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Guest editors’ introduction: Poverty, technology, microfinance and development
Electronic Commerce Research and Applications 11 (2012) 447–449
Contents lists available at SciVerse ScienceDirect
Electronic Commerce Research and Applications journal homepage: www.elsevier.com/locate/ecra
Guest editors’ introduction: Poverty, technology, microfinance and development
A consistent expectation on the part of public policy-makers, governments and non-governmental organizations (NGOs) has been that information and communications technologies (ICTs) will be a driver of economic growth and social development for the people away from poverty in the nations that harness them effectively. As this process proceeds around the world in the presence of dramatic technical progress, poverty nevertheless continues to be a difficult and grinding social problem to combat. In spite of the promised changes, the reality is that today there are greater population pressures, continuing inertial forces for economic stagnation, unstable social conditions and regional strife, as well as an increasingly inequitable distribution of wealth and lacking opportunities for growth in many countries. This special issue takes time out – apart from chronicling the advances in the leading technologies, innovative business models and insights from theoretical explanations about the modern digital economy – to consider some more fundamental issues of the quality of life and social welfare of human beings across the globe. Several years ago, we initiated a process to seek articles for Electronic Commerce Research and Applications that would break the common mold of topics and issues that have been studied in the journal. This seemed like a valuable personal commitment for the guest editors to make, as well as a good direction for the journal’s coverage of key policy issues involving technology and ecommerce. More recently, Khun Mechai Viravaidya, founder and chairman of Thailand’s Mechai Viravaidya Foundation, spoke in August 2011 at Singapore Management University’s 2011 Convocation Assembly for entering undergraduate students. He first promoted the idea of offering microcredit to poor people in Thailand more than a quarter of a century ago, while further encouraging the poorest of the poor to practice birth control and to seek good nutrition, as a basis for moving out of poverty. Khun Mechai’s speech emphasized that this is not a problem of the past. Instead, it is a continuing problem in the present, and likely to become an even more critical problem in the future, with the growth of population. There is a great difference between 1974, when a young university professor, Mohammed Yunus, on a visit to a very poor Bangladeshi village, recognized that he could make a difference by lending a very small amount of money to 42 basket-weavers to help them get out of poverty. The difference is due to the extent to which ICT has become cheaply and widely available, and can be creatively used to address all kinds of economic and social problems. With this purpose in mind, for this special issue project we solicited articles that would provide new insights on the issues of poverty, technology, microfinance and development in develop1567-4223/$ - see front matter Ó 2012 Published by Elsevier B.V. http://dx.doi.org/10.1016/j.elerap.2012.09.002
ing country contexts. Six different research works materialized from our efforts to bring together perspectives on related issues from Brazil, Singapore, South Korea, Taiwan and the United States. Joanna Ledgerwood, who has written on the issues associated with microcapital and the transformation of lending to the poor defines microfinance as ‘‘financial services to poor or lowincome clients, including consumers and the self-employed.’’ The special issue opens with a perspective piece and research directions on this topic from ECRA’s Editor in Chief, Rob Kauffman, and Guest Editor, Fred Riggins. Their article is entitled ‘‘Information and Communication Technology and the Sustainability of Microfinance.’’ The authors conducted a stakeholder analysis of the key players’ common positions in the industry ecosystem of microfinance and poor people in developing nations. They discuss the distinguishing characteristics and policies of microfinance institutions (MFIs). They also examine the underpinnings of technological innovations that have resulted in new and effective directions for helping the more than three billion people that the World Bank’s indicators place at the bottom of the pyramid of subsistence, who live on less than $2.50 each day. The authors consider the role and impact of ICT at the customer level, the MFI level, the donor level, and the microfinance industry level, and offer insights that showcase the value chain impacts and transformations that are occurring. This article provides an appropriate kick-off for the further exploration of the relevant issues by other authors. Another form of microfinance that has become popular in the past five years, as it has been made possible by technology-based matching networks, is peer-to-peer (P2P) lending. This is a financial service in which a digital intermediary plays the role of bringing together borrowers and lenders, without the digital intermediary