Q&A with Marguerite Robinson

Marguerite Robinson gives suggestions on how to mobilize savings from the poor people on a large scale and still remain profitable.

Marguerite S. Robinson is the author of Mobilizing Savings from the Public: Basic Principles and Practices, supported by USAID, SPEED, Chemonics, and Women’s World Banking. Here, she answers 4 frequently-asked questions about how commercial MFIs can mobilize voluntary savings from the poor on a large scale – and still remain profitable.

My answers will focus on some basic principles and practices that hold for all regulated financial intermediaries that mobilize savings -- banks of various kinds, non-bank financial institutions, credit unions, etc. I will emphasize microfinance institutions (MFIs) that are beginning to add voluntary savings from the public to their credit portfolios—and on what they need to learn to do this successfully. But the issues discussed here are also relevant for other microfinance intermediaries. Financial institutions that already mobilize and intermediate savings, but that want to improve their performance and increase scale, can select those concepts and methods that are most relevant for their needs (which will vary from one MFI to another).

In “Mobilizing Savings from the Public” you outline 10 key principles for successful voluntary savings mobilization from low-income people. Which of these principles are the most important?

Marguerite Robinson with the late Sugianto, Managing Director of BRI Microbanking (in the middle) and staff from BRI and the Center for Policy and Implementation Studies. Shown at a BRI Unit in Ambon (Eastern Indonesia) in the 1980s, they were conducting extensive demand research on savings.

First, mobilizing savings from the public is not for every microfinance institution (MFI). MFIs mobilizing savings from the public should be publicly regulated and supervised. Important prerequisites for MFIs collecting and intermediating savings from the public include:

• Country-level conditions such as an enabling macro-economy and basic political stability; an appropriate policy and regulatory environment; and competent public supervision for MFIs.
• Institutional prerequisites including clear ownership; skilled and knowledgeable governance and management; an organizational structure appropriate for commercial microfinance; and a corporate culture of transparency and accountability.

Also required are a strong institutional performance record, extensive knowledge of the microfinance market, expertise in financial intermediation among branches that may be located far apart, and experience in suitable investment strategies for excess liquidity.

Second, MFIs need to learn directly from low-income people what they currently do with their savings—and what they like and dislike about their present savings methods. Poor people already save—as Stuart Rutherford’s “Ask the Experts” interview for this series shows unmistakably. MFIs that want to mobilize savings from the poor must understand that they will be in competition with savings strategies currently employed by such people, such as saving in gold, cash, animals, informal savings and credit associations, private savings collectors, postal banks, etc. The job of the MFI is not to teach poor people to save, but to provide products and services appropriate for their needs. And the first step is to learn from prospective clients what they want.

Then the MFI needs to design and deliver, efficiently and effectively, a set of products that offer what savers like about their present methods. For example, saving in cash in the house offers convenience, while saving in animals yields byproducts such as wool, milk, eggs, and labor, which provide returns. But the MFI must also provide solutions for the problems presented by savings methods that poor people currently use, which can include risk, inconvenience, and lack of liquidity, confidentiality, or returns.

I have found that low-income savers—whether in India or Mexico, Kenya or Vietnam, Bolivia or Indonesia—all want essentially the same things: security; convenience; liquidity; confidentiality; products appropriate for their needs; helpful, friendly, and respectful service; returns; and potential access to loans. And they want their financial savings to be a legally recognized asset. It is often the only one they have.

These demands form a package—they are not an à la carte menu from which the MFI can choose. The MFI must remember that for credit, it is the institution that must trust the client. But for savings, it is the client who must trust the MFI.

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How can financial institutions stay profitable while serving large numbers of poor savers?

The short answer is that they must mobilize savings from the public, not from the poor alone. It is possible that with the increasing development of technology, the costs of servicing small accounts may decrease significantly in the future. But currently transaction costs for a $5 savings account tend to be little different from those of a $1,000 account, although the latter is considerably more profitable. Thus when MFIs mobilize voluntary savings from large numbers of poor people, they need to raise the average account size with larger accounts. Such MFIs can then mobilize savings profitably and on a large scale.

But doesn’t this defeat the MFIs’ mission? No, it enhances it. Collecting savings from higher-income individuals, as well as from organizations, businesses, and institutions that are located near the MFI’s branch or sub-branch, permits the MFI to do several things at once:

• Meet local demand for savings services
• Collect small savings from large numbers of the poor
• Use savings from all sources to finance an expanding microloan portfolio, and
• Maintain the institution’s financial self-sufficiency.

