Q&A with Steve Peachey

Steve Peachey highlights the key messages of his paper "Access to Finance: What Does It Mean and How Do Savings Banks Foster Access".

1. According to the findings of your study, what are the unique strengths of savings banks including postal savings banks in providing access to finance?

Unique is a word I am always cautious about using. What I think we have found, working with World Savings Banks Institute (WSBI), is a rather special combination of proximity to, appropriate products for, and affordability in the mass-market for ordinary people's savings and loan needs. For me the most striking finding was that savings banks in the poorest fifth of countries operate with an average savings balance that is roughly a quarter of per capita GDP. At this ratio to average income, we know mass access is possible as we find the same relationship between average deposit size and per-capita GDP in the richest European countries with strong savings banks (France, Germany, Spain, etc) which we know reach the bulk of the mass-middle market and beyond, underpinning very high levels of access to finance (90%+). This is different from commercial banks, where tentative evidence the World Bank gathered from regulators suggests that per-capita deposits average five or six times per capita GDP in the poorest fifth of countries, a ratio that is only compatible with servicing the needs of the top end of the market.

2. What do your observations reveal about the financial viability and the quality of services offered by savings banks?

What is really encouraging is that savings banks seem to be able to do small-scale savings mobilization without crippling profitability – they are truly double-bottom line institutions. Their founding statutes or missions will almost always commit them to providing universal access to basic savings and payments products (and sometimes credit as well) but they also make a profit on the whole from this business. Of the 72 or so WSBI members for whom we have relevant data, around 65 make an operating profit and a positive net return on assets even after bad debts are accounted for.

Unfortunately, the data we have on postal savings banks is much patchier than we have on other forms of savings banks but I think the point on outreach being possible without foregoing profitability can still be made, because there seems to be no systematic difference between average balances at non-postal savings banks and postal savings banks. This is an area where we are doing more work with the World Bank.

Quality is a less tangible attribute. The basic savings passbook may look primitive to a commercial banker but to very many ordinary people – some of them with limited literacy skills – it is a precious record of what they have and when they last used it. I was struck by the following comment in Marguerite Robinson's earlier Q&A:

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.

Staff at savings banks around the world achieve just this with basic passbook savings products and simple money transmission services. It may not always be accounted for in real time. This may sometimes mean there have to be procedural delays to customers from accessing their accounts away from their home branch. But this product package does the job that very, very many poor people want at an affordable price.

Now this is not to say that savings banks are all technologically backward. Try saying to the half or more of all German or Spanish adults who bank at a Sparkassen or Caja, that they receive a backward service. Try saying it also to the microfinance customer of the Thai Government Savings Banks whose account officer is completely mobile and can accept a deposit in cash, of any size away from the branch, and print off a deposit acceptance slip from a hand-held device that updates account records back at the branch later that day through an optical link. A really exciting finding from our research with WSBI is that savings banks can scale their costs and technology to fit local market conditions. This is why their average balances scale down in line with per capita GDP in even the poorest countries, whereas purely commercial banks only operate in the poorest countries at average balances that are out of reach for mass-market customers.

3. Your paper states that "microfinance needs to be seen as a complement to savings and commercial banking, and not as a substitute," How can this be achieved?

For me this is partly an article of faith as much as an evidence-based conclusion. I believe very strongly in plurality and I think that it applies to finance as much as to the way we choose to live our lives. So, like WSBI, I want to see room for MFIs, savings banks, specialist agricultural and development banks, credit unions, co-operatives and last but not least commercial banks in the market for providing accessible financial services. In fact, I would go further and say that no institutional type is doing such a good job providing access that some other kind of supplier has no place in the market. I want access to finance for all, not just the rich but equally not just the poor.

As to the evidence of complementarity, I would cite just three findings in our study: (a) on average non-postal savings banks in developing and transition economies recycle half the savings they mobilize as credit and, where we have the necessary data, this lending is often at the same average balance as MFIs operating in same region; (b) more than half of WSBI developing country members run a microfinance scheme as part of their product offering and this is often a leading source of microcredit for their country and (c) only in countries with very low levels of access do MFIs provide the bulk or all of that access – if you want a country to approach full access there almost always has to be a significant savings bank presence.