having to take on any responsibility for the related financial risks. This market mechanism is an interesting innovation in financial services, since it separates the traditional functions of financial intermediation from its search and matching components. As a result, non-expert lenders may engage in a much less well-informed way with borrowers who may simultaneously deal with many different lenders who come together to provide credit. The second article of this special issue, entitled ‘‘Information Sets and Transaction Histories for Lending Decisions in Online Peer-to-Peer Lending,’’ is an empirical work. The authors, Haewon Yum and Byungtae Lee, analyze P2P lending for relatively riskier and even non-bankable borrowers, in a marketplace that supplies loaned funds through the aggregation of microlenders. They note how information asymmetry and borrower performance in terms of past payment history and the repetition of loan requests influence the likelihood of a borrower’s current request being success-
448
Editorial / Electronic Commerce Research and Applications 11 (2012) 447–449
fully funded. They also consider the extent of public knowledge of a borrower’s riskiness, in the absence information to diminish the information asymmetry. They characterize their treatment of this problem in terms of the wisdom of crowds, as both a basis and a limitation for relevant information sharing in microlending decisions. Their empirical study was developed using data from Popfunding (www.popfunding.com), a P2P microfinance intermediary in South Korea. The authors report that new borrowers with a borrowing track record are at a disadvantage, since their prospects for a loan are largely controlled by the opinions of others who don’t know them. Borrowers with prior funding experience at Popfunding fare better, since their repayment history and borrowing experience diminish the information asymmetries that are associated with uninformed, risk-averse lenders. This article demonstrates the range of technological innovations that are supporting the growth of microfinance today. The next paper in the special issue is by Eduardo H. Diniz, Rene Birochi and Marlei Pozzebon, who discuss the issue of ‘‘Triggers and Barriers to Financial Inclusion: The Use of ICT-Based Branchless Banking in an Amazon County.’’ This is an especially interesting topic for the special issue, since the Autazes area in the Amazon River region in Brazil essentially had no viable banking viable system access until as recently as 2002. The result was a relatively limited cash economy, and high transaction costs for employers and employees who wished to exchange services. Over the years though, a system of regional corresponding banking arose, but it too was limited by lack of technical infrastructure, banking expertise and inefficient sharing of capital. The authors explore the technological basis for new innovations in Amazon region correspondent banking – what they call ICT-based branchless banking. The Brazilian model of ICT-based correspondent banking provides cost-effective, technology-supported financial inclusion for the region’s poor people. The authors show the range of macrobenefits to the economy, based on economic growth, the new capabilities of the government to extend social benefits to the poor, and new financial services infrastructure. They further point out that ICT-based branchless banking is not a substitute for education for people about financial planning. They also report new difficulties that have arisen, including the relatively high debt loads and problems with the concentration of capital and financial power. P2P lending is a form of financial inclusion that extends the retail market for loans to people who many banks believe are not bankable in the usual terms of credit risk analysis. In ‘‘Herding Behavior in Online Peer-to-Peer Lending: An Empirical Investigation,’’ Eunkyoung Lee and Byungtae Lee study the relatively new phenomenon of the digitally-intermediated market for unsecured loans. The ‘‘twist’’ in this marketspace is that there still is intermediation that is occurring, but not financial intermediation in the usual sense, where a middleman is compensated for bearing some kinds of financial risk, and can charge rents to the parties who need to obtain funds. With this model, the credit risk assessment and offering of loaned funds is separate from the process of providing a platform in which to bring prospective lenders and borrowers so they can meet. The authors conduct an empirical analysis of data from Popfunding, similar to another article in the special issue, with a data set involving over 2200 loan auctions and nearly14,300 data points. They evaluate nine different hypotheses, involving the bidder participation rate and the newness of a loan auction, interest rate and payback period on the loan, Q&A board postings, and borrower loan auction history, among others. The results substantiate the authors’ argument that P2P lending is subject to herd behavior, which means that due to informational asymmetries, lenders are likely to key off of the wrong signals about the creditworthiness of borrowers, resulting in less-thanbest lending decisions. They obtained these findings based on the use of the well-known multinomial logit model of market share.