Mobilizing savings from the general public also has another important advantage: staggering withdrawals. If MFIs target only low-income clients, withdrawals can be clustered around certain times—when school fees are due, at religious holidays, in pre-harvest months, and the like. This can precipitate a liquidity crisis for the MFI. But serving a mix of clients—poor and non-poor, individuals and institutions—helps to spread withdrawals more evenly.

Successful microfinance intermediaries understand and act on a fundamental principle: the number of borrowers can be controlled by the number of loans approved—but voluntary savers cannot be turned away without widespread and long-term negative effects. This basic difference can result in very rapid growth in the client base when an MFI opens savings services for the public that are designed to be appropriate for their needs. But such large and essentially uncontrollable growth carries substantial financial, operational, and strategic risks.

Managing high growth and maintaining profitability requires highly skilled—also scarce and costly—management resources. When an MFI opens its doors to public savings, it must have the capacity to provide the services that have been promised. This typically requires additional, and considerably upgraded, management, staff, internal supervision, training, transportation facilities, security, space, furniture, supplies, and the like. Treasury management, asset-liability management, and liquidity management become crucial. The information management and reporting systems must have the capacity to handle the increased complexity of the MFI’s operations and intermediation. And the governing board must have the capacity and skills to oversee these basic changes.

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You have urged financial institutions to limit the range of microfinance services they offer. How can these institutions balance a limited range of services with meeting the diverse needs of clients?

The key to large-scale savings mobilization from the public is not many products, but rather a few well-designed and effectively delivered products that clients can use to customize their savings portfolios in ways that meet their particular needs. It is generally difficult and costly for the institution to manage effective delivery of more than a few products, especially in the beginning. Too many products can lead to strains on management and staff capacity that negatively affect both the MFI’s performance and its client service. What is essential is consistent, high-quality delivery of a few complementary products in high demand.

Customizing the use of products. A savings account permitting unlimited transactions, a fixed deposit account (including accounts with 1, 2, and 3-month maturities), and one or two other savings products are all that is needed to start. These basic products must be carefully designed for use in different combinations for different purposes by all types of savers—poor and non-poor, individuals and institutions. Savers then customize their use of these products to meet their own needs—and they can reconfigure the ways in which these accounts are used as their needs change over time.

Learning from clients

A woman I met in Nairobi made the issue of customization very clear to me. NR, a K-REP borrower, owns and runs a very small radio sales and service shop in the slums of Nairobi. As we talked, I explained three types of savings and deposit accounts that the new K-REP bank might offer when it became licensed. I described an interest-bearing savings account permitting an unlimited number of withdrawals, a savings account with a higher interest rate in which withdrawals were limited to two per month, and a fixed deposit account featuring the highest interest rate of the three products but including a penalty provision for withdrawal before maturity. I then asked if she would find any of these products useful. She replied immediately:

“I would want to have all three accounts for different purposes. The account that allows withdrawals at any time would be good for me because I can afford to buy only one radio part at a time. As soon as I sell the part, I buy another—so this type of account would be good for buying parts. I would use the account that allows withdrawals twice a month for my repair service. I have an employee who repairs radios, and I pay him every two weeks. I could deposit the money for his salary in that account, as I would need to withdraw from it only twice in a month. Also, I have to save to buy radios and television sets. I would use the fixed deposit account to save for these; the higher interest rate would help me to acquire inventory faster.”

Product design is the easy part—product delivery is hard. For many years, product design was neglected in microfinance. Now the pendulum has swung, and product design is overemphasized. Many other factors are crucial to capturing and maintaining public savings, including convenience of branch and sub-branch location and opening hours, staff attitudes toward clients, appropriate management information systems and other technology, space use, asset-liability and cash management, intermediation among branches, efficiency of operations (e.g., short waiting periods for savers who want to deposit or withdraw), quality of administration, quality of the loan portfolio, and trustworthiness of the institution. Getting the structure of these inter-linkages right is far more important than a wide range of products. Successful commercial microfinance intermediaries with large-scale outreach tend to be those with the best delivery of a few well-chosen products.

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What are some examples of successful financial institutions mobilizing voluntary savings from low-income people?

