Digital solutions can enable microfinance providers to cost-effectively serve untapped customer segments through peer-to-peer lending.

1. Cognizant 20-20 Insights | May 2017
Executive Summary
Efforts to expand financial inclusion have been
remarkably successful in recent years, fueled
by innovative communications technologies.
Financial services participants at the base of the
pyramid have especially benefited. Encouraged
by central banks and regulators around the world,
financial institutions have driven this revolution
by leveraging channels such as digital payments
and e-money solutions to reach unbanked and
under-banked population segments.
Microfinance institutions (MFIs), which have
been hamstrung by regulatory pressures and
operational costs, could benefit significantly
from recent technological innovations and
market developments. They have an opportunity
to explore a segment of the market previously
inaccessible to them.
In this paper, we discuss the operating model,
revenue growth and product development
opportunities that MFIs can consider to serve
this segment. While the paper focuses on the
India market, the concepts are applicable to simi-
lar markets in Asia Pacific and Africa with similar
customer profiles.
Expanding
Microfinance
Offerings in
Emerging Markets
Digital solutions can enable
microfinance providers to cost-
effectively serve untapped
customer segments through
peer-to-peer lending.
COGNIZANT 20-20 INSIGHTS

2. Cognizant 20-20 Insights
AN UNTAPPED MARKET
Large segments of the Indian population still do
not have access to banking services. Banks have
intensified their efforts to reach the unbanked,
in an effort to tap the estimated market potential
of $24.4 billion.1
Figure 1 details the estimated
rise in incomes of low-income groups across the
world.
Historically, banks have faced various chal-
lenges in their attempts to provide loan
services in rural markets and economically
weak geographic areas. Obstacles include high
operating costs and lack of collateral. MFIs grad-
ually stepped in to fill this gap, as they are able
to provide loans without collateral. As a result,
borrowers throughout India, particularly in rural
areas, have formed self-help groups to obtain
loans from MFIs to gain working capital to start
a business or engage in other entrepreneurial
activities.
Microfinance is a crucial source of financial ser-
vices for entrepreneurs and small businesses
that do not have access to banking and related
services. MFIs have realized relative success;
however, large segments of the world remain
unbanked.
The Rise of Fintechs
In recent years, several fintechs have emerged
to support a variety of non-traditional lending
approaches. Many peer-to-peer (P2P) business
models have emerged in this space. These lend-
ing models are set to disrupt the status quo,
especially in the small business space.
Income Growth in Emerging Markets
The average daily income for the first and second economic quintiles of national populations is on
the rise.
$10
$8
$6
$4
$2
$0
AverageDailyperCapitaIncome(USD)
2000
Latin America &
Caribbean
Middle East &
North Africa
Sub Saharan
Africa
East Asia &
Pacific
South Asia
2020 Projected
Figure 1
Source: Analysis by the Center for Financial Inclusion, Accion, based on data from the World Bank,
World Development Indicators, 2012 , http://www.centerforfinancialinclusion.org/storage/documents/IIF_CFI_Report_FINAL.pdf.

3. Cognizant 20-20 Insights
Expanding Microfinance Offerings in Emerging Markets | 3
Alternative lenders are filling a critical gap for
business segments that traditional banks have
not pursued. Potential benefits for these lenders
include:
• New asset classes.
• Transparency.
• High returns.
• Diversification.
AN MFI-P2P MODEL
We believe MFIs can leverage alternative lend-
ing models by launching a P2P lending platform,
supported by a powerful analytics engine. Given
their expertise in rural markets, these organiza-
tions are well positioned to successfully facilitate
a marketplace for semi-urban and rural investors
and borrowers.
A P2P service platform would enable MFIs to
service ultra-small loan requests (token size of
Rs100 to 2,000) with very short tenures (one to
10 days) were previously untenable due to the
high operational costs involved in recollection.
The range of services that MFIs could offer in this
segment include:
• Emergency loans (for medical/family emer-
gencies).
• Working capital loans for small vendors
(hawkers).
• Very short-term loans (one-day loans, etc.).
• Loans for college students to meet their
immediate needs.
• Month-end bridge loans.
• Education loans.
MFIs can act as intermediaries between lenders
and borrowers, and charge both parties for the
service (see Figure 2).
After providing some basic details, lenders would
enroll with the P2P site. Following registration,
Cognizant 20-20 Insights
Using P2P for Microfinance Services
MFIs post the borrower profiles and their loan
needs in the P2P interface. Loan disbursement
takes place after a lender approves the loan need.
MFIs collect repayments from the borrowers
with the appropriate risk management
measures in place and return it to the lender
MFI-P2P INTERFACE
BORROWERS
LENDERS
Loan Disbursement Loan Repayment
Figure 2

