth in customer numbers. On the other hand, some forecasts say that the industry will suffer from loan portfolio deterioration in the following years due to the end of the tax vacation.

Let’s dive deeper into the situation to see how MFIs can improve their situation by using innovative solutions and avoiding forecast hurdles.

Is the future for MFIs a shiny prize or a line in a drop-out list?

According to the global microfinance market forecast published by in February 2022, the trajectory of development is going up. The research predicts the market will hit $304.3 billion in size by 2026 in comparison with $156.7 billion in 2020. The annual growth rate (CAGR) is expected to be at 11.9%. 

S&P Global research says that the microfinance market is going to face the growth of non-performing assets (NPAs). Due to the end of the loan repayment moratorium, the NPA rate is going to reach 10-11% in 2022, rising from an 8% rate in 2020. 

Bearing in mind those two opposing research results, we can see that microfinance institutions are stuck between a hammer and an anvil. 

What challenges will MFIs face while growing and reaching new customers? How can microfinance software ensure growth and minimize the NPAs rates?

Microfinance institutions and ongoing challenges

With the opposing forecasts in mind, microfinance institutions have to balance between the two extremes. The growing demand for funds from MFIs is not all rosy, causing certain challenges microfinance lenders should be cautious about. 

Increased customer demand

Due to emergency support packages, customers expect a minimum or very low-interest rate. Despite the inflation, those expectations remain. In addition, customers are seeking fast and convenient ways of getting loans. 

High cost of customer outreach

Among MFIs potential customers, there are lots of people who have no access to loans from banks. There are plenty of reasons for that, from lack of previous credit history to living in rural areas. The traditional approach of building new branches or offices is a costly way to reach new customers in this case.

Non-performing loan growth

With the tax vacation coming to an end, small and medium enterprises (SMEs) will have to start paying taxes again. This will immediately affect their cost-efficiency and ability to repay loans.

Poor quality of customer data

Without proper KYC procedures and customer data collection and processing, MFIs are in the risk zone of NPAs rate growth. To stay afloat, microfinance organizations need to get sound and timely data about their current and potential customers to avoid loan portfolio deterioration.

Ineffective collection procedures

With the tremendous growth of the demand for MFIs services, it’s nearly impossible to monitor customer financial health manually. Constant monitoring of clients’ capability to repay loans becomes a tough challenge without automation and digitalization.

Microfinance software is the compass to outmaneuver the hurdles

COVID-19 has greatly impacted the software development market, pushing many industries to digitize their services. The microfinance industry must follow suit. Let’s see how microfinance software can help MFIs turn forecasting hurdles into new opportunities.

Meeting customer demands

End-to-end digitalization of the lending process can significantly decrease operational costs. This can allow MFIs to offer their customers low-interest loans while providing seamless transactions, convenient funding without delays, and the elimination of filling in lots of documents.

Customer outreach cost reduction

In the world, four of five people are using mobile devices in their everyday life. By providing services through mobile apps and self-service platforms, MFIs can significantly improve their customer outreach. Mobile banking provides microfinance institutions with a perfect opportunity to engage new clients without the need to use physical offices or field employees.

Automating NPAs monitoring

By using automated early warning systems (EWS), MFIs can analyze their financial state and monitor the financial health of their customers online. This constant analysis helps companies react quickly to any changes in a client’s default probability. By using advanced EWS, MFIs can improve their cross-sell as well as up-sell. 

Accurate data collection

Microfinance software backed by Artificial Intelligence and Machine Learning algorithms can significantly improve the quality of customer data. By collecting, merging, and analyzing data from various sources, MFIs are able to assess customers applying for a loan accurately and effectively. The processes of collection and analysis are quick and seamless. 

Effective collection procedures

By using microfinance software solutions, MFIs can automate the process of debt collection. The automation of customer notification systems and payment reminders significantly streamlines the work of collection officers. Digitalization of collection allows MFIs to stay in touch with defaulted customers to reschedule their payments or restructure current loans.

AI and its potential for growth in the financial industry

It is clear that the digitalization of microfinance creates ample opportunities and advantages for both the supply and demand sides of the market. Digital tools are of great importance for financial inclusion and managing risks while dealing with current clients. 

The pressing need to promote microfinance software for providing financial services becomes the key to tackling ongoing hurdles and ensuring further sustainability and growth of MFIs.