The Power of Successful Market-led Savings Mobilization

19 April 2011
3 comments

Successful savings products can transform financial institutions, leading to explosive growth in numbers of clients, funds for on-lending and income.

Grameen Bank’s under-recognised transformation to Grameen II in 2002 saw a massive increase in clients – including many who repaid loans that were long overdue in order to gain access to the new range of products offered by the bank. The Grameen II system represented a revolution in the way that Grameen Bank does business.

It was the culmination of years of hard work to assess the aspirations and needs of the poor in Bangladesh and re-design the “classical” Grameen system to respond to those needs. At the core of the re-design was the focus on offering savings services in order to attract capital for the bank, which was facing a funding crisis arising from declining quality of its portfolio, aggravated by the 1998 floods. It was this search for liquidity that drove Grameen Bank to offer its new savings products, including the hugely popular Grameen Pension Scheme recurring deposit product, to not just the poor but also the better off in the villages of Bangladesh – so long as they enrolled in a group.

Stuart Rutherford’s work for MicroSave showed that the Grameen customers were using the Grameen II products in a wide variety of ways, to meet the diversity of needs and challenges that face them. The introduction of individual passbook savings accounts and contractual or programmed savings products allowed them to save “up” as well as “down,”¹ and increased the range of financial instruments and options that they have to manage their complex household budgets. Grameen II showed that as the range of products on offer expands, the utility to the users increases dramatically.² This increased utility encouraged many previous drop-outs to return and defaulters to repay and rejoin Grameen – access to a range of market-responsive products is a valuable asset. It is not unreasonable to surmise that with the increased utility and ability of the poor to manage their meagre financial resources, the developmental impact will be higher too.

As Stuart Rutherford noted in 2006, “Grameen took 27 years to reach 2.5 million members – and then doubled that in the full establishment of Grameen II” – since then the bank has added another 3.5 million members. But this has come with significant challenges – as can be seen from the graph. As part of it fund-raising drive, Grameen offered fixed and recurring deposit products not just to its traditional poor members, but also to the better off people in the villages. These savings products were very generously priced, and now the bank has a significant, and growing (nearly $550 million at the end of 2010), excess of savings over the amount of loans it is able to push out to its members. Successful savings mobilization can create over liquidity.

MicroSave also worked with what was then Equity Building Society to refine its savings products. In 2001, when the work started Equity had only 109,000 clients – today it has nearly 6 million customers and is widely recognised as the leading microfinance bank in Africa. At the heart of this extraordinary turnaround was the delivery of a range of savings services with unparalleled, efficient customer service using IT systems, ATMs and now mobile phones as channels. Equity Bank’s focused commitment to the low income market segment has made it the bank of choice for millions of Kenyans. Equity’s culture combines the professional demeanour and dress code of a traditional banker with a commitment to serve each and every customer – however poor – with the same care, respect and enthusiasm.

Much of Equity Bank’s success is built on the commissions/fees it charges for its services, a large proportion of which is derived from a Ksh.30 withdrawal charge that is the lowest in the market and accepted by its clientele. It is the widespread acceptance of withdrawal fees (as opposed to ledger fees that are universally disliked) across Africa that has allowed rapid take-off of mobile money on the continent.

There are important commonalities between Grameen II and Equity Bank. Both organizations demonstrate key principles for effective savings mobilization:

  1. For large-scale savings mobilization to be viable and to finance substantial portfolios, savings must be mobilized from the public and not from the poor alone. This makes it possible to serve large numbers of small savers profitably. While the transaction costs of very small accounts make mobilizing savings from the poor expensive, the larger account sizes of the non-poor raise the average account size and permit a combination of institutional profitability and wide outreach. This cross-subsidisation is the only way that the poor can be served cost-effectively on a large scale. However, such practice requires special attention to ensure that the products are attractive to all potential savers.
  2. Contrary to popular opinion, mass savings mobilization from the public need not be an expensive source of capital. Small savings, when captured as part of savings mobilization, can be collected at relatively low financial costs. In addition, there are synergies created through the economies of scope between savings and lending. Products’ interest rates and fees can also be used to provide: • Incentives to build up and maintain balances • Disincentives to withdraw • Revenue from transactions/ledger fees
  3. Appropriately designed products are necessary but not sufficient for profitable voluntary savings mobilization from the public, as they are only one element in a much larger set of requirements (including MIS, training, marketing and above all customer service) for the profitable large-scale mobilization of savings.

MicroSave provides technical assistance to financial institutions seeking to offer savings and mobile money services to the low income market. Find them on www.MicroSave.net ¹

See Rutherford Stuart, The Poor and Their Money, Oxford University Press, Delhi, 2000, for an explanation of the terms saving “up” and saving “down”.

² For many years BURO, Tangail was able to charge a 60% higher interest rate on its loan products because it offered a range of credit and savings products that were greatly valued by its membership.

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Comments

Submitted by Ian Radcliffe on
Dear Graham, Many of the conclusions that Graham draws in his article resonate loudly with us at the World Savings Banks Institute (WSBI). WSBI has been working since 2009 on a substantial programme in 10 countries to double the number of savings accounts amongst the poor. Background information is available on WSBI’s website. The programme still has 4 years to run so naturally we are at relatively early stages in extracting lessons from the various projects being delivered, although our first thoughts may also be found on our website. One point in particular caught my attention: it is mentioned that cross subsidisation is the only way that the poor can be served cost effectively on a large scale. In our programme we have so far shied away from cross-subsidisation, mainly because for the provision of financial services to this segment to become truly sustainable and grow, ultimately a viable business case will have to be established. This is hard, we know, and we are still developing and proving the concepts. But through a combination of engineering costs out, entering into partnerships and taking advantage of new technologies, we are optimistic that savings banks will show the way. Ian Radcliffe

Submitted by Peter van Dijk on
Dear Graham, I have two questions after having read your article. 1. What is the exact legal status of GrameenBank with the Bangladeshi Central Bank. In its registry I see it under Micro-credit NGO, so not as a commercial bank. I know about the Ministerial Exemption of 1983 so that it can call itself a “bank”. I heard once that it is a member-based, “Village” Bank but that would question the legality of collecting and on-lending Non-Member deposits is it not. Could you please explain? 2. The recently published RBI monetary policy includes again a policy driven and credit focus of bringing MF to so far non-banked people. At the same time Postbank and the National Savings Program I heard are very successful. Why have the shortcomings of the first strategy not resulted in change (market-based, voluntary, deposit-led change) and why does RBI never mention Postbank and NSB although it is responsible to protect public deposits? Thank you, Peter

Submitted by Dr V.Rengarajan on
Dear Graham Wright In the context of more presence of micro credit in the block series, it is refreshing to note values of the new savings products of Gramin for the poor. A few points to share 2. The savings product inclusive of gramin pension scheme is welcome 3. The events like ‘return of drop outs, defaulters repayments are unique in the context of total neglect of attrition in MF/SHG functioning in many region 4. However there is a concern over the coverage of both poor and non poor towards institutional strengthening for candid achievement of ultimate goal of MF – sustainable poverty reduction. In this regard, the establishment of Regional Rural Bank (RRB) in India which started in a grand manner exclusively for the welfare of rural poor as early in 1975, later focused more on urban for the sake of profitability and sustainability at the cost of its origional mission . The lesson is that coverage of both poor and non poor may help attain institutional sustainability but would not fetch desired result in the poverty sector. Probably micro insurance, another potential MF services for the poor, if adeqautely synergized with micro savings and micro credit products, may help strengthen the institution with undivided attention to the target poor. Thanks Rengarajan

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