Savings mobilization strategies : lessons from four experiences

F c us No. 13 August 1998 Savings Mobilization Strategies: Lessons From Four Experiences I n t r o d u c t i o n * Securitv of savings and confidence and trust Around the world, poor households save itl in the repositorY of the savings, in other various forms and for various purposes. Although wvords, "the trust factor." A P empirical evidence suggests that the poor * The liquiditv of the savings option. Quick would deposit if appropriate financial institu- access to deposits is especiallv crucial for The Focus Series is CGAP's tions and savings facilities were available, little poor households for emergencies and in- primary vehicle for dissemi- nation to governments, progress has been made to establish micro- vestment opportunities that emerge suddenly. donors, and private and finance institutions (MFIs) as full-fledged *The transaction costs, eg, the cost of making financial institutions on financial intermediaries. In fact, today most best practices in microen- MFls offer only credit, and savings mobiliza- a deposit and oJ iiquidating it. Time spent terprise finance. tion remains the forgotten half of nicro-finance traveling to the financial institution, waiting in line, and completing paperwvork can Please contact FOCUS, The CGAP WVorking Group on Savings, result in such high costs that a seemingl CGAP Secretariat with formed in 1996 and chaired bv GTZ positive rate of return becomes negative. comments, contributions, (representing Germany), has recentlv com- Inevitablv small savers will rather turn and to receive other notes in the series at: pleted case studies of four deposit-taking to informal means of savings. MFIs and a related comparative paper. This The real interest rate. Although there is 1818 H Street NW, note represents a svnopsis of these studies.Tera neetrte lhuhteeI Room Q 4024, evidence that rural savings takes place even Washington DC 20433 under negative real returns offered bv the Tel: 202.4739594 Potential for Savings Mobilization informal sector; in manv countries the de- mand for savings products by all savers, in- Fax: 202. 522 3744 People tend to save to compensate for uneven cluding the poor, has increased as interest income streams. Poor houselholds save for rates have increased. e-mail: various purposes, such as insurance against CProject@Worldbank.org bad health, disabilitv and other emergencies, WWW: investments, social and religious obligations, The Benefits of Savings Mobili- http://www.worldbank.org/ and future consumption. Poor households z at i o n f o r M F I s html/cgap/cgap.html save in-cash, in-kind (animals, gold, grain, Savingsmobilization can help MFIs to expand land, raw material and the like), and useC rotating savings and credit associations and and deepen their outreach. A larger number other forms of financial and non-financial of poor households choose to use savings savings and loan associations because of services instead of credit services. In particular, limited access to appropriate deposit facilities, poorest households mav rely on savings before thev have an effective demand for credit. More- Evidence showvs that the poor wvill hold finan- over, deposits from the public are a less volatile cial savings in savings accounts xvith financial source of funds than alternative sources, such as institutions, if appropriate facilities are avail- rediscount lines from the Central Bank or funds able. The following factors influence the from donor agencies. This stable funding household's decision to hold a savings ac- source can expand lending operations and, count: therefore, also benefit poor borrowers. CGAP THE CONSULTATIVE GROUP TO ASSIST THE POOREST IA MICR(-FINANCE PROGRAM;I  Mobilizing small and micro-savings can contribute to self-sustain- Case Studies of Savings Mobilization ability by providing the MFI with cheaper funds than those S t r a t e g i e s from the interbank market. However, there may be a trade-off between the lowver financial costs and the relatively GTZ carried out case studies of four banks the Bank for Agriculture and Agricultural CooperatiTes in Thailand high costs of mobilizing and administering small deposits. (BAAC), the Banco Caja Social in Colombia (BCS), the Attractinsg depositors may instil a stroger demand -orienta- Bank Rakyat Indonesia (BRI) and the Rural Bank of Panabo tion and thriftiness in MFIs' operations and increase public in the Philippines (RBP). These institutions were selected confidence. As savers become important stakeholders in because (i) the average amount on deposit is far below the deposit-taking institutions, the latter are forced to improve average GNP per capita, (ii) the number of savers exceeds their product variety and the efficiency of their services. the number of borrowers, (iii) the actual number of savers Moreover, effective prudential regulation and supervision represents a large share of the potential market, and (iv) sav- can increase the public's confidence in an MFI's financial ings are the most important funding source, contributing operations. more than 50 percent to total liabilities. BAAC and BRI are both government-owvned banks. BCS is owned The Challenges of Savings Mobilization by the Catholic Church in Colombia, and RBP by private in- by MFIs vestors. While the