Where I think microfinance may temporarily substitute for savings banking is in the acute post-conflict phase when conditions are just not in place to run anything approaching a professional banking operation (although please let us salute those savings banks that somehow keep operating in even these circumstances). Later on, however, customer needs increasingly drive towards the introduction of microbanking services – as with, for example, the transformation of ACLEDA in Cambodia from an NGO format to a banking format or the development of CARD Bank in the Philippines alongside its founding NGO microfinance institution.

How to get savings banks and microfinance institutions to cooperate rather than just compete is another and more difficult issue. But I do think that there are great opportunities for MFIs to outsource to low-cost savings banks the processing of loans once they are originated. Another paper in the World Savings Bank Institute Research Series – "The Provision of Microfinance Services by Savings Banks: Selected experiences from Africa, Asia and Latin America"– gives a very encouraging example of this from Senegal. There, La Poste runs savings accounts for women's groups that have received direct aid in the form of equipment, boreholes, etc. The accounts are run to accumulate money to maintain and eventually replace the equipment donated. But the accounts are also used as a home for voluntary savings by group members and act as a platform for both disbursing microcredits and collecting subsequent repayments. La Poste does not make the loans – like many postal savings banks its statutes do not allow it to do so. Rather, the loans are made by microfinance foundations set up to support the women's' groups but an ordinary La Poste savings account provides an operating platform for these microcredits.

4. What do we know about the cost structure of savings banks?

This is an area where we need to do more work. What we have found in the paper is that the ratio of operating costs to assets is much lower for savings banks than for microfinance institutions in similar regions that appear in MIX-MBB. The only region where the gap closes a bit is in South and East Asia, where the MIX-MBB is dominated by a lot of large-scale microfinance banks. We are going to do more on this with World Bank and should have results by about the middle of the year.

The other approach we have taken with World Savings Bank Institute is to start pulling together tariff material on the charges made to customers. Even when charged for, we find a reduction in return on savings of only around 2~3%, and for card-based accounts this - rises to only 3~4%. When you think that this reduction in yields is on average account balances that are typically only equal to a fifth to a quarter of per-capita GDP, then there is at least a prima facie case that savings banks are delivering affordable services to the mass market. I should stress, however, that this is based on only a very few examples.

Underpinning this good cost performance is the high productivity typical of savings bank staff, who handle roughly 900 accounts each (some of which will be inactive). Even if this were to be the case, all the inactive accounts will be creating some net interest margin to help cover the costs of active accounts at any one point in time. In a way savings banks offer a pooling of costs so that charges for anyone using an account can be kept affordable even for poor people.

5. What evidence do you have to assure in your paper that "savings banking is a scaleable business right down to the smallest scale rural outlet"?

This is partly based on personal experience – I have worked with many rural branches of national savings banks – and seen how they tailor opening hours and staff time to fit available business flow. But it is also based on survey evidence we gathered from about twelve World Savings Bank Institute members. For two thirds of these institutions, we found that the number of accounts per employee was higher outside the major metropolitan centers than at branches within them. We also found that 80%+ of the surveyed members were offering their full personal banking product range through sub branches, agencies and sometimes even mobile branches, as well as through their main branches.

I think there is an important link here to Robert Vogel's recent Q&A about risk-based supervision. Regulation needs to fit the risk that an institution and its customers actually pose to a financial system. In particular prudential regulation aimed at protecting customers does them no service if it makes banking too expensive to meet their needs. Fortunately some developing country savings banks can escape the full force of commercial bank regulation because they operate under their own special laws rather than their country's general banking law. No one is asking for lax supervision or prudential norms for savings banks, but it is important that operational regulations designed for internationally active banks or higher risk domestic market activities are not applied wholesale to low risk personal banking. The examples I have in mind are (a) anti-money laundering and anti-terrorism rules that can make it virtually impossible for a migrant worker to send home a few tens or at most a couple of hundred dollars and (b) branch design requirements set with high-value commercial activity in mind being applied to low balance rural savings collection services. The more these sorts of rules increase the fixed cost of doing even basic business, then the less savings banks will be able to do for customers in remoter and poorer locations.