Savings Glossary

Asset Liability Management (ALM) - The process of coordinating the management of an entity's assets with the management of its liabilities. Banks, in the normal course of business, assume financial risk by making loans (assets) at interest rates that differ from rates paid on deposits (liabilities). Deposits often have shorter maturities than loans and adjust to current market rates faster than loans. The result is a balance sheet mismatch between assets and liabilities.

The function of asset-liability management is to measure and control three levels of financial risk: Interest Rate Risk (the pricing difference between loans and deposits), Credit Risk (the probability of default), and Liquidity Risk (occurring when loans and deposits have different maturities).

Compulsory/Mandatory Savings - Savings payments are required as part of loan terms or as a requirement for membership, usually in a credit union, cooperative, microfinance institution, village bank or savings group. Compulsory savings are often required in place of collateral. The amount, timing, and level of access to these deposits are determined by the institutional policies rather than by the client. Compulsory savings policies vary: deposits may be required weekly or monthly, before or when the loan is disbursed, and/or each time a loan installment is paid. Clients may be allowed to withdraw their savings at the end of the loan term; after a set number of weeks, months or years; or when they terminate their memberships.

Contractual/Programmed Savings - Savings in which the client commits to regularly depositing a fixed amount for a specified period of time to reach a pre-determined goal. After the maturity date, the client can withdraw the entire amount plus the interest earned. Early withdrawal is prohibited or penalized. Contractual products help depositors accumulate funds to meet specific expected needs, such as expenses associated with school, a festival, a new business, an equipment purchase, or a new house. They also help financial institutions better predict the volume and timing of deposits and withdrawals.

Credit Union/Financial Cooperatives - A non-profit financial institution that is owned and operated by its members. Credit unions provide financial services for their members, including savings and lending. Credit unions and financial cooperatives are typically savings-based, i.e. they fund their loan portfolio with member deposits as opposed to external financing.

Demand/Sight Deposit - A deposit that may be withdrawn by the depositor at any time. The balance can be withdrawn via check, ATM or by transfers to other accounts using a personal computer or telephone.

Deposit Insurance - Insurance to reimburse depositors for the loss of their deposits in the event their financial institution fails. Deposit insurance is typically provided by government as an adjunct to regulation and supervision. It may also be required by regulation but provided by private insurers. Deposit insurance does carry a risk: by assuring that depositors will not lose their savings if a bank goes under, it can 1) undermine depositors’ motivation to oversee the institutions in which they deposit and 2) encourage managers to take on more risk than they otherwise would if the deposits were not insured.

Financial Intermediation - Process of accepting and then mobilizing deposits to 1) offer loans to clients; and/or 2) invest in other types of financial instruments. Financial intermediation is significantly more demanding than managing credit alone and requires strong institutional capacity. Challenges of effective financial intermediation include managing liquidity, developing effective internal controls, and monitoring asset quality to ensure that the institution has sufficient capital to honor its liabilities.

Informal Savings - Savings held outside of a formal financial institution. Informal savings mechanisms include saving at home (in cash or kind), joining village savings circles (e.g. ROSCAs and ASCAs), saving with neighbors or relatives, and informal sector deposit collectors (people who charge a fee to hold a saver’s money for a determined period). Informal savings devices are often convenient but may be unreliable, insecure and/or illiquid.

Interest Rate Risk - Risk associated with changes in market interest rates that can harm a financial institution’s profitability. A financial institution exposes itself to interest rate risk when it mobilizes deposits at one interest rate and lends them out at another.

Interest Rate Spread - Difference between the rate a financial institution pays for deposits and the rate it charges for loans. In a financially sustainable institution, this spread is large enough to cover operating costs, the opportunity cost of holding liquid reserves that earn no or low interest, losses in the value of the institution’s assets due to inflation, the cost of provisions for loan and investment losses and capitalization.

Internal Controls - Policies and procedures designed to minimize and monitor operational risks, in particular the risks of fraud and mismanagement. Institutions that mobilize deposits must implement rigorous internal control policies and procedures because the unpredictable size and timing of cash deposits make financial institutions particularly vulnerable to fraud and errors.

Liquidity Reserve Requirements - Government regulations mandating the percentage of deposits that a financial institution must set aside as liquid reserves to be able to meet withdrawal demands. The reserve rate affects the institution’s viability in two ways: 1) by improving the likelihood that depositors will be able to withdraw their funds when they want to, reserves protect the institution from the risk of a liquidity crisis and insolvency; and 2) reserves often earn no or little interest, so if the reserve rate is high, the financial institution must compensate by obtaining a higher return when it invests the rest of its deposits.

Liquidity Risk - The risk that a financial institution will not have enough liquid assets to meet the demand for cash outflows, including saving withdrawals, loan disbursements, and payment of operating expenses. A lack of liquidity can put a quick and final end to a financial institution’s efforts to mobilize deposits – and, in the worst case, can cause it to collapse or close. Deposit mobilization requires clients to trust that they will always be able to access their savings when they want or need them. A financial institution invests significant time and resources instilling this trust in clients, but a liquidity crisis can destroy it instantly.

(Non-Postal) Savings Banks - Banks are heavily savings-focused, and are often large, with significant outreach among the poorest households in their countries, especially in rural areas. Some have loan portfolios, but most of their loan assets are in large investment loans rather than small retail loans. Most savings banks were set up with a mission to reach out to clients who were not being served by commercial banks. Typically, they are not profit-maximizers.

Passbook Accounts - Demand deposit accounts that use passbooks rather than checks, ATMs or point of service devices for transactions.

Postal Savings Banks - Delivering mail requires a wide network of post offices that includes rural areas, and a functioning system for moving documents and information among the offices. In some post offices, staff time is not fully occupied by handling mail. Many countries take advantage of their postal infrastructure to provide financial services. Postal banks usually do not make loans: their services are limited to savings and payments/transfers. Account and transaction sizes tend to be quite small.

Risk Management – A systematic approach to identifying, measuring, monitoring and managing business risks in an institution. 

Rotating Savings and Credit Associations (ROSCAs) - Informal savings and credit groups in which each member deposits the same amount of money at the same regular interval; each time members deposit, they give the whole of the amount collected to one member. When there have been as many distributions as there are members, the ROSCA cycle ends. Everyone has put in and taken out the same amount; for example, ten people each save $10 a week, and each week for ten weeks one person walks away with $100.  ROSCAs exist around the world—called merry-go-rounds in Kenya, tandas in Mexico, chit funds in India, kibati in Tanzania, and esusu in Nigeria.

Supervision - Systematic oversight of deposit-taking financial service providers to make sure that they comply with the regulations governing them, or to close them if they do not. Supervision plays a crucial role in protecting depositors from losses due to mismanagement or fraud.

Savings/Regular Savings Account - Demand deposit accounts that use passbooks, magnetic stripe or smart cards, ATMs, POS devices or some combination of these for transactions. They do not allow accountholders to use checks.

Self-Help Groups (SHGs) - A community-based group of low-income persons who come together to address issues of mutual concern, share knowledge, and provide financial and non-financial services to each other. Financial services provided typically include savings and loans in which loans are funded by group savings. Government and non-governmental organizations often play a role in forming and serving self-help groups to facilitate and strengthen group formation and operation. The SHG model is the dominant form of microfinance in India. They are typically comprised of a group of 10–20 poor women.

Term/Time Deposit/Certificate/Fixed Deposit - A savings product in which a client makes a single deposit that cannot be withdrawn for a specified period of time. At the appointed time, the client withdraws the entire amount with interest. The financial institution offers a range of possible terms and usually pays a higher interest rate than on its demand deposit or contractual products.