Microsavings Compared to Other Sources of Funds

Publication Date: 1999
Published by: Consultative Group to Assist the Poor (CGAP)
Document Type: Paper

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Should more attention be paid to savings-driven financial intermediaries?

Provides convincing evidence that the microfinance sector is by far not only a credit market, using case studies

Argues against the widespread belief that poor people cannot save, stating there is a tremendous demand for savings products. Also that in order to take full advantage of savings as a source of funds, microfinance institutions (MFIs) have to be aware of the implications regarding costs and risks involved with the deposit business instead of just designing savings products and bringing them into the market

Discusses the various aspects of savings as a source of funds compared to other sources of funds such as equity, commercial loans, grants and others

Examines the liabilities structure of traditional banks and non- bank financial institutions. Reviews the specific risks involved in funds management. The differences between the funding strategies of MFIs and traditional financial institutions are examined and provide insights into the existing obstacles for commercialising and "popularising" the sources of funds in MFIs

Concludes that more attention should be paid to savings- driven, full-fledged financial intermediaries and their role in attracting small deposits. If donors want quick results, NGOs might be the most promising agents for rapid implementation of standardised microcredit programmes for the poor. However, if long term sustainability is the ultimate goal, full-fledged financial services must be provided to microclients at an early stage of institutional development. As this requires institutional complexity, demand-oriented product design and a clear service orientation, commercial banks and savings-driven institutions will be a better choice. These institutions often have more appropriate incentives in terms of ownership, sound governance and internal control systems as prerequisites for savings mobilisation. While savings-driven institutions such as savings and credit cooperatives and village banks are able to manage simple savings and loan products, commercial banks might be better qualified for handling a large array of different financial services and their respective risks. Donors and governments must decide whether the ultimate goal of their development finance strategies is the replication of standardised credit delivery systems for the poor, or the provision of full-fledged financial services.
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