Developing economies: Financial inclusion proves both worthy and profitable

At National Microfinance Bank (NMB) in Tanzania, financial inclusion – extending banking services to previously “unbanked” communities – is a top priority.

According to a survey conducted in 2009 by FinScope, a pan-African market research company, the proportion of the country’s adult population that was using banks and other formal institutions was just 12.4 per cent.

The vast unbanked segment of the population represents a significant opportunity for NMB and it is making good progress. Over the past five years, customer numbers have more than doubled from 600,000 to 1.4m.

In part, that has been because of the expansion of its branch network, from 100 to 140 branches, giving NMB an on-the-ground presence in 80 per cent of the country’s administrative districts.

The bank’s enthusiasm for new technology has also played an important part in this growth, allowing it to reach out to remote rural audiences who do not have easy access to a bank branch, according to John Ncube, chief information officer and the man directing these efforts.

“We were the first bank in Tanzania to offer mobile banking, enabling our customers to check balances, transfer funds and buy top-ups for their electricity accounts via their mobile phones,” he says.

While this service has proved useful to those already participating in the financial system, NMB has taken inclusion a step further recently.

With the launch of its Pesa­Fasta cardless ATM service in April, NMB customers are now able to send money to people who don’t have a bank account.

Unbanked Tanzanians can withdraw funds sent to them via any of NMB’s 400 cash machines nationwide, using a code sent to their mobile phone, rather than the traditional card.

Mr Ncube now has plans to extend the service to point-of-sales systems in selected retail outlets by early 2012.

“I see my job as helping my colleagues in the bank to understand exactly what is possible with today’s technology – and mobile technologies are a huge part of this,” he says.

It is a conversation that is taking place in countless other boardrooms in banks across the world.

Branchless banking, in particular, is a preoccupation for emerging-market banks that, like NMB, can count on plentiful demand – if only they can find ways to service it. Technology has a significant role to play.

Take, for example, the satellite-linked “floating bank” launched in late 2009 by Bradesco, a Brazilian bank, to serve remote communities along the Amazon river; or State Bank of India’s September announcement that it has appointed Spanco, a technology provider, to open and run 200 banking kiosks in Maharashtra villages on its behalf, using fingerprint biometrics to identify customers.

For western banking customers, still feeling bruised after the credit crisis, access to banking services may seem insignificant compared with other problems in the developing world, such as access to fresh water, adequate healthcare and education.

But Tony Mwai, country manager for IBM east Africa, insists that financial inclusion occupies a justifiably important place among the various issues facing emerging economies.

For unbanked customers, he says, it is a matter of convenience and security – a vast improvement on “keeping money under the mattress”.

Interest on savings provides an incentive to start saving in the first place. “And once previously unbanked customers have acquired a record with their bank, they are able to access other services, such as insurance against crop failure and, over time, microloans,” he says.

But for Ed Cutrell, head of the technology for emerging markets team at Microsoft Research India in Bangalore, inexperienced customers need a great deal of help and education to use these services effectively.

Just because they can now be reached by technology, he argues, does not mean they know how to use it – or the services that it underpins.

Efforts by the Indian government to drive financial inclusion through the use of branchless banking, for example, have ensured that almost 60 per cent of the country’s adult population now has a bank account.

“However, it appears that the majority of bank accounts are not being used, especially not by the poor who are the target for financial inclusion,” Mr Cutrell says.

Better financial education would help the poor to use these services more effectively, he says, and decrease their reliance on costly, informal alternatives – such as credit at usurious rates from local shopkeepers. It might also reduce their vulnerability to being mis-sold financial services that they do not need.

This raises the tricky question of how emerging-market banks can make the most of the business opportunity that unbanked populations represent, while making the necessary investment in technologies, and living up to their responsibility to help customers to use services wisely.

“Some days, I’m optimistic about financial inclusion, when I see people using financial services to effect big improvements in their lives and those of their children and their wider communities,” says Mr Cutrell.

“Other days, I’m more anxious. Unbanked communities are vulnerable; they should not be viewed as just a new way to make money. If financial inclusion is to work, it’s got to be both viable and responsible – and that can be hard for many banks to achieve.”