The next article returns to the issue of ICT-based branchless banking and is by Eduardo H. Diniz, Martin Jayo, Felipe Zambaldi and Tania Christopoulos. Their contribution, ‘‘Groups of Services Delivered by Brazilian Branchless Banking and the Respective Network Integration Models,’’ begins with the observation that branchless banking has been a useful, but not a perfect innovation to create greater social welfare for impoverished people in Brazil. They ask: how can different business configurations involving network integration through which the branchless banking channel be structured, so as to create the maximum benefits from the range of bank services that are offered? In contrast to some of the others in the special issue that use data and modeling-based analyses, the results of this work are founded on interviews with Amazon Basin correspondent banking managers. They also collected data from 300 community correspondent banking locations in rural stores and offices, and other places where physical bank branches could not exist. They built a taxonomy-building and cluster analysis of the data, as a basis for fitting groups of financial services to different corresponding banking network configurations. They report an interesting finding: that ‘‘the more suited to deliver social-oriented, pro-poor services the channel is, the more it is [likely to be] controlled by banks.’’ Their research offers useful insights into the Brazilian experience, but also provides a helpful way to understand how transaction costs seem to influence the development of different ICT-based rural correspondent service configurations around the world. The final article of the special issue is by Shing H. Doong and Shu-Chun Ho, entitled ‘‘The Impact of ICT Development on the Global Digital Divide.’’ One of the key issues that has been recognized over the years with the technological progress in e-commerce, the Internet, social media and mobile phones is the extent to which poor people are often shut out of the sharing of the social welfare benefits that are available due to these things. Based on the global public policy efforts of leading international organizations – the World Bank and the United Nations, for example- some observers might be led to make a critical inference that may not be correct: If ICT investments occur, then a country should be able to achieve improvements that will enable its population to overcome the digital divide, and bridge the gap that exists to parity in social welfare with leading developed nations over time. Is this true though? What evidence is there to suggest a country is able to achieve convergence in growth and development due to the formation of ICT capital and relevant technical infrastructures? The authors collected publicly-available data on 136 countries during 2000– 2008, and used a single-valued metric based on multivariate data to characterize a country’s ICT development level. From this, they applied a data clustering approach and panel data econometrics to tie in ICT development level to national income, as a means of gauging a country’s wealth. This permitted the authors to offer suggestions about where convergence is happening, as well as where it is not seen, including on a time-wise basis. The findings offer a useful set of empirical regularities for policy-makers to explore, and from which theory-builders can explore the basis for new explanations of abatement and persistence of the digital divide. More than some of our other projects of late, this special issue has been a work of service in a different sense. Of course, we hosted an editorial process, sought out authors with interesting things to say in the relevant areas of study, and supported the refinement of their ideas through a disciplined process of developmental, supportive reviewing. We feel more satisfied, however, to have taken some time out to promote the development and sharing of new knowledge that has some potential contribute to the improvement of social welfare for people, the diminution of poverty and lagging economic growth, and the uses of ICT-based innovations to promote more supportive financial services systems for
Editorial / Electronic Commerce Research and Applications 11 (2012) 447–449
people who live in developing countries. We also hope that this will stimulate follow-on discussion and submissions to this journal in the area of poverty, technology, microfinance and development. This area of study is interdisciplinary by nature, and the value of interdisciplinary exchanges among academic researchers and industry leaders offers an available means to tack some of the most important problems of our time. If the journal is able to provide a platform for ongoing dialogue in this area, its value will be enhanced beyond the journal’s impact factor, the notoriety of its editorial board, and the quality up to now of the academic articles it has published. We are pleased to have driven some new stakes in the ground around this mission, and are honored to have had a chance to host the global dialogue this time around. In closing, we would like to thank Electronic Commerce Research and Applications’ Editorial Assistant, Ms. Tong Li, who provided general support and helpful follow-up assistance with the authors for the completion of their papers. The guest editors also appreciated the support of the W.P. Carey School of Business at Arizona State University, where we initiated this project. The university
449