BAAC exclusively provides financial services to agricultural producers and their respective organizations, A bostile macroeconomic and financial sector environment. clients of the other institutions are comprised of low-income Even the most efficient MFIs find it difficult to attract savings and middle-income household-enterprises from all sectors. from poor clients when political turmoil and high annual BCS is the only bank of the sample that exclusively operates inflation rates prevail. When there is uncertainty about the in urban areas. (See chart) future, people prefer non-financial assets as hedges against Al four institutions show impressive outreach. They serve instability. Also, MFIs find mobilizing savings a loss-making between 10 (BCS) and 85 (BAAC) percent of the households venture wvhen extensive government interference exists that compose the potential market for these institutions. through interest rate controls and subsidized credit. The number of savers exceeds borrowers one to four, Absence of regulatory framnework tailored to the special charac- The average loan amount (a proxy for determining the ability teristics of MF7s. In the absence of specific prudential regula- to reach low-income households with credit) is generally be- tion for micro-finance, most MFIs would have to transform I : ~~~~~~~~~~low, and in the case of BCS only slightlv above, GNP per capita into formal financial institutions. To become a formal insti- tution, however, MFIs have to meet high minimum capital rn s the respect-ve countrhes. The average savings accounts rep- requirements and abundant requirements for loan documen- suggest that the-intiuon rec ver poo househld tation and collateral that most cannot fulfill. In addition, w ith the ics.iDeposs re prsn bet oln6 these legal stipulations are not adjusted to the specific risk and over 80nperentso talibits inthe tiuons. exposre ofMFIs suchas hgh tunoverof lans dc toand over 80 percent of total liabilities in the four institutions. exposure of ch lasehig tur e sd Financial indicators for all four show high rates of return short maturities or use of collateral substitutes.(RARO)adhgoprtnlefiecy (ROA, ROE) and high operational efficiency. iVfore sophisticated manag,ement capabilities. While some MFIs have experience screening clients and monitoring Factors for Successful Mobilization of loan repayment to minimize the probability of default, risk S m a II a n d M i c r o - s a v i n g s management requirements for deposit-taking institutions managemorent strequirementants formdep osi g in sotectipons A comparison of the banks' experiences points to seven key are more stringent and complex in order to protect poor factors that contributed to the success of small and micro-' depositors. Deposit-taking MFIs will need to train and savings th ation. motivate their staff to meet the challenge of matching assets savings mobilization. and liabilities (matching the different maturities and sizes of Economic Reform and Financial Sector Liberalization. small credit and savings accounts) to appropriately manage In each case, liberalization resulted in increased competition liquiditv. The interest rate spread (the difference betveen for the MFIs, which made them broaden the array of finan- the cost of mobilizing savings and the earning on loans) cial products offered, particularly savings, and incorporate new will have to be carefully managed to ensure institutional groups of customers, particularly the poor. For public banks sustainabilitv. Cost accounting and control of expenses can like BRI, government support without interference in day- inhibit the introduction of small and micro-savings facilities to-day operations made financial intermediation a profitable because in the short to medium term it max, become a undertaking. Elimination of cheap financing available from cost-intensive cndeavor. government institutions stimulated BAAC and BRI to mobi- lize savings. And finally, relaxation of interest rate controls enabled all four MFIs to set interest spreads on a profitable basis. CGAP THE CONSULTATIVE GROUP TO ASSIST THE POOREST [A MICRO-FINANCE PROGRAM]  Outreach ,and Performance Indicators, 1996a Performance Indicators BAAC Thailand BCS Colombia BRI-Unit Desa Indonesia RBP Philippines Ownership Government Private Government Private GNP per capita 3,000 2,000 1,070 1,190 Lending activities Volume of loans outstanding 5,590 million 513 million 1,713 million 5.6 million Number of loans outstanding 2.4 million 209,000 2.5 million 6,350 Average loan size 2,329 2,455 685 882 Avg. loan as proportion of GNP 77% 123% 64% 74% Savings activitiesI VoLume of deposits outstanding 1,875 mnilion 279 million 2,600 million 2.7 miLlion Number of deposit accounts 4.2 million 1.1 million 16 million 10,850 Average deposit size 447 254 163 249 Avg. deposit as prop. ofGNP 15% 13% 15% 21% Financial intermediation indicators Deposits to loan ratio 71% 101% 181% 80% Deposits to liabilities ratio 65% 87% 89% 72% Profitability indicators Return on assets " 0.35% 2.5% 5.5% 7.0% Return on equity 2.82% 19.0% not applicable 36.7% 'All amounts expressed in US Dollars Net income or profits before taxes/avcrage total assets Demand deposits only (does niot ilnclude time deposits) Net inicome or profits beforc taxes/average total capital For end of 1995 