4. Expanding Microfinance Offerings in Emerging Markets | 4
lenders would be able to browse through bor-
rower profiles and assess the various risk-reward
levels that the site offers (see Figure 3).
Lenders would assess borrowers on factors
such as rate of return, credit history, etc. After
both parties agree to the terms and conditions
imposed by the MFI, the amount would be dis-
bursed to the borrower.
Similarly, borrowers would enroll with the P2P
site after furnishing basic details. After registra-
tion, borrowers would make a loan request that
includes information such as the intent of the
loan, tenure and interest rate that the individual
is willing to pay, etc. The MFI would calculate the
borrower’s credit score using its scoring model,
powered by the analytics engine. The engine
would consider parameters such as credit his-
tory, employment history, family history, etc. to
arrive at the credit score (see Figure 4).
The analytics engine could also be leveraged
by the MFIs for cross-selling products and ser-
vices to customers based on parameters such as
occupation, employment sector, credit history,
etc. This information could also be used for lead
generation.
BUSINESS USE CASES
Two business cases can help illustrate the poten-
tial of digital payments technology to solve
longstanding challenges for MFIs.
Case 1: Operating costs – including disburse-
ment and recovery – have been a pain point for
MFIs. This has prevented them from serving cus-
tomers with very short-term loans. Also, not all
rural consumers have a mobile device to access
digital solutions.
To get around this hurdle, an MFI can create
a group of borrowers or potential borrowers
1
Lender Interaction with the P2P Site
MFI-P2P interface
Furnish basic details
and complete
registration
Confirm terms and
agreement
Finalize the
borrower
Look at enrolled
borrowers
Browse through the
bouquet of services
Look at risk-reward
levels on offer
Disburse amount
to borrower
BORROWER
LENDER
Figure 3
Borrower Interaction with P2P Site
MFI-P2P interface
Furnish basic details
and complete
registration
Borrower confirms
terms and
agreement
A lender agrees to
offer loan
Lenders browse
through the loan
requests
Credit score for the
individual is
calculated
Borrower posts the
request for a loan
BORROWER
Amount is
disbursed
Figure 4

5. Cognizant 20-20 Insights
Expanding Microfinance Offerings in Emerging Markets | 5
under a leader. The leader acts as a touchpoint
for customers using digital payments. Disburse-
ment and money recovery can be done via the
leader, which would work with digital wallet ser-
vice providers such as Paytm and MobiKwik. This
will reduce operational costs for the MFIs (see
Figure 5).
Case 2: While MFIs have a range of measures
in place to ensure loans are put to productive
use, there are still instances of customers using
a loan for purposes other than those for which
it was disbursed. Digital technologies can help
MFIs ensure proper use of the loan. For example,
if a loan is sought for purchasing certain mer-
Reducing Operational Costs for Short-Term Loans
Lender releases
funds
MFI gets
the money
Amount sent to
area distributor
Borrower collects
the loan
DIGITAL WALLET SERVICE PROVIDER DIGITAL WALLET SERVICE PROVIDER
Lender repays to
area distributor
Area distributor
repays MFI
MFI releases funds
to the lender
Lender gets
the repayment
LOAN DISBURSEMENT LOAN REPAYMENT
Figure 5
Working with Merchants in P2P
MFI-P2P interface
Merchandise
Merchandise
Merchandise
Loan request
Loan acceptance
Lender Borrower Borrower
Borrower
Borrower
MFI-P2P interface
MFI-P2P interface
Loan request
Loan acceptance
Lender Borrower
Loan request
Loan acceptance
Lender Borrower
MERCHANT
Figure 6

6. Cognizant 20-20 Insights
Expanding Microfinance Offerings in Emerging Markets | 6
chandise, MFIs can partner with online retailers/
merchants or with small neighborhood retail
stores (known in some regions as “kiranas”)
with access to digital wallets. The retailers could
deliver the merchandise directly to the borrower
rather than disbursing cash (see Figure 6, previ-
ous page).
Figure 7 lists some examples of the players in the
MFI-P2P model.
RISK MITIGATION MEASURES
FOR LENDERS
MFIs currently have several risk mitigation mea-
sures in place, including:
• Offer group loans only.
• Peer pressure and individual repayment
assessment.
• Initial margin requirements in the form of
gold, real estate, etc.
• Requirement of a guarantor or other collat-
eral, such as a post-dated check or jewelry.
• Use of the Critical Rating Index (CRI) or a sim-
ilar quality assessment tool.
Given that in a P2P platform most lenders will
be from urban areas, MFIs can put in place addi-
tional measures, such as offering compensation
in the event of a default or creating a capital
requirement fund.
LOOKING FORWARD
MFIs have successfully penetrated the rural
market over the past two decades. It is time for
them to take advantage of the digital initiatives
disrupting the market right now and serve a
broader customer base. This will enable them to
secure both top- and bottom-line growth in the
segment. A marketplace lending model should
attract investors as it offers them more options.
Lenders are always on the lookout for new invest-
ment options, which should make the MFI-P2P
model a success.
Merchant, Borrower, Lender Examples
MERCHANT EXAMPLES
• Local neighbor-
hood stores
• Flipkart
• Amazon
• Big Basket
• Paytm
• MobiKwik
• PayUmoney
BORROWER EXAMPLES
• Farmers
• Hawkers
• College
students
• Self-help groups
• Small-scale
industries
• Very low-
income group
• Small local
neighborhood
store owners
LENDER EXAMPLES
• Pawn brokers
• Salaried employees looking for
an alternate investment option
Figure 7