hosted our discussions on some of the issues we have discussed here in its undergraduate classes and doctoral seminars in Information Systems. Rob Kauffman is also grateful to the W.P. Carey Chair, which he held during his time at Arizona State University, for financial support, as well as the Living Analytics Research Center at the School of Information Systems, Singapore Management University, where this project was completed. Editor in Chief and Guest Editor Robert J. Kauffman Electronic Commerce Research and Applications Singapore Management University Singapore Guest Editor Frederick J. Riggins North Dakota State University USA
Contents lists available at SciVerse ScienceDirect
Electronic Commerce Research and Applications journal homepage: www.elsevier.com/locate/ecra
Guest editors’ introduction: Poverty, technology, microfinance and development
A consistent expectation on the part of public policy-makers, governments and non-governmental organizations (NGOs) has been that information and communications technologies (ICTs) will be a driver of economic growth and social development for the people away from poverty in the nations that harness them effectively. As this process proceeds around the world in the presence of dramatic technical progress, poverty nevertheless continues to be a difficult and grinding social problem to combat. In spite of the promised changes, the reality is that today there are greater population pressures, continuing inertial forces for economic stagnation, unstable social conditions and regional strife, as well as an increasingly inequitable distribution of wealth and lacking opportunities for growth in many countries. This special issue takes time out – apart from chronicling the advances in the leading technologies, innovative business models and insights from theoretical explanations about the modern digital economy – to consider some more fundamental issues of the quality of life and social welfare of human beings across the globe. Several years ago, we initiated a process to seek articles for Electronic Commerce Research and Applications that would break the common mold of topics and issues that have been studied in the journal. This seemed like a valuable personal commitment for the guest editors to make, as well as a good direction for the journal’s coverage of key policy issues involving technology and ecommerce. More recently, Khun Mechai Viravaidya, founder and chairman of Thailand’s Mechai Viravaidya Foundation, spoke in August 2011 at Singapore Management University’s 2011 Convocation Assembly for entering undergraduate students. He first promoted the idea of offering microcredit to poor people in Thailand more than a quarter of a century ago, while further encouraging the poorest of the poor to practice birth control and to seek good nutrition, as a basis for moving out of poverty. Khun Mechai’s speech emphasized that this is not a problem of the past. Instead, it is a continuing problem in the present, and likely to become an even more critical problem in the future, with the growth of population. There is a great difference between 1974, when a young university professor, Mohammed Yunus, on a visit to a very poor Bangladeshi village, recognized that he could make a difference by lending a very small amount of money to 42 basket-weavers to help them get out of poverty. The difference is due to the extent to which ICT has become cheaply and widely available, and can be creatively used to address all kinds of economic and social problems. With this purpose in mind, for this special issue project we solicited articles that would provide new insights on the issues of poverty, technology, microfinance and development in develop1567-4223/$ - see front matter Ó 2012 Published by Elsevier B.V. http://dx.doi.org/10.1016/j.elerap.2012.09.002
ing country contexts. Six different research works materialized from our efforts to bring together perspectives on related issues from Brazil, Singapore, South Korea, Taiwan and the United States. Joanna Ledgerwood, who has written on the issues associated with microcapital and the transformation of lending to the poor defines microfinance as ‘‘financial services to poor or lowincome clients, including consumers and the self-employed.’’ The special issue opens with a perspective piece and research directions on this topic from ECRA’s Editor in Chief, Rob Kauffman, and Guest Editor, Fred Riggins. Their article is entitled ‘‘Information and Communication Technology and the Sustainability of Microfinance.’’ The authors conducted a stakeholder analysis of the key players’ common positions in the industry ecosystem of microfinance and poor people in developing nations. They discuss the distinguishing characteristics and policies of microfinance institutions (MFIs). They also examine the underpinnings of technological innovations that have resulted in new and effective directions for helping the more than three billion people that the World Bank’s indicators place at the bottom of the pyramid of subsistence, who live on less than $2.50 each day. The authors consider the role and impact of ICT at the customer level, the MFI level, the donor level, and the microfinance industry level, and offer insights that showcase the value chain impacts and transformations that are occurring. This article provides an appropriate kick-off for the further exploration of the relevant issues by other authors. Another form of microfinance that has become popular in the past five years, as it has been made possible by technology-based