The True Cost of Deposit Mobilization (Draft)

Publication Date: Dec 2007
Published by: Consultative Group to Assist the Poor (CGAP)
Document Type: Paper (PDF)

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This draft report presents findings from an activity-based cost study of deposit services in five financial institutions.

This CGAP draft report presents the findings of a study that investigated the true, all-in cost of deposits, at five different financial institutions serving poor clients using activity-based costing (ABC).

The study aimed to determine:

• How expensive is it really to mobilize deposits from poor people?
• Can costs be reduced by identifying major cost drivers?

It found that:

• Total deposit costs varied dramatically among the participating institutions.
• There were four major types of administrative costs:
  • Opening deposit accounts;
  • Servicing deposit accounts;
  • Handling cash transactions;
  • Sustaining activities.
• Financial cost (the interest paid to depositors) contributed significantly to total deposit cost.
• The cost of deposits alone did not determine their attractiveness to institutions.
• For these five institutions, the contribution of deposit services to their social mission made up for their impact on overall profitability.

The report concludes that:

• Deposits can bring advantages such as stability of funds, reduced dependency on external borrowing, opportunities for cross-selling, and client acquisition and retention benefits;
• Financial institutions should make the choice between deposits and alternative sources considering the above benefits, not just costs;
• Good information on costs is crucial to making informed choices about the way an institution can best serve clients and shareholders.