Institutional Type and Governance. Governance, owniership, integral part of the institution's services. Second, they imple- and reputation of the institution are crucial in attracting savings mented sufficient checks and balances, including getting in- because they lend to (or detract from) depositor confidence volved in strategic business planning and decision-making to about the safety of their savings. Savings customers are com- ensure sound financial performance and preserve customer con- fortable about entrusting their savings with the four institu- fidence. tions as their owners are wvell-known, and are perceivred as tonstwsrthe owneriskarenwell-kown,r a ex arple, S pciv Co ias Organizational Structure. The closer the MFI gets to its trustworthy and risk-conscious. For example, BCS In Colombia is part oonoft lagsanmswcustomers, the larger the number of small depositors with is part of one of the largest and most wvell-known holding acest aig aiiis AC C n R aeetn companies~~ owe bv th Cahoi Cucinolma. access to savings facilities. BAAC, BCS and BRI have extcn- sive branch and field units located strategically where poor Most depositors are confident that rheir savmigs will bei safe- MostrdepoitorCsufare a confident thatltheirnsavingscwil cresaf. people live or work (e.g. market places). The latter is also true for RBP although it does not operate on a nation-wide scale. Because governments tend to rescue troubled public banks, These field units-particularly those of BAAC and BRI-are government-owncd banks such as BAA and BRI have govnmeadvant-oene bavnksgss mobilizatind Br avel generally lean, low-cost operations, with onlv essential staff- some advantage in savings mobilization over privately-owned..' institutions that lack effective deposit insurance systems. The ing and facilities. The units/branches are treated as cost cen- institutions tha lackeffectivedepositinsurance tepos. iT ters with incentives for efficient operations. Decision-malung implicit guarantee raises customers' confidence in the is decentralized (with adequate oversight) and structured to facilities of these institutions. This guarantee may provide a is tralized and accouabilityu cost advantage over private financial institutions because the latter must often compensate for the lack of an effective de- Field offices of BCS, BAAC, and BRI have access to an posit insurance system by paying higher interest rates to internal liquidity pool and support services for other functions attract deposits. such as training and new product development. Such access to Vulnerability to government intervention, however, is omni- secondary structures allows the institutions to benefit from present in publicly-owned institutions. BAAC and BRI continue economies of scale. to implement mandated government credit programs wvith poor Savings Products and Technologies. Individual, voluntary, results. The losses from these operations are either covered by and open-access savings accounts have proved most success- government funds-as in the case of BAAC-or absorbed by the ful in attracting savers. Though BAAC, BCS, and RBP have profits generated by the unit desas in BRI. These transfers rep- been experimenting with compulsory, locked-in savings or resent a loss of resources and inhibit profitability in both cases. group accounts, these services have produced lower outreach There are two ways that the governing bodies (or boards) of and a remarkably slower growth of the deposit hase than vol- BCS, BRI, and RBP have plaved critical roles in MFIs' suc- untary deposits. In the experience of these institutions, com- Bcs,sBRu savndgR hobilizaveon plrayed . crirstic rles dined sue- pulsory savings, as a requirement for loans, were perceived as cessfual savings mobilization strategy. First, they defined say- acs obro,igrthrta evc visl ings as a key element of corporate identity and made it an CGAP THE CONSULTATIVE GROUP TO ASSIST THIE POOREST WA IMICRO-FINANCE PROGRAM)  When an MFI shifts to voluntary savings mobilization after Regulatory Framework and Internal Control. Prudential a long history of forced savings, it can face a number of chal- regulation and effective supervision provide guidelines for lenges. For example, despite the change in policy at BCS, in sound financial management practices and thereby safeguard practice, its staff continues to require savings from customers the interest of depositors. Each of the four countries reformed who wvant access to credit. The bank is also burdened with their finiancial sector regulatory frameworks during the 1980s administering a considerable number of 'dormant' savings and 1990s. The new regulations specified capitalization levels accounts with very low balances from customers who did based on the level of asset risk and set minimum standards not close accounts after repaying loans. for management capabilities and financial performance. Small minimum balance requirements by all four of the MFIs Despite the restructuring of the financial sector, external su- lowered the barriers to savings facilities for poor households. pervisory capacity in the Philippines and Indonesia has been Savers can open an account with a minimum deposit of US$2 weak. Liberalization of the financial sectors in these countries at BAAC, US$3.80 at RBP, US$4 at BRI, and US$50 at BCS. has