The Microfinance Gateway would like to thank Small Enterprise Development (http://www.itdgpublishing.org.uk/sed.htm), an international journal of microfinance and business development, for granting permission to publish this article.
This text is taken from Small Enterprise Development, Vol. 16, No. 1 (March 2005), pages 4-5, published by ITDG Publishing.
| Dear Kurt, It is clear that savings is in high demand among the poor. CGAP’s recent survey of “alternative” financial institutions around the world uncovered a surprising 750 million accounts, among which 623 million are savings accounts. Clients (many of them poor) seem to be ‘voting with their feet’ as they open up savings accounts in droves. At the same time, we don’t know much about the quality of these currently available savings services – in fact we suspect that most of them are of fairly poor quality. They probably do not meet the true needs of poor people, and are provided by institutions that may not be viable over the long term. We also know that the informal forms of savings used by nearly all poor people are very dangerous. Informal savings include in-kind (animals, jewelry, construction materials) and other informal arrangements, like money collectors or ROSCAs. MicroSave’s research in Uganda confirms that poor people are much more likely to lose their informal savings than their formal savings (in the absence of hyper-inflation). So, massive, unmet client demand is the first reason why MFIs should mobilize savings. MFIs have the mission and the market knowledge to meet this demand. If we as an industry really care about the impact of our work on the lives of poor people, then we should encourage MFIs to enter into this market when they meet the proper pre-conditions (a licence to mobilize savings; proper governance, management, and staff in place; controls and systems to protect the public’s money, etc.). But what about the MFIs’ own interests? There has been much debate recently about whether savings mobilization among poor clients is a viable activity for MFIs. After all, most poor clients want and need highly secure, convenient deposit services that allow for very small balances and transactions and offer easy access to their funds. The administrative costs of managing many tiny savings transactions could prove too costly. Also, the costs of setting up the physical infrastructure like safes, and secure premises and systems can be very high. However, the microfinance world would do well to follow the example of the credit union movement. In its research on Guatemalan credit unions, WOCCU found that very small accounts and transactions were the rule rather than the exception. They also found that the savings expense ratios were very low. The total administrative costs (direct and indirect operating expenses divided by the average outstanding volume of savings deposits) were only 3.65 per cent – a ratio that plummets once a credit union has over $1 million in savings volume. It appears, therefore, that savings can be a low-cost source of funds for MFIs, if done correctly. Also, even though many clients hold small balances and prefer to deposit and withdraw frequently, small-balance savings can be a relatively stable source of funding in the aggregate, as Marguerite Robinson points out in her discussion of Bank Rakayat Indonesia, an organization with more than 20 million savers. Another benefit of mobilizing savings among poor clients is the synergy between savings and loans. First, they give an opportunity to cross-sell savings and loan products to meet more client needs and deepening consumer loyalty. Also, savings can lower information and loan loss provision costs by allowing MFIs to draw on the deposit histories of potential borrowers for clues on repayment potential. However, MFIs should beware: introducing savings is not just a matter of adding a few more products. It requires a fundamental re-orientation of the organization. Now, the MFI is no longer ‘choosing’ its clients – the clients are choosing them. The adjustments needed in legal orientation, systems, financial management, attitudes and staffing may mean that pro-poor savings mobilization is not appropriate for all MFIs. Management at Compartamos (a non-banking financial institution in the process of converting into a bank to mobilize savings) has referred to the introduction of savings as the ‘detonator’ of the institution – the organization must be literally turned inside-out to make this enormous step. Only the most committed should embark on this potentially explosive journey. Best wishes, |
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Dear Brigit, Mobilizing savings is a worthwhile endeavour for MFIs who have the authority, infrastructure and knowledge to develop secure, accessible, cost-effective savings products. Nevertheless, the strategy an MFI takes towards financing its loans should reflect the economic conditions and regulations present in a particular country. At BancoSol we follow a strategy of diversification in financing sources. BancoSol has access to lines of credit that exceed US$85 million, out of which US$43 million comes from external lines of credit. Nevertheless, we finance more than 80 per cent of our portfolio with deposits from the public – approximately 24 per cent through savings accounts and 56 per cent through term deposits. In short, we obtain funding from a wide range of sources: international lenders, local institutions, and individuals – including both the better-off and low-income savers. I believe that such a mix of savings and debt is healthy for MFIs. It provides funds at a range of interest rates and maturities and thus helps the bank manage liquidity and interest rate risk. It keeps our contacts open to different kinds of funders, allowing us to seek more from one source at a time when there might be a scarcity in another source. In a country like Bolivia that has experienced a certain amount of political instability in the past few years, institutions are advised to preserve their relationships with a variety of local and international sources of finance. Our savings programme represents a very important piece of the total financing picture, for several reasons. Savings accounts are a stable source of financing that we can count on, and in financial terms, they are less expensive than other forms of financing. Moreover, having made the infrastructure and human resource investments to provide loans and serve clients from branch locations staffed with tellers, it makes good business sense to use that infrastructure to the fullest by offering savings services. Moreover, savings is an integral part of our mission. Our mission at BancoSol is to offer financial services – including savings, of course – to underserved sectors of the population. Savings help our clients make themselves less vulnerable to economic shocks and other kinds of crises that plague the poor. Over time, savings can lead to increased investment and development. Promoting savings among individuals can also develop a culture of savings within a society. You raise concerns about the quality of savings products being provided, and I think you are right to differentiate between the quality of savings being offered by formal and informal mechanisms. Keeping money in a bank or a regulated MFI is much safer for customers than keeping it at home or saving in-kind. And while it is possible that even formal institutions may have difficulties when they first institute savings products, market forces will necessitate that the institutions improve quickly to remain competitive. This means that regulated financial institutions are more appropriate vehicles to offer savings than NGOs. They tend to have higher levels of sustainability. Ultimately, the sustainability of savings as part of an MFI’s product mix will depend on the overall sustainability of the institution. So altogether I would say that although savings may be important for MFIs, they should remain only a part of an overall funding strategy. Sincerely, |
Small Enterprise Development Vol.16 No.1 March 2005.