Savings FAQs
- Do poor people really save?
- How do poor people save?
- What criteria must be considered when designing deposit services for the poor?
- What are the prerequisites to offering savings services?
- What problems do credit-based financial institutions commonly face when developing savings services?
- What are the biggest legal and regulatory constraints to pro-poor savings mobilization?
- How can donors support small-balance savings mobilization?
- Why have MFIs historically not emphasized savings as much as credit?
1. Do poor people really save?
Yes. Poor people save because they must: their income is rarely sufficient to manage crises (such as a sudden illness or a flood), to invest when opportunity strikes, or to pay for large expected expenses, such as school fees, a wedding, or a home renovation. Numerous studies and experience worldwide confirms that the poor use informal savings devices, even though these are often neither reliable nor secure. Initiatives such as the Financial Diaries in India, Bangladesh, and South Africa; MicroSave in eastern and western Africa; and studies by the International Food Policy Research Institute have documented savings practices among the poor.
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2. How do poor people save?
The poor have limited access to deposit services offered by formal or semi-formal institutions. The consequence of the scarce availability of appropriate savings services is that most poor people save in informal ways—by tucking cash under the mattress, buying animals or jewelry that can be sold off later, joining village savings circles, or giving money to neighbors for safekeeping. The problem with these methods of saving is that they are risky— cash can be stolen, animals can get sick, the neighbor can run off. They can also be fairly illiquid. It is impossible to cut off the leg of a cow and sell it if only a small amount of cash is needed.
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3. What criteria must be considered when designing deposit services for the poor?
Typically, the poor want their savings to be secure, with low transaction costs, appropriate design, and, if possible, constant in value:
Security - Secure savings are not in jeopardy from fraud, theft, fire, and relatives’ demands. Safety is paramount, even in the face of inflation.
Low transaction costs - Proximity is essential to reduce the high transaction costs of making deposits and withdrawals. Convenient opening times and minimal paperwork are also important.
Appropriate product terms - Individual voluntary deposit products that allow frequent deposits of small, variable amounts and quick access to funds are best. Contractual savings are also useful for planned future lifecycle expenditures such as weddings, funerals, and birth celebrations.
Interest rates - If transaction costs are low, rural savings takes place even with negative real returns – indicating that the poor can be relatively insensitive to interest rates as a priority when evaluating savings options. Nevertheless, demand for savings products does increase as real interest rates rise.
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4. What are the prerequisites when offering savings services?
An institution should have:
- the legal authority to mobilize deposits
- effective governance
- financially sustainable operations
- a sound business plan showing continued viability and indicating where savings can be invested profitably
- adequate capital
- a history of rigorous credit management
- a system for measuring and monitoring financial performance
- sufficient internal controls supported by a culture, policies and human resource management that prioritize the security of funds
- the technical capacity to manage liquidity and interest rate risk
- a management information system, whether manual or computerized, that can handle the volume of anticipated transactions and can provide information that is sufficient, accurate, timely and transparent
- the necessary physical infrastructure including secure premises in safe and convenient locations, a strong room or vault, and sufficient office space with counters.
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5.What problems do credit-based financial institutions commonly face when developing savings services?
For a credit-based institution, managing the shift to being a full-fledged financial intermediary is a complex challenge, bigger than simply developing new products and adapting some management systems. The transformation to a full financial intermediary fundamentally changes a financial institution. Some of the biggest challenges include:
Sufficient Staff Commitment - Many institutions find that one of the biggest obstacles to developing sound savings operations is staff resistance. To overcome this, savings-oriented human resource management is crucial. If the existing institutional culture, staff incentives and evaluation system reward only strong credit performance, management must change these to prioritize savings.
Cost Recovery - There are two keys to viable savings mobilization: 1) attracting an adequate volume of deposits and 2) managing operating costs. Achieving this volume and level of cost control requires rigorous management, appropriate incentives, effective mechanisms for accountability and an appropriate management information system.