Leading commercial MFIs of various institutional types have achieved rapid growth in savings. Three quite different examples can give a sense of the kinds of growth that a well-managed commercial microfinance intermediary—with the characteristics described in the answer to the first question—can expect.

Bank Rakyat Indonesia (BRI)
In 1983 the loss-making subsidized rural credit program of the then-failing, state-owned Bank Rakyat Indonesia (BRI) had $18 million in savings after a decade of offering voluntary savings services in more than 3,600 bank units located in all the country’s sub-districts. In 1984, the microfinance program was converted to a commercial microbanking system. As part of the reforms, BRI totally revamped its approach to voluntary deposits and began pilot projects in a major new savings initiative.

A rapid and severe decline in the exchange rate of the rupiah to the US dollar occurred in 1998 during the East Asian crisis, and was followed in subsequent years by other notable variations in the exchange rate. Thus US$1=909 rupiah in 1983; 2,161 rupiah in 1996; 14,900 rupiah in June 1998, but 8,025 rupiah in December 1998; and 9,320 rupiah in 2004.

A rapid and severe decline in the exchange rate of the rupiah to the US dollar occurred in 1998 during the East Asian crisis, and was followed in subsequent years by other notable variations in the exchange rate. Thus US$1=909 rupiah in 1983; 2,161 rupiah in 1996; 14,900 rupiah in June 1998, but 8,025 rupiah in December 1998; and 9,320 rupiah in 2004.

Twenty-one years later, by the end of 2004, the microbanking system had $3.5 billion in 31.3 million accounts. The number of savings accounts and the rupiah value of savings increased substantially throughout the period, even during the severe Asian financial and economic crisis of the late 1990s (see Robinson 2002). The average savings account balance in 2004 was $112 (14 percent of the country’s 2003 per capita GNI of $810). With some modifications, the savings products in BRI’s microbanking system are the same three accounts that were carefully designed in 1984 both to meet demand and to enable effective and efficient delivery.

In 2003 BRI shares were offered to the public on the world’s major stock markets, and currently about 40% of the bank’s shares are privately owned. BRI is the largest financially self-sufficient microfinance intermediary in the world. It is also the first MFI to offer shares broadly in the world’s main financial markets. These two points are, of course, directly related. (Source: BRI unit bank monthly reports and other BRI data).

Equity Bank, Kenya
In 1994 Equity Building Society (EBS) in Kenya began its conversion from a failed mortgage lender to a commercial microfinance institution. A regulated institution, EBS had mobilized voluntary savings between 1984 and 1993, but it had a narrow product focus and its managers and staff knew little about client demand. Savings stagnated. Then a new management team took over and began to revise its products and services, with the result that savings grew from $3 million in 12,000 accounts in 1994 to $7 million in 41,000 accounts in 1998. By 2003 EBS savings had jumped to $43 million in 252,000 savings accounts—a growth in 5 years of more than 6 times both the number of accounts and the amount of savings. The year 2003 alone saw a growth of $22 million (a one-year increase of 65 percent) in more than 100,000 new accounts (an increase of 63 percent). In 2003 the average account balance was $170 (44 % of Kenya’s $390 per capita GNI that year). In 2005 EBS was licensed as Equity Bank. (Source: Equity Bank data).

ACLEDA Bank, Cambodia
ACLEDA began as an NGO in 1993, and by late 2000 it was licensed as a bank. ACLEDA then began raising voluntary savings from the public, and by December 2001 it had $1.9 million in 3,800 savings accounts. And by December 2004 the number had grown to $31.6 million in 57,100 savings accounts. Thus in three years the amount of savings increased by nearly 17 times and the number of savings accounts by more than 15 times. The average savings account balance was $554, 179 percent of the country’s $310 GNI per capita in 2003. Cambodia is the poorest of these three countries, and ACLEDA reports that more than 90 percent of its operations are in microfinance. But its ability to attract larger accounts as well as serving its microfinance clients, helps the bank to retain its continued profitability. (Source: The MixMarket)

Despite their disparate beginnings, BRI, EBS, and ACLEDA all followed the same basic principles of commercial microfinance outlined in the answer to the first question. It is not coincidental that all three institutions have excellent management and are financially self-sufficient. And all are now banks. Though each still faces challenges (of different kinds), all these institutions are now leaders in the emerging global commercial microfinance industry.

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