Voluntary Saving Mobilization as a Service for the Poor and a Source of Funds for Regulated MFIs

1. Voluntary Saving Mobilization as a Service for the Poor and a Source of Funds for Regulated MFIs Marguerite Robinson HIID Institute Fellow Emeritus March 20, 2001 Washington, D.C.

2. Some Basic Principles for MFIs in Large-Scale Savings Mobilization (L-SSM) • 1. Voluntary and compulsory savings are incompatible in L-SSM, which must be based on voluntary savings. • 2. Successful L-SSM is not a matter of adding a few products to a microcredit institution. It changes the institution fundamentally. Don’t start if you’re not prepared for major institutional change. • 3. For profitable L-SSM, MFIs must mobilize savings from the general public. Such an effort takes time and must be properly sequenced.

3. Some Basic Principles for MFIs in Large-Scale Savings Mobilization (L-SSM) – con’t • 4. L-SSM should be limited to publicly regulated and supervised banks and nonbank financial institutions that are legally permitted to mobilize public savings, except in extremely unusual cases. • 5. For savers what is crucial is not necessarily any particular savings product, but the combination of products available from the MFI – which each saver can customize for his/her own use. • 6. MFIs should offer only a few carefully-designed and tested products. Too many products makes branch management too complex and expensive, and is not necessary for L-SSM..

4. Some Basic Principles for MFIs in Large-Scale Savings Mobilization (L-SSM)– con’t • 7. Products are important, but they are only one element in a much larger set of requirements for profitable L-SSM. • 8. Savings can be combined with other commercial sources of funds to finance MFI portfolios, with commercial debt declining as more savings is mobilized.  • 9. Public savings can be extremely stable, even in times of major national or regional crisis.

5. Mobilizing Microsavings: Six Broad Patterns

6. Advantages for the Poorof Saving in Financial Institutions with Appropriate Products and Services • Security • Convenience • Liquidity • Confidentiality • Good Service • Returns • Potential access to loans

7. Disadvantages for the Poor of Saving in Financial Institutions with Appropriate Products and Services • The real value of the deposits may decline due to inflation or currency devaluation • Transaction costs to the savers • May need funds when MFI not open • Interests on savings may be taxed (but poor savers’ income often below taxable minimum) • MFI may fail or go bankrupt • Savers with very small account balances may receive no interest

8. Sequencing the Introduction of Savings Mobilization in MFIs 1. Study international experiences 2. Appropriate macroeconomic conditions, regulatory environment and supervision capacity 3. Financially sound institutions: • clear ownership • good governance • a record of high repayment • profitable • appropriate capital adequacy

9. Sequencing the Introduction of Savings Mobilization in MFIs 4. Full-time high-level management resources made available 5. Conduct demand research 6. First Pilot Project 7. Pilot Project assessment and revision 8. Second Pilot Project if necessary

10. Sequencing the Introduction of Savings Mobilization in MFIs 9. Monitor pilots and train trainers for expansion 10. Expand gradually to all branches, training staff in each location 11. Systematic Approach to savings mobilization and staff incentives for performance 12. Market penetration

11. Value of outstanding loans and savingsin BRI’s unit desas 1984-96in millions of US Dollars

12. Number of outstanding loans and savings accounts in BRI’s unit desas, 1984-96(millions)

13. Value of outstanding loans and savings(in Trillions of rupiahs) in BRI’s unit desas 1996-2000

14. Number of Outstanding loans and savings accounts in BRI’s unit desas, 1996-2000(millions)

15. Penetrating the Market All loans funded by unit savings Learning Market Penetration Expansion to All Units Stages of Development and Performance in BRI’s Unit Desa Savings Mobilization Program 1984 - 1996 (in millions of US Dollars) Pilots

16. BRI Unit DESA Savings ProductsDecember 31, 2000Number of Accounts . * SIMPEDES (Rural Savings): 17,600,517

17. BRI Unit DESA Savings ProductsDecember 31, 2000Value of Savings by Account Types (US$ billion) * SIMPEDES (Rural Savings): US$1.23 billion US$1 = 9700 rupiah (December 31, 2000)

18. Issues Relating to the Costs of Mobilizing Microsavings Is Mobilizing voluntary microsavings too expensive for sustainable MFIs?

19. Issues Relating to the Costs of Mobilizing Microsavings Argument 1: • Interest rates need to be high to counterbalance lack of trust in institutions. Answer: If the institution is trustworthy and provides savings services appropriate for their needs, poor people generally do not require high interest rates.

20. Issues Relating to the Costs of Mobilizing Microsavings Argument 2: • The poor have small accounts which are expensive for the MFI to administer their savings and cannot fund large loan portfolios. Answer: This argument is correct. However, the problem is solved when savings are collected from the public. Savers with higher account balances cross-subsidize those with small account balances.

21. Issues Relating to the Costs of Mobilizing Microsavings Argument 3: • The poor demand high liquidity which will make transaction costs for the MFI high and collection of small savings mobilization expensive Answer: • The poor want the OPTION to withdraw whenever they want. Most do not withdraw frequently. • When saving is mobilized from the public, savers include many types of individuals, institutions, and enterprises, and withdrawals do not tend to come at the same time.

22. Who Benefits from Savings Mobilization by Regulated MFIs ? • Individuals and enterprises • Groups, organizations and institutions • Implementing MFIs • Governments and Donors • The economy, development and equity