Biometric technology helps microfinancing in Asia

Banks in Indonesia and India have emerged as leaders in deploying innovative technologies to grow their microfinance businesses, according to a new study on biometrics in microfinance by Farmingham, Massachusetts-based Financial Insights, an IDC company. Case studies of two banks demonstrate that technologies such as biometrics and smart cards can be successfully deployed to target previously under-served customer segments, providing business benefits alongside poverty reduction. Banks in Indonesia and India have emerged as the frontrunners in deploying advanced technologies to grow their microfinance businesses. The success of these programs invites other banks in these and other Asian countries that may not have previously considered microfinance as a viable business. These banks have also been able to dispel the myth of biometric authentication systems’ being an expensive technology for use in consumer and mass financial services,” said Abhishek Kumar, senior research analyst, Asia/Pacific Banking Advisory Service.

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. In recent years, however, banks with microfinance experience have been able to prove that a well-run microfinance program can maintain low levels of loan default. Bangladesh’s Grameen bank’s portfolio-at-risk (PAR) ratio between 2002 and 2005 remained below 3 percent. 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 percent. 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 percent of its total loans to these sectors with more than forty 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 percent. BRI’s microfinance strategy has attributed to its net income growth in excess of 11 percent 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 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.