Independent research and advisory firm Financial Insights, an IDC company, has announced the release of a new report examining the growing use and effectiveness of innovative technology solutions in microfinance initiatives.

Abhishek Kumar, senior research analyst, Asia/Pacific Banking Advisory Service, notes, "Banks in Indonesia and India have emerged as leaders in deploying innovative technologies to grow their microfinance businesses. These banks have shown that technologies like biometrics and smart cards can be successfully deployed to target previously under-served customer segments, providing business benefits alongside poverty reduction."

Historically, the perception of microfinance has been one of being a resource-intensive and generally unprofitable business venture. Concerns over high administration costs and especially the fear of default rates with the lack of conventional risk management tools (such as credit histories) have often dissuaded financial institutions from entering this field. However, in recent years, banks with microfinance experience have been able to prove that a well-run microfinance program can maintain low levels of loan default.

For instance, Bangladesh’s Grameen bank’s portfolio-at-risk (PAR) ratio between 2002-2005 remained below 3%. Grameen bank has been providing microfinance services since 1976 and has grown proficient at ensuring low levels of loan default. In June 2007, the banks stated that its loan recovery rate was at 98.61%.

Another example is Indonesia’s Bank Rakyat Indonesia (BRI) whose goal is to establish itself as the largest bank in the region serving the microfinance and SME sectors. In 2006 the bank attributed more than 60% of its total loans to these sectors with more than 40 million clients by the end of the year. In addition to year-on-year double-digit growth in microfinance loans, the bank has been able to maintain NPL ratios of approximately 5%. BRI’s microfinance strategy has attributed to its net income growth in excess of 11% from 2005 to 2006.

In light of such successes, banks in India and Indonesia are actively growing their microfinance operations. Indonesia’s Danamon bank and India’s ICICI bank are relying on biometric and smart card technologies to alleviate the high cost of microfinance administration as well as the expansion of microfinance distribution points.

The use of such technology is proving to be quite attractive to the unbanked population. Biometric authentication systems are particularly useful in areas with low literacy rates. Customers no longer have to rely upon signatures or filling out documents – they can simply provide their fingerprints to authenticate themselves and access their accounts through specialized biometric teller machines (BTMs).

In addition to this, smart cards are used to track customer interactions to build real-time credit histories and bolster know-your-customer initiatives. Ultimately, the use of biometric and smart card technology makes it easier for the masses to access financial services.