Transforming microfinance through digital technology in Malaysia

This page in:
Dato’ Seri Dr. Ahmad Zahid Hamidi, Deputy Prime Minister of Malaysia, launching the Virtual Teller Machine (VTM) at the National Savings Bank. Digital technologies such as the VTM are now changing the way microfinance works. Photo: The Star
Today, smartphones are used by more than half the world. By 2020, this number will reach 6.1 billion. Mobile-based digital technology presents a huge opportunity to enhance financial inclusion for the two billion individuals and 200 million micro, small and medium enterprises (MSMEs) in emerging economies that still lack access to basic savings and credit services.
In Malaysia, while 92% of adults have a basic bank account, the financing gap for MSMEs remain. Globally and in Malaysia, even those who have access to financial services often pay high fees for a relatively limited range of financial offerings.

At the Global Symposium on Microfinance in Kuala Lumpur, jointly organized by the World Bank Group and Bank Negara Malaysia, more than 35 experts from financial service providers, tech companies and leaders in microfinance attended to reflect on the microfinance achievements of the last four decades, and to develop a better understanding of how Microfinance Institutions (MFIs) can be part of a digital financial system that is evolving through technology.

Some of the key lessons from the Symposium include:

1. Customer centricity

Digital technology and data allow financial service providers to more effectively serve the financially excluded with a “customer-centric” approach. Using specialized algorithms, providers can analyze information on a customer’s mobile telephone (e.g. frequency and amount of airtime top-up) and non-traditional data (e.g. social media profiles) to develop the credit profile of a client when they make lending decisions. These digital footprints help financial service providers interact better with customers, and provides a range of financial products and services based on a deeper understanding of their financial needs.

2. Reducing operational risk

For microfinance institutions, the use of digital channels can mitigate cash risk and increase operational efficiency. Current microfinance lending models are cash-intensive, and this exposes the institution and customer to cash risk, such as during storage and transit, which incurs additional costs. As such, time that could have been used more productively is spent managing this risk. Through digital technology, clients have the flexibility to repay loans through their mobile phones, avoiding the risks of cash-in-transit.

3. New business models

Mobile banking supports new business models through mobile technology and data analytics in credit scoring, decision and underwriting processes. However, implementation has been led by mobile network operators, and to some extent large commercial banks and a small number of new cashless microfinance institutions. While traditional institutes are known for their expertise in clients’ needs, they must adapt and develop more capacity to stay competitive and relevant to take advantage of mobile banking services or those that are soon to become available in their countries.

Additionally, crowdfunding can improve access to finance for unserved and underserved borrowers which creates cheaper, community-based financial products, and facilitates access to digital investments for people with limited options to receive financial returns on their savings.

4. Partnerships and collaboration

There is a need for a range of different financial service providers, be it banks and non-banks (telecommunications companies or fintechs). Just like Uber and Airbnb, which transformed the transportation and hotel industries, innovation in algorithm-based credit risk assessment, psychometrics testing and crowdfunding platforms are bound to change the financial services industry.

5. Building trust

Microfinance institutions and fintechs face similar challenges in building trust around new digital financial services, and ensuring reliable and stable service delivery takes time. The latter is often limited by poor telecommunications and energy infrastructure, especially in remote areas. Providers should establish communication channels and complaint resolution mechanisms which can address customers’ risk perceptions. Using approaches like assisted digitization (step-by-step demonstrations of processes that show transactions in passbooks or receipts) to help the client transition to digital financial services should also be considered.

6. Consumer protection

Clients of new digital technologies may face new risks ranging from poor customer recourse mechanisms, fraud, data privacy and security breach, service unavailability, hidden fees, discrimination, insolvency to unauthorized ads. It will be critical for financial service providers to meet user expectations in order to achieve financial inclusion.

Digital technology has emerged as an important driver of innovation, competitiveness and growth in microfinance. By leveraging the nearly ubiquitous growth of mobile phones, digitization can reduce cost, increase efficiency and allow financial service providers to reach new clients. By developing an inclusive and sustainable digital financial ecosystem through substantial investment, skilled resources, adequate infrastructure, agile processes, and a conducive regulatory environment, it can foster more widespread adoption and usage.


Djauhari Sitorus

Senior Financial Sector Specialist

Ahmad Hafiz Abdul Aziz

Financial Sector Specialist

Join the Conversation

The content of this field is kept private and will not be shown publicly
Remaining characters: 1000