Savings for Poor People Make Good Business Sense, CGAP
For Immediate Release
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Groundbreaking study shows potential for microfinance institutions to serve small savers profitably through cross-selling, fees, and use of new technologies.
Washington, D.C., 6 October 2010—Many microfinance institutions are already serving small savers profitably and many more could do so. So say the authors of a groundbreaking study on the business case for small savers. CGAP researchers Glenn Westley and Xavier Martin Palomas were given full access to the 2008 books of two microfinance institutions that offer savings for low-income clients–-ADOPEM in the Dominican Republic and Centenary Bank in Uganda. They conclude that savings accounts, which are a very high-cost product for microfinance institutions to offer, can nonetheless generate high profits through cross-sales of loans and other products to small savers, and by the fees generated from the savings accounts.
“The business case for serving small savers is compelling,” said author Glenn Westley. “We identified a whole range of ways in which these institutions are using small balance accounts to generate profits. We suspect that many microfinance institutions are already serving small savers profitably, and the evidence shows that many more could do so.” Revenues from small balance savers turn out to be significant: 400% of the deposit balances in Centenary, and over 1000% in ADOPEM.
Without the small savers, says the paper, Is There a Business Case for Small Savers?, these two very profitable institutions would lose about 30% of their total profits. One of the issues most poor people face is not just a lack of money, but uneven and unpredictable income. Deposit services can have a hugely beneficial effect in helping even out the troughs and peaks, and ensuring that families have access to savings to cover school fees or emergencies. And yet microsavings have failed to take off in the same way that microcredit has over the past few decades. One of the reasons that microsavings has languished, despite widespread recognition across the microfinance industry of the considerable consumption-smoothing benefits it offers, is simple economics.
Deposit services are expensive for microfinance institutions. And it’s harder to make a profit from customers who make lots of tiny deposits without massively trimming transaction costs. This new study is significant because it shows that microfinance institutions can integrate savings services as part of an overall service offering, and that in doing so deposit services more than overcome their high operational costs, reaping quite significant profits for the institutions. In both the institutions studied for this paper, cross-selling of loans and money transfer products to small savers was significant.
In ADOPEM there was a high rate of cross-selling of loans to small savers, with about three quarters of ADOPEM’s small savers also borrowing at any given time, while Centenary Bank generated most of its profits through the fees charged on small savings accounts (a monthly charge of US$ 0.56 on savings accounts alone accounted for 32% of all small saver profits) and by offering a range of money transfer products (which accounted for 16% of all small saver profits). Centenary also makes substantial use of ATMs to attract and retain clients, boost savings levels, and cut costs. “This use of ATMs,” said Westley, “points to the even greater potential of reducing transaction costs and increasing deposit balances by leveraging technologies such as mobile phones and point of sale devices that allow banking services to be offered outside of expensive to run bank branches.”
CGAP is an independent policy and research center dedicated to advancing financial access for the world’s poor. It is supported by over 30 development agencies and private foundations who share a common mission to alleviate poverty. Housed at the World Bank, CGAP provides market intelligence, promotes standards, develops innovative solutions, and offers advisory services to governments, microfinance providers, donors, and investors. CGAP works toward a world in which poor people are considered valued clients of their country’s financial system.