Savings for poor people make good business sense: CGAP

Tuesday, 12 October 2010 21:21 -     - {{hitsCtrl.values.hits}}

Many microfinance institutions are already serving small savers profitably and many more could do so. So say the authors of a groundbreaking study on the business case for small savers.

CGAP researchers Glenn Westley and Xavier Martin Palomas were given full access to the 2008 books of two microfinance institutions that offer savings for low-income clients–-ADOPEM in the Dominican Republic and Centenary Bank in Uganda.

They conclude that savings accounts, which are a very high-cost product for microfinance institutions to offer, can nonetheless generate high profits through cross-sales of loans and other products to small savers, and by the fees generated from the savings accounts.

“The business case for serving small savers is compelling,” said author Glenn Westley. “We identified a whole range of ways in which these institutions are using small balance accounts to generate profits. We suspect that many microfinance institutions are already serving small savers profitably, and the evidence shows that many more could do so.”

Revenues from small balance savers turn out to be significant: 400% of the deposit balances in Centenary, and over 1000% in ADOPEM. Without the small savers, says the paper, Is There a Business Case for Small Savers?, these two very profitable institutions would lose about 30% of their total profits.

One of the issues most poor people face is not just a lack of money, but uneven and unpredictable income. Deposit services can have a hugely beneficial effect in helping even out the troughs and peaks, and ensuring that families have access to savings to cover school fees or emergencies. And yet microsavings have failed to take off in the same way that microcredit has over the past few decades.

One of the reasons that microsavings has languished, despite widespread recognition across the microfinance industry of the considerable consumption-smoothing benefits it offers, is simple economics. Deposit services are expensive for microfinance institutions. And it’s harder to make a profit from customers who make lots of tiny deposits without massively trimming transaction costs.

This new study is significant because it shows that microfinance institutions can integrate savings services as part of an overall service offering, and that in doing so deposit services more than overcome their high operational costs, reaping quite significant profits for the institutions.

In both the institutions studied for this paper, cross-selling of loans and money transfer products to small savers was significant. In ADOPEM there was a high rate of cross-selling of loans to small savers, with about three quarters of ADOPEM’s small savers also borrowing at any given time, while Centenary Bank generated most of its profits through the fees charged on small savings accounts (a monthly charge of US$ 0.56 on savings accounts alone accounted for 32% of all small saver profits) and by offering a range of money transfer products (which accounted for 16% of all small saver profits).

Centenary also makes substantial use of ATMs to attract and retain clients, boost savings levels, and cut costs.

“This use of ATMs,” said Westley, “points to the even greater potential of reducing transaction costs and increasing deposit balances by leveraging technologies such as mobile phones and point of sale devices that allow banking services to be offered outside of expensive to run bank branches.”

CGAP, World Bank Group survey shows financial access growing despite effects of crisis

Even as economies globally were contracting as a result of the financial crisis in 2009, access to formal finance in developing countries grew. An estimated 2.7 billion people around the world have no access to formal financial services. But the picture of financial inclusion is shifting, finds a new report by CGAP and the World Bank Group.

Financial Access 2010 is the second annual survey of financial regulators in more than 140 countries covering the turbulent period between 2008 and 2009. It shows that the number of bank accounts worldwide was growing even as the volume of loan and deposit accounts dropped.

Sixty-five deposit accounts were added per 1,000 adults in 2009, representing a 4.3 percent average growth in the number of deposit accounts. Use of credit services suffered more than that of deposit services from the financial crisis, and the number of loans per 1,000 adults was broadly unchanged between 2008 and 2009.

“Access to savings and payments accounts is a basic need,” said Nataliya Mylenko, the report’s lead author. “The fact that people were using basic deposit services more, even as world financial markets were experiencing high volatility, confirms how essential these services are to help families manage through risky and uncertain periods.”

In conjunction with a worldwide effort supported by the Group of 20 to improve the measurement of financial access, policy makers are committing to an agenda that promotes financial inclusion.

“As there are increasing calls for more and better data around financial inclusion, including from the G20, the annual Financial Access survey will provide key data and help monitor progress over time,” said Alexia Latortue, CGAP’s Deputy Chief Executive Officer.

The report also presents the first comparable global data on lending to small and medium enterprises (SMEs), estimated at US$10 trillion in 2009.

Financial Access 2010 shows that regulators are often hampered by a lack of resources or enforcement powers to implement policies for financial inclusion. Nonetheless, the report also shows promising trends, including the expansion of retail infrastructure and use of new technologies to deliver financial services cost effectively.

Globally, one bank branch, five ATMs, and 167 point-of-sale terminals were added per 100,000 adults in 2009. For the first time, the number of ATMs exceeded the number of bank branches in low-income countries. But low- and middle-income countries still lag behind high-income countries in terms of physical outreach.

“New technologies such as mobile payments and Internet banking are likely to further reinforce this shifting picture of financial inclusion,” said Oya Pinar Ardic, an author of the report.

Whether it is countries’ commitment to policy change or the numbers of people gaining services who were previously unbanked, the broad patterns of financial inclusion detailed in Financial Access 2010 are promising.