The concept of decentralizing microloans from developed cities to underserved regions pays homage to the continuing legacy of Grameen Bank started by Muhammad Yunus. His work as a humanitarian and author with his book “Banker to the Poor” is still making an impact today in helping those who would otherwise have limited access to such resources. Dismissing all widespread conventions, the Bangladeshi economist adopted an alternate model that revolutionized traditional banking, from operating practices to customer service delivery and organizational composition. 

Muhammad Yunus was awarded the Nobel Peace Prize in 2006 for his revolutionary microloan program, which aimed to provide a chance at entrepreneurship even to beggars. By providing them with the necessary capital and support systems, he enabled them to start small businesses right from their doorsteps; this gave these individuals an economic opportunity that ultimately allowed them to live better lives. His initiative is proof that everyone can be successful if given the appropriate resources and opportunities. 

The program provided support to over 100,000 beggars, with more than 22,000 of them ceasing begging altogether. His innovative and compassionate approach is inspiring in the mission to reach the unbanked and underbanked: women, impoverished people living in rural areas, or small business owners. 

An immense opportunity to reach the global population lies untapped in formal financial services. Approximately 2.7 billion people, representing 70% of adults living in developing countries, are excluded from having access to essential banking and saving accounts – a key segment for increasing financial inclusion worldwide. Microfinance in Southeast Asia has become an increasingly important part of the regional economy. In recent years, microfinance institutions (MFIs) have grown rapidly, expanding into rural and underserved markets as governments in ASEAN countries strive to reduce poverty through financial inclusion. The microfinance industry provides microloans to entrepreneurs or small business owners in the form of microcredit and microsavings. This drives economic growth, improves financial inclusion for the unbanked and underbanked, reduces poverty, and encourages entrepreneurship. 

The success of microfinance institutions in developed cities suggests that microloans have the potential to make a greater impact if decentralized to underserved areas. Decentralizing microloans to rural areas in Asia Pacific will further financial inclusion, increase access to microcredit and microsavings, create employment opportunities and generate economic growth. 

For instance, microfinance service providers in the ASEAN region are largely concentrated in Tier 1 cities. Customers in Tier 2 and Tier 3 cities struggle with access to financial services, as they cannot approach banks because they require a good credit score & history, collateral, and many other requirements that are far from reach by these populations. And that’s a threat to the region’s economic growth, given MSMEs account for more than 97% of ASEAN businesses.   

So the big question becomes, how would the shift from T1 to T2 and T3 cities promote inclusivity in banking in the ASEAN region? 

Impact Microloans Can Have on Financial Inclusion 

It is important to note that the physical location of microfinance institutions doesn’t matter; their digital availability does. We should focus on how these institutions can expand their online presence from major cities in countries such as Indonesia, Malaysia, Philippines, and Vietnam to small towns – so they are able to reach more customers and increase ROI while also improving financial inclusion. But what will be the exact benefits? 

Empowering MSMEs 

Despite the fact that MSMEs are the backbone of most countries in the ASEAN region, one of the key challenges they battle with is access to finances. In Malaysia, for instance, MSMEs contributed 38.2% to the country’s GDP in 2020 and are projected to reach 45% in 2025. A report by the International Finance Corporation particularly shows that 50% of microenterprises and 59% of SMEs in East APAC are women-owned, hence the need for empowerment.  

By decentralizing, microloan service providers can reach remote Micro, Small & Medium Enterprises in T2 and T3 cities as well as rural areas to provide financial support to those in need. Microloans live up to their namesake, providing small loans that are tailored for MSMEs. Although these sums appear minor at first glance, it is important to note that the loan cap depends on a variety of factors such as the jurisdiction where the microlender works in, its financial state, and, most importantly – customers’ creditworthiness. Malaysia’s Touch ‘n Go (TNG), for example, offers personal microloans from around US$20 to US$2,250. Such amounts can be a huge lifeline for those living in rural areas looking to improve their quality of life. 

Delivering Financial Literacy  

Financial literacy and business management are tightly coupled together. Unfortunately, many small business owners in the region lack a formal understanding of how to earn, spend, save and invest, borrow, and protect finances. This makes them constantly make poor financial decisions that only hurt their personal and business financial lives.   

In Indonesia, low financial literacy is believed to be one of the biggest barriers to access to credit. A study by IPA on the impact of financial literacy programs on Indonesians showed that those who received training were more likely to open a bank account than those who did not. That’s part of the reason why only 41% of the total population and 32% of those living in rural areas have a formal bank account.   

While this is slightly higher compared to other ASEAN countries like the Philippines (25%) and Malaysia (36%), it is quite low compared to countries in other regions such as Norway (71%), Israel (72% of men and 54% of women), Denmark (71%), etc. By offering digital microlending and providing services to unbanked customers, we can reach out to the financially excluded demographic of ASEAN and offer them a brighter future. 

Reaching Entrepreneurs in Need 

Those most in need of microfinancing live in predominantly rural areas across ASEAN. According to the Global Economy, many ASEAN countries have significant amounts of people living in rural Tier 2 and Tier 3 Cities, Cambodia – 75%, India – 64%, Vietnam – 61%, Philippines – 52%, Thailand – 47%, Indonesia – 42%, Malaysia – 22%. Decentralizing microloans through digital technologies to reach these potential entrepreneurs is crucial to helping people lift themselves out of poverty and grow the overall economy. Through digital technologies, microfinancing institutions can do just that by using alternative credit scoring, digital channels, and more to bring people into the financial system and provide a lifeline to help them improve their lives. 

What this Shift Means for Banks, Microlenders, and FinTech Players 

To ensure that the underserved are not left behind, it is essential for organizations to extend their services from T1 cities toward T2 and T3 areas in the APAC region. Regardless of being traditional or Sharia-based, financial inclusion must be a priority for all stakeholders in order to deliver resources directly to customers and teach them how best to make use of these assets. At the same time, cost-efficiency must be considered so service providers can benefit from reliable Return On Investment (ROI). 

Financial technology enablers offer an incredible opportunity for banks, microlenders, and other financial institutions to sustainably grow their reach into Tier 2 and 3 cities. Our Digibanc platform consists of pre-built Microfinance components that allow these organizations to quickly integrate our solution with their existing systems as well as customize it according to their needs. With this, innovation can occur at scale with minimal cost or delays associated with building from the ground up. 

Conclusion 

As stakeholders strive to create a more prosperous ASEAN region, it is clear that microloans can make a remarkable difference when reaching the ideal customers – MSMEs and low-income earners. It doesn’t matter if lenders have a physical presence in remote regions or not; digitalizing their offerings can help everyone access them by only needing an internet connection and a smartphone. By providing capital and financial knowledge to empower microlenders, not only can we transform their lives but also improve the overall economy while driving higher returns for lenders. To make this a reality, adopting ready-made solutions from FinTechs is essential since it allows them to access such services quickly and affordably – which should be goal number one when considering inclusive lending strategies.