Information and Communication Technology and Microfinance: Options for Mongolia

Abstract

The literature indicates that ICT innovations have an exciting promise to improve the efficiency of microfinance operations and expand outreach by lowering transaction costs and bringing services closer to clients. However, many of the cases that used as examples of ICT application are either still in the pilot phase or are not really financial institutions whose main mission is to serve the poor and reduce poverty. The latter refers to cases of ICT application in mainstream financial institutions, which may not be necessarily serving the poor. The number of microfinance institutions that have gone beyond piloting ICT applications is still limited. They are primarily in countries which have economies of scale, a relatively developed financial services sector, and a more favorable communication infrastructure and regulatory environment. It is also found that it will be a while until MFIs will be able to fully utilize all the potential of ICT. It may be more realistic to take small steps in applying ICT in some functions of microfinance operations. For example, MFIs in many developing countries are not ready to make the full investment in complete ICT solutions. Rather, at least some of them may be able to invest in smaller-scale technology solutions that can result in concrete benefits worth the cost involved. This suggests the importance of detailed cost benefit analysis. There is no such analysis available to date. In the absence of a more rigorous cost benefit analysis, an examination of feasible ICT solutions based on a given context and institutional factors may be a good starting point. This paper presents an analysis of four possible ICT solutions in the case of Xacbank in Mongolia.