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The answers to these questions are adapted from Savings Operations for the Poor: An Operational Guide, edited by Madeline Hirschland from Kumarian Press (1294 Blue Hills Avenue, Bloomfield, CT 06002).
- Do poor people really save?
- What are some of the chief obstacles to serving poor savers?
- What role can donors play to support small-balance savings mobilization?
- What are the most common problems faced by regulated institutions that seek to expand their savings services to lower-income or more rural markets?
- What are the most common problems facing credit-based financial institutions that seek to develop savings operations?
- What prerequisites should an institution meet in order to develop savings operations?
- What are the biggest legal and regulatory impediments related to pro-poor savings mobilization?
Yes. Poor people save because they must: their current income is rarely sufficient to manage crises (a sudden illness or a flood, for example), to invest when opportunity strikes, or to pay for large expected expenses, such as school fees, a wedding, or a new roof. Numerous studies and experience worldwide confirm that the poor use informal savings devices, even though these devices often are neither reliable nor secure.
What are some of the chief obstacles to serving poor savers?
Two of the biggest obstacles to serving low-income depositors are distance and product terms. For many poor and rural savers, walking or paying to travel to make small, frequent deposits may not be realistic. And for people with unreliable incomes, product terms such as minimum balance requirements, transaction fees or regular fixed payments may not be manageable. To recover their costs while meeting regulatory requirements, many institutions employ product terms that de facto exclude the poor; for example, they charge transaction fees that are equivalent to a significant portion of a laborer’s daily wage or require a minimum deposit that is many times this wage. While the poor might pay such a fee for rare large deposits, these product terms are prohibitive for small everyday savings requirements. Similarly with distance: while poor savers may be willing to travel to make a large one-time deposit, they are much less likely to do so for small frequent deposits.
Although these two features (services that are close by and the opportunity to deposit small and variable amounts) are essential to poor and rural savers, they raise operating costs for institutions. To provide convenient, useful services to poor savers and remain financially viable, most institutions must employ alternative forms of staffing and delivery channels. Some institutions use staff with less education, a single staff person or volunteers, or even offer services using deposit collectors, part-time satellite offices and mobile units.
What role can donors play to support small-balance savings mobilization?
Donors can powerfully 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
What are the most common problems faced by regulated institutions that seek to expand their savings services to lower-income or more rural markets?
Regulated, deposit-taking institutions face three major obstacles to expanding their savings services to smaller and more remote rural depositors: costs, controls, and culture.
Costs: To successfully go further “down market,” regulated financial institutions typically need to develop ways to deliver more convenient, less expensive services than their existing delivery channels. For example, they might use small part-time satellite offices, mobile deposit collectors or ATMs. Each of these mechanisms involves a cheaper physical infrastructure, fewer staff hours and/or less educated staff, who can be paid lower salaries. In addition, reaching a broad mix of clients can help institutions spread the fixed costs of providing small savings services over larger volumes of deposits.
Controls: Lowering staff and infrastructure costs can change the nature of internal controls and security. While some electronic technologies can even increase controls while lowering transaction costs, serving depositors from a small, thinly staffed office or with a mobile deposit collector is inherently less secure than doing so from a substantial building with a management information system and a vault. The loosening of existing, familiar controls can make it difficult for mainstream financial institutions to employ alternative delivery channels.
Culture: For a mainstream regulated institution, serving the poor people 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.
What are the most common problems facing credit-based financial institutions that seek to develop savings operations?
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.
What prerequisites should an institution meet in order to develop savings operations?
Before it develops savings operations, 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 risks
- a management information system, whether manual or computerized, that can handle the volume of transactions anticipated 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
What are the biggest legal and regulatory impediments related 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:
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.