matching networks, is peer-to-peer (P2P) lending. This is a financial service in which a digital intermediary plays the role of bringing together borrowers and lenders, without the digital intermediary having to take on any responsibility for the related financial risks. This market mechanism is an interesting innovation in financial services, since it separates the traditional functions of financial intermediation from its search and matching components. As a result, non-expert lenders may engage in a much less well-informed way with borrowers who may simultaneously deal with many different lenders who come together to provide credit. The second article of this special issue, entitled ‘‘Information Sets and Transaction Histories for Lending Decisions in Online Peer-to-Peer Lending,’’ is an empirical work. The authors, Haewon Yum and Byungtae Lee, analyze P2P lending for relatively riskier and even non-bankable borrowers, in a marketplace that supplies loaned funds through the aggregation of microlenders. They note how information asymmetry and borrower performance in terms of past payment history and the repetition of loan requests influence the likelihood of a borrower’s current request being success-
448
Editorial / Electronic Commerce Research and Applications 11 (2012) 447–449
fully funded. They also consider the extent of public knowledge of a borrower’s riskiness, in the absence information to diminish the information asymmetry. They characterize their treatment of this problem in terms of the wisdom of crowds, as both a basis and a limitation for relevant information sharing in microlending decisions. Their empirical study was developed using data from Popfunding (www.popfunding.com), a P2P microfinance intermediary in South Korea. The authors report that new borrowers with a borrowing track record are at a disadvantage, since their prospects for a loan are largely controlled by the opinions of others who don’t know them. Borrowers with prior funding experience at Popfunding fare better, since their repayment history and borrowing experience diminish the information asymmetries that are associated with uninformed, risk-averse lenders. This article demonstrates the range of technological innovations that are supporting the growth of microfinance today. The next paper in the special issue is by Eduardo H. Diniz, Rene Birochi and Marlei Pozzebon, who discuss the issue of ‘‘Triggers and Barriers to Financial Inclusion: The Use of ICT-Based Branchless Banking in an Amazon County.’’ This is an especially interesting topic for the special issue, since the Autazes area in the Amazon River region in Brazil essentially had no viable banking viable system access until as recently as 2002. The result was a relatively limited cash economy, and high transaction costs for employers and employees who wished to exchange services. Over the years though, a system of regional corresponding banking arose, but it too was limited by lack of technical infrastructure, banking expertise and inefficient sharing of capital. The authors explore the technological basis for new innovations in Amazon region correspondent banking – what they call ICT-based branchless banking. The Brazilian model of ICT-based correspondent banking provides cost-effective, technology-supported financial inclusion for the region’s poor people. The authors show the range of macrobenefits to the economy, based on economic growth, the new capabilities of the government to extend social benefits to the poor, and new financial services infrastructure. They further point out that ICT-based branchless banking is not a substitute for education for people about financial planning. They also report new difficulties that have arisen, including the relatively high debt loads and problems with the concentration of capital and financial power. P2P lending is a form of financial inclusion that extends the retail market for loans to people who many banks believe are not bankable in the usual terms of credit risk analysis. In ‘‘Herding Behavior in Online Peer-to-Peer Lending: An Empirical Investigation,’’ Eunkyoung Lee and Byungtae Lee study the relatively new phenomenon of the digitally-intermediated market for unsecured loans. The ‘‘twist’’ in this marketspace is that there still is intermediation that is occurring, but not financial intermediation in the usual sense, where a middleman is compensated for bearing some kinds of financial risk, and can charge rents to the parties who need to obtain funds. With this model, the credit risk assessment and offering of loaned funds is separate from the process of providing a platform in which to bring prospective lenders and borrowers so they can meet. The authors conduct an empirical analysis of data from Popfunding, similar to another article in the special issue, with a data set involving over 2200 loan auctions and nearly14,300 data points. They evaluate nine different hypotheses, involving the bidder participation rate and the newness of a loan auction, interest rate and payback period on the loan, Q&A board postings, and borrower loan auction history, among others. The results substantiate the authors’ argument that P2P lending is subject to herd behavior, which means that due to informational asymmetries, lenders are likely to key off of the wrong signals about the creditworthiness of borrowers, resulting in less-thanbest lending decisions. They obtained these findings based on the use of the well-known multinomial logit model of market share.