7. Cognizant 20-20 Insights
Expanding Microfinance Offerings in Emerging Markets | 7
REFERENCES
• Pratik Bhakta, “P2P Firms Look to Hit Fund Trail to Get Rs 2-Crore Starting Capital,” The Economic Times, June 13, 2016,
http://economictimes.indiatimes.com/small-biz/startups/p2p-firms-look-to-hit-fund-trail-to-get-rs-2-crore-starting-capital/
articleshow/52723753.cms.
• Namrata Acharya, “P2P Lenders Chalk Out Aggressive Expansion Plan Post RBI Recognition,” Business Standard, May 3,
2016, http://www.business-standard.com/article/finance/p2p-lenders-chalk-out-aggressive-expansion-plan-post-rbi-recogni-
tion-116050300895_1.html.
• “Peer Pressure: How Peer-to-Peer Lending Platforms Are Transforming the Consumer Lending Industry,” PricewaterhouseC-
oopers, February 2015, http://www.pwc.com/us/en/consumer-finance/publications/peer-to-peer-lending.html.
• Pratik Bhakta, “RBI Keeps a Watch, Demands P2P Lending Only Via Bank Accounts,” The Economic Times, May 27, 2016,
http://economictimes.indiatimes.com/industry/banking/finance/banking/rbi-keeps-a-watch-demands-p2p-lending-only-via-
bank-accounts/articleshow/52457529.cms.
• “India Top 50 Microfinance Institutions,” CRISIL, October 2009, http://www.crisil.com/pdf/ratings/CRISIL-ratings_india-top-
50-mfis.pdf.
• “The Business of Financial Inclusion: Insights from Banks in Emerging Markets,” Institute of International Finance, Center for
Financial Inclusion, Accion, July 2016, http://www.centerforfinancialinclusion.org/storage/documents/IIF_CFI_Report_FINAL.
pdf.
FOOTNOTES
1 “Financial Inclusion Summit 2016,” Resurgent India, 2016, http://resurgentindia.com/wp-content/uploads/research/FINANCE/
Financial%20Inclusion%20Summit.pdf.

8. Cognizant 20-20 Insights
Expanding Microfinance Offerings in Emerging Markets | 8
Sathish
Thiruvenkataswamy
Director, Cognizant Business
Consulting
Shyam Prakash
Business Analyst, Cognizant
Business Consulting
Pranav Narang
Consultant, Cognizant
Business Consulting
Sathish Thiruvenkataswamy is a Director within Cognizant Busi-
ness Consulting. He has over 16 years of technology and consulting
experience in the banking and financial sector. Sathish holds a
post-graduate diploma from IIM Calcutta and earned his bachelor’s
degree from National Institute of Technology, Silchar. He can be
reached at Sathish.Thiruvenkataswamy@cognizant.com.
The authors would like to thank Kamesh Krishnamoorthy for
reviewing the paper and providing valuable feedback. Kamesh
is a Consulting Partner and Practice Leader in the Banking and
Financial Services business unit at Cognizant and leads Cognizant
Business Consulting in India.
The authors would also like to thank Dr. Jeyaseelan for his valuable
inputs in the ideation stage. Dr. Jeyaseelan has worked for more
than two decades in rural banking. He has been a consultant to
UNDP, UNOPS, GTZ, Agricultural Finance Corporation, Tamil Nadu
Corporation for Development of Women Ltd., various microfinance
institutions and Water Partner International (USA). He is currently
the Group CEO at Hand in Hand India.
Shyam Prakash is a Business Analyst within Cognizant Business
Consulting. He has over five years of technology and consulting
experience in the banking and financial sector. Shyam holds a
post-graduate diploma from Institute for Financial Management and
Research and earned his bachelor’s degree from Sri Venkateswara
College of Engineering at Anna University. He can be reached at
Shyam.PrakashR@cognizant.com.
Pranav Narang is a Consultant within Cognizant Business Consult-
ing. He has over five years of technology and consulting experience
in the banking and financial sector. Pranav holds a post-graduate
diploma from Indian Institute of Foreign Trade, Delhi, and earned his
bachelor’s degree from NIT Calicut. He can be reached at Pranav.
Narang@cognizant.com.
ABOUT THE AUTHORS
ACKNOWLEDGMENTS

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