led to a mushrooming of new financial institutions and taxed the capacity of the supervisory bodies. While pruden- Rapid access to deposits is also appealing to poor households. All four banks offer at least one liquid savings product wvith tial norms for micro-finance are still emerging, a proven track unlimited f b ithdra,vals. In addition, they offer semi-liquid sav- record of the ability to operate as sound financial intermediaries ings accounts and time deposits with a fixed term to address will remain critical to the successful mobilization of savings. the needs of various market segments. To offset the higher costs In the absence of effective supervision and the lack of a associated with managing small savings accounts, the MNfIs paid reliable deposit insurance system, internal auditing often no interest on balances below a specified minimum. Addition- takes on a more important role than external supervision. ally, as an incentive for savers to increase deposits and avoid In BAAC and BRI, headquarters monitor regional offices, making withdrawals, interest rates increased with the account regional offices supervise the branches, which in turn control balance. banking operations in the field units. Lotteries appear effective in attracting savings from poor house- Lowering the Cost of Savings Mobilization. The four MIFIs holds. In BRI, savers wvith a stipulated minimum deposit par- lowered administrative costs through designing simple savings ticipate in a drawing to xvin prizes, such as motorcycles and jeeps. products, offering differentiated interest rate systems with no The lottery drawings are important social events in the com- interest on low balance accounts, and maintaining lean field munity and provide opportunities to promote new or existing offices with the same staff handling lending and savings ser- financial products. Actually they strengthen the customer-bank vices. In addition, each institution has adequate built-in relationship that is crucial for depositors' trust in banking mechanisms (such as a performance bonus system) to instill operations. high levels of operational efficiency and encourage savings mobilization. They also have access to an internal or external Simple design of savings products makes it easier for savers to miidiool T hatereduce s a o an te o ortio select the product that best suits their needs, and for the NMI's liquiditv pool that reduces cash-holding and the proportion staff to administer them. BRI's savings services are notably of non-earning assets to keep operating costs low. easy to understand and possiblv a major factor in garnering 16 million small saving accounts. Similarly, eye-catching iThis -ore is a, syncsp,a, oftrie folor-ing lisa papers pu,blisled 1y D,,,tseise Gesefl,,,aft fCir trademarks for savings products (BAAC, BCS and BRI) can Technische Zusammenarbcirt GTZ - Germin an Technical Cooperation) sith fuodinsga, r also help savers better understand the particular design of the Federal Miaistrn for Economic Cooperationi anid Dcvclop!-nt EBMZl; in Germnanv. The s! ytnopsis as prcpared bv Joyita Molkherjec of the CGAP Sccretariat and Svlh ia Wisnisyski each savings product and to distinguish them from those of of GI 'Z. competitors. Market studies and pilot-testing of newv savings GTZ. 1997. Comparatice .A1alysis of Sayiings Mobilizationi Strategies (0,scCIvics of thic products are of utmost importance. BCS and BAAC have Poor Case Studies). Eschborn [Afred -annig. Laura Elser, and Srlyia Wisisis special divisions at headquarters level for the design and GTZ. 1997. Co-uiaarti-s Aeialois suS,vi.gs Moblsiliz-ti.n Straltgis Case Studs, 13amc divisions ~~~~~~~~~~~~~~~~~~~Caja Social. EsclhbLoren [Svlisa ViS sni,sski] improvement of savings products. GTZ. 1997. Comparative Ana!vsis of SavinapS M,obiljzatizn Strategies: Case Study. Bank for Agricalture and Agreuclrraal Cooperatises. Eschborm. (Dclbert Fitclert I Risk and Liquidity Management. All four institutions manage risk through strict borrower screening, diversifving Rakyat Indones;a. Esdchborn [kaus oiSinasSer the loan portfolio, moniitoring borrowers, an-d following GTZ. 1997. Comparative Analysis of Sainags Mobilizatistn Strategies: Case Study, Rural sound provision policies. Batik of Panabo. Eschborn. [Citnch Wchncrt] GI'Z. 1997. Sas ings is, the Context of Microfinsance. Discussionsa Paper prepared for tic For prudential liquidity management, each of the MFIs has CGAP Working Grousp on Einsanacial Inastruinsents. Eschlssorn. established an internal liquidity pool or is linked to the liquid- Copies oftisese papers are asailable front GTZ. Financial Systems Derclspmcnt amCd Barkisg Services,Atin Alfied Hiannig, P.O Bets 51 80. D-6S726 Escebborn; FPhone: 49-6196-79-1375; ity pool of a partner organization (another bank). The inter- Fax:49-6196-79-6150; email: alfred.hannig@gtz.dc nal liquidity transfer price is set high enough to encourage savings mobilization. Empirical evidence from BRI and BCS Focu1s Note Series Editor: Mohini Mallaotra; Pr,odLctio,s: Valerie Chaisholm; shows that an internal liquidity price close to the interbank EarthWise Printing, Gaithersburg, MND (301) 977-3765. lending rate is conducive for savings mobilization. O Printed on recycled paper CGAP THE CONSULTATIVE GROUP TO ASSIST THE POOREST [A MICRO-FINANCE PROCGRAMI