The Microlending Company of the Future
Our blog has dealt with the birth and humble beginnings of microlending. Now, it’s time to take a look at the future of microlending and contemplate the ways it can grow and adapt to the growing needs of the market.
To Move Forward, You Firstly Need to Look Back
Microlending is a relationship between people and not merely the name of a process. The digitalisation of microlending might have made the whole experience more mechanic but it is important to understand its roots. Microlending was built on human relationships of trust and reliability. The person that needed the money would enter into a personal relationship with the microfinance officer before arriving at a deal.
With loan applications being stripped down to online questionnaires, that human bond seems to be eroding. The future of microlending companies might be closely related to the digital world but it’s essential for companies to not forget about this bond. Digitalisation is nothing but a tool to make the process simpler and more efficient for the customer. What companies of the future need to always remember, is that customers value trust and personal relationships more than a state of the art website and a seamless application process. No matter how much the industry evolves, trust and communication will forever be at its core.
Building a Healthy Microlending Ecosystem
Microlending started as a financial lubricant for people in underdeveloped countries. The initial impact was great as people were now able to finance their dreams and ambitions through a system designed to assist them. Evolution of the concept though revealed some cracks in both its design and application.
Not everyone is born to be an entrepreneur and handling the burden of a loan (no matter the size), is not an easy task. What time has shown is the need for microlending to adapt and diversify its offerings to people. The simple notion of giving money to the people that need it might just be too simplistic. The microlending company of the future should be able to offer financial support through different instruments, targeting different groups.
Not everyone has the same tolerance to risk and not everyone has the knowledge for handling their financials. Education should come as an inseparable part of the deal. Not only will it help people understand the technical aspects of microlending, but it will also build a relationship between loan issuer and customer. Financial support goes hand in hand with financial literacy and what binds these two together is education.
Apart from product diversity and education, what seems to be the last element for a healthy microlending ecosystem is the ability of microlending companies to add value. Profit is the ultimate goal for any company in any vertical in the world. Due to the unique nature of microlending, value to the community is a prominent factor. Financial inclusion and social change don’t always go together but the future calls for more effort on that front. Microlending companies should be able to reconcile the ideas of value for the community and company profit.
Is There an Alternative? Enter Nanofinance
As we said before microlending in its purest form is not enough to satisfy everyone. There’s a certain part of the population that is not comfortable with traditional loan methods and the risk associated with them. Even the low threshold of microfinancing seems too high for them. How do you infiltrate that market? By turning microfinance into nanofinance.
Nanofinance refers to a loan of money that’s as small as 0.50 cents. It usually covers emergency needs such as water, electricity or healthcare. With pay-as-you-go models and the employment of mobile technology, companies can get this seemingly complicated business model to work.
The model is complicated because of the very low threshold of loans and the difficulty of collecting money. It makes it challenging for banks to get interested.
The target audience for nanofinance often gets their income based on weather conditions, harvest or available resources. The unpredictability of these factors make it impossible for them to follow a traditional, rigid repayment model. Their ability to repay a loan should be based on their consumption. Companies should give them some leeway both in the deadline and way of repaying their loan.
Why should the microlending company of the future invest in nanofinance? Because according to the most recent findings, 1.7 billion adults remain “unbanked”. The market for people that don’t have a bank account is massive. Most if not all of them, belong in the exact demographic of nanofinance candidates.
The Importance of Mobile Technology
The secret to penetrating the “unbanked” population of underdeveloped countries answers to the name of mobile technology. Smartphones have been welcomed by low-income communities. They are a relatively cheap way for collecting data, performing basic compliance and credit score checks.
Mobile phones provide the optimal medium for early adopters of the microlending system. Their cheap design and ability to gamify the user experience makes it easier for people to respond to. People can ease their way into the banking system. Thereafter, they can get exposed to more complex ideas such as savings accounts and mortgages.
What Does The Microlending Company of the Future Look Like?
Zidisha is what the microlending company of the future will look like. A decentralised, online community that directly connects lenders and entrepreneurs across borders.
How? By using the power of mobile technology and machine learning. This is just the beginning for Zidisha. Their work is merely opening the door and pushing the boundaries of what’s possible in the world of microfinance.
Their work with machine learning platform DataRobot shows the unlimited potential for this vertical. The opportunity to build something that’s both profitable and ethically sustainable is big and up for the taking.
Here is a quote from Julia Kurnia, Director of Zidisha:
”As our machine learning models are exposed to more data and improve their accuracy, we will get better at differentiating people who will repay from those individuals most likely to default. This will feed on itself and increase the flow of repayments, which determines how many new loans we can extend. As we grow we will build our own data science team, and the entire Zidisha family will use DataRobot to continually improve the platform for our community.”