Finding right ways to resolve 'last mile issue' of microloans

Client data gathering and suitable products key for industry's development

Identifying high-risk clients and targeting products at the right level are major problems faced by financial inclusion professionals around the world, experts said at an industry forum.

"Getting the information and designing products－that is a very difficult situation everywhere," said Jonathan Morduch, a professor of public policy and economics at the Wagner Graduate School of Public Service at New York University.

"It's exciting that this year, the International Forum for China Financial Inclusion is focused on the 'last mile issue'. That's a problem around the world: How do you not just design a product but really deliver it in a way that is both fairly cheap and effective on a wide scale?" said Morduch, who attended the forum in Beijing in October.

In the past, people used to think that the "last mile issue" means it is difficult to find customers because they live in remote areas. But the "last mile issue" is not simply caused by distance－it could also be triggered by other factors such as product issues, said Bei Duoguang, president of the Chinese Academy of Financial Inclusion at Renmin University of China.

"What customers really need is perhaps a small loan of 10,000 yuan ($1,438) for only one month. But this kind of product is not available. The financial service suppliers sit in the city and think about how to provide assistance to these customers. However, their perception is wrong," Bei said.

"Traditionally, the government and financial institutions think about how to provide financial inclusion from the perspective of the supply side, but actually we should think about the issue from the perspective of the demand side," he explained.

In the United States, the most interesting products are not coming from traditional banks, but more often from credit unions and other institutions that are really located within communities and have close relationships with customers, according to Morduch.

He commended credit unions on their efforts to address the lack of information about some customers, by carefully designing products that help people to take out loans and repay them. This enables those types of customers to generate some credit information, which will help them later on.

"Generally speaking, technologies such as big data will help to promote the development of microfinancing. By definition, they will be excluded from many financial products and services due to a lack of (credit) information about them, so bringing different kinds of information about them is very helpful," Morduch said.

Experts expected fintech companies such as Ant Financial and JD Finance to make a greater contribution to the development of microlending based on big data and artificial intelligence.

However, fintech companies are facing problems with solving the "last mile issue" in rural areas, due to their parent companies' lack of solid logistics and e-commerce networks in mountainous and remote areas.

"If you look at the whole country, the rural credit cooperative is still the major force to develop microfinancing in China. They have a very solid network in rural areas," said Bei.

"Most of the banks were not established for such small clients. Even rural credit cooperatives need to learn a lot of techniques to conduct microfinancing, and the approaches are quite different from those of large banks," he said.

It is also necessary for some new forces to enter the market, especially highly market-oriented microfinance companies such as CD Finance, Bei added.

Drawing on international experience, because of the risks involved, the lending rates to small businesses must be high enough to allow the lender to cover its costs. For most microloans globally, interest rates after inflation range from 15 to 30 percent, Morduch said.

"Lending at a very small scale is fundamentally expensive, so a lender should highlight two things: one is to balance larger loans and smaller loans and to cut the costs in that way; and the second is to find ways to reduce risk," he said.

Worldwide, most microfinancing institutions have some form of subsidy-based support, which helps them to develop technology and reach customers that otherwise would not receive loans.

"Subsidies are often helpful and can be necessary for some, but they can't substitute the efforts to reduce risk by collecting better information, by developing relationships with borrowers, and by having more efficient contracts and enforcement," Morduch said.

He advised the government not to cap interest rates for microenterprises, otherwise lenders will stop lending to people who really need financing.

"Our experience is that if the financial service is fair and meets the need of the customers, and if the relationship between the customers and the lenders is one of respect, the price is just one of many concerns－not the most important concern. Even a higher price is OK as long as the other parts of the service are high-quality. So it's really more about the quality of the service than the price," he said.