Information Management - Savings operations usually require an information system that can handle a huge volume of transactions, balance accounts frequently, and meet the audit and reporting requirements of regulators. Adequate information management requires expertise and is often costly and time-consuming. In particular finding the right software, migrating to it, and customizing it can be major on-going challenges.
Sufficient Governance - To safeguard the savings of depositors, a board or other governance body must exercise reasonable oversight, ensure sufficient discipline, and serve as a check on management performance. This body must be knowledgeable, engaged, and sufficiently powerful to be able to step in if management puts either savers’ deposits or the institution’s viability at risk.
Developing Trust - People will entrust their savings to an institution only if they perceive it as secure, honest, professional, and stable. To gain trust, a financial institution will need to consciously develop staff, quality of service and a consistent brand image in the market. A key and costly element of developing this image can be upgrading physical facilities to instill a sense of security in existing and potential clients.
Implementing Adequate Internal Controls - Savings operations can be more vulnerable to fraud and errors than credit operations because of larger amounts of cash in the institution, and the unpredictability of the size and timing of deposits. Some institutions discover that their internal controls are not sufficient to reliably detect mismanagement or fraud.
Culture - For a mainstream regulated institution, serving the poor often requires a change in institutional culture. Professional staff who are well suited to serving better-off clients may have a hard time relating to poor clients – and the poor may not use a service if they feel uncomfortable or unwelcome. Furthermore, better-off clients may be unwilling to wait in lines next to or behind poor depositors, who may slow down tellers by transacting in many small coins. Commercial institutions often carefully cultivate a professional image that appeals to better-off clients. This image may be difficult to maintain when also serving poorer clientele. Using different delivery channels and staff can partially overcome this obstacle. Above all, moving “down market” with savings requires strong senior-level commitment. If the commitment is there, solutions to the other challenges of mobilizing small deposits will follow.
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6. What are the biggest legal and regulatory constraints to pro-poor savings mobilization?
Some regulatory policies undermine the viability of savings operations while others place services out of reach of rural and poor savers. Prohibitions against unsecured lending and interest rate caps on loans can make it impossible to invest savings at volumes and interest rates that cover costs. High reserve requirements also make it hard to generate sufficient revenues. High capital adequacy and some types of detailed reporting requirements make it difficult to establish small financial institutions such as rural banks or small credit unions that can serve rural areas.
In practice, small and rural depositors may also be excluded by regulations that govern branches, including:
- where branches can be located
- transactions may only be conducted in the office and not in the field
- accounts must be cleared daily
- each branch must have a strong room or be open certain hours
- two employees must handle each transaction (rather than allowing for other methods of internal control, such as verifying passbooks against branch records after the transaction)
These branch regulations preclude the use of mobile units, small offices, and deposit collectors – delivery systems that can be the key to serving small depositors on a viable basis.
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7. How can donors support small-balance savings mobilization?
Donors can help or hinder savings operations. The soft loans that donors often provide can make it less attractive for a financial institution to mobilize deposits. However, donors can help develop sound savings operations by:
- helping to strengthen regulation and supervision
- improving regulators’ understanding of microfinance issues (such as the high volume of small-value transactions, alternative collateral, interest rate policy, and human resource needs)
- providing technical assistance grants
- supporting visits to successful deposit institutions
- funding savings-focused market research
- supporting a range of institutional types and delivery channels to extend services to poor and rural markets
- investing in physical or technological infrastructure to jumpstart savings mobilization in rural areas
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8. Why have MFIs historically not emphasized savings as much as credit?
In its first two decades, the microfinance “movement” focused more heavily on loans than on savings, for three main reasons:
1. the movement’s aim was to help the poor, who were not thought of as having much money to save;
2. in most countries, new credit techniques, not new savings techniques, launched the movement, and
3. most of the institutions involved were NGOs, which were not legally licensed to collect savings.
However, in recent years there has been an increasing recognition that most poor families do save, and that this saving is usually in non-financial form (for instance, stockpiling goods). This is not because the poor prefer non-financial savings, but because they often lack access to good formal savings facilities.
The answers to these questions are adapted from Savings Services for the Poor: An Operational Guide, edited by Madeline Hirschland (2005).
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