The next article returns to the issue of ICT-based branchless banking and is by Eduardo H. Diniz, Martin Jayo, Felipe Zambaldi and Tania Christopoulos. Their contribution, ‘‘Groups of Services Delivered by Brazilian Branchless Banking and the Respective Network Integration Models,’’ begins with the observation that branchless banking has been a useful, but not a perfect innovation to create greater social welfare for impoverished people in Brazil. They ask: how can different business configurations involving network integration through which the branchless banking channel be structured, so as to create the maximum benefits from the range of bank services that are offered? In contrast to some of the others in the special issue that use data and modeling-based analyses, the results of this work are founded on interviews with Amazon Basin correspondent banking managers. They also collected data from 300 community correspondent banking locations in rural stores and offices, and other places where physical bank branches could not exist. They built a taxonomy-building and cluster analysis of the data, as a basis for fitting groups of financial services to different corresponding banking network configurations. They report an interesting finding: that ‘‘the more suited to deliver social-oriented, pro-poor services the channel is, the more it is [likely to be] controlled by banks.’’ Their research offers useful insights into the Brazilian experience, but also provides a helpful way to understand how transaction costs seem to influence the development of different ICT-based rural correspondent service configurations around the world. The final article of the special issue is by Shing H. Doong and Shu-Chun Ho, entitled ‘‘The Impact of ICT Development on the Global Digital Divide.’’ One of the key issues that has been recognized over the years with the technological progress in e-commerce, the Internet, social media and mobile phones is the extent to which poor people are often shut out of the sharing of the social welfare benefits that are available due to these things. Based on the global public policy efforts of leading international organizations – the World Bank and the United Nations, for example- some observers might be led to make a critical inference that may not be correct: If ICT investments occur, then a country should be able to achieve improvements that will enable its population to overcome the digital divide, and bridge the gap that exists to parity in social welfare with leading developed nations over time. Is this true though? What evidence is there to suggest a country is able to achieve convergence in growth and development due to the formation of ICT capital and relevant technical infrastructures? The authors collected publicly-available data on 136 countries during 2000– 2008, and used a single-valued metric based on multivariate data to characterize a country’s ICT development level. From this, they applied a data clustering approach and panel data econometrics to tie in ICT development level to national income, as a means of gauging a country’s wealth. This permitted the authors to offer suggestions about where convergence is happening, as well as where it is not seen, including on a time-wise basis. The findings offer a useful set of empirical regularities for policy-makers to explore, and from which theory-builders can explore the basis for new explanations of abatement and persistence of the digital divide. More than some of our other projects of late, this special issue has been a work of service in a different sense. Of course, we hosted an editorial process, sought out authors with interesting things to say in the relevant areas of study, and supported the refinement of their ideas through a disciplined process of developmental, supportive reviewing. We feel more satisfied, however, to have taken some time out to promote the development and sharing of new knowledge that has some potential contribute to the improvement of social welfare for people, the diminution of poverty and lagging economic growth, and the uses of ICT-based innovations to promote more supportive financial services systems for
Editorial / Electronic Commerce Research and Applications 11 (2012) 447–449
people who live in developing countries. We also hope that this will stimulate follow-on discussion and submissions to this journal in the area of poverty, technology, microfinance and development. This area of study is interdisciplinary by nature, and the value of interdisciplinary exchanges among academic researchers and industry leaders offers an available means to tack some of the most important problems of our time. If the journal is able to provide a platform for ongoing dialogue in this area, its value will be enhanced beyond the journal’s impact factor, the notoriety of its editorial board, and the quality up to now of the academic articles it has published. We are pleased to have driven some new stakes in the ground around this mission, and are honored to have had a chance to host the global dialogue this time around. In closing, we would like to thank Electronic Commerce Research and Applications’ Editorial Assistant, Ms. Tong Li, who provided general support and helpful follow-up assistance with the authors for the completion of their papers. The guest editors also appreciated the support of the W.P. Carey School of Business at Arizona State University, where we initiated this project. The university
449
hosted our discussions on some of the issues we have discussed here in its undergraduate classes and doctoral seminars in Information Systems. Rob Kauffman is also grateful to the W.P. Carey Chair, which he held during his time at Arizona State University, for financial support, as well as the Living Analytics Research Center at the School of Information Systems, Singapore Management University, where this project was completed. Editor in Chief and Guest Editor Robert J. Kauffman Electronic Commerce Research and Applications Singapore Management University Singapore Guest Editor Frederick J. Riggins North Dakota State University USA