Savings for Poor People: Good for clients, good for business?

When savings accounts in financial institutions serving the poor outnumber microloan accounts seven to one, one thing is certain: microfinance clients want savings services. The problem is, deposit-taking financial institutions don't always have the ability or incentive to provide them.
Recent research led by CGAP found that "double bottom line" financial institutions (which seek to pursue a development mission while operating sustainably) can mobilize savings from poor clients and still be profitable overall. When "total client profitability" is considered, providing savings may be a real business opportunity over time.

Demand for savings: A popular service for clients
The numbers demonstrate demand: a 2006 study showed that there were 1.3 billion low-average balance deposit accounts versus 190 million loan accounts in developing and transitioning economies. "Poor savers turn tiny amounts of money into lump sums to help smooth consumption and mitigate the effects of economic shocks," says Kate McKee, CGAP senior advisor. "In many developing countries, poor people are willing to pay to save. Roving deposit collectors in many African countries, for example, charge a fee—typically 6 percent of the average monthly balance—to relieve clients of extra cash."

Is there a business case?
Regulated financial institutions in many markets see several real and perceived challenges in delivering deposit services to poor people. So, is there a business case? Beyond the product approach: Total client profitability Savings services tend to be closely linked to other products financial institutions offer. They can confer many, often intangible, benefits to institutions beyond simple cost of funds and profit, including customer loyalty and satisfaction, enhanced reputation and mission fit.

A more dynamic and longer term perspective on profitability—now in favor in developed markets focused on client retention, cross-selling and diversifying revenues—also suggests benefits of providing small-balance savings accounts. "Consider a savings client in terms of 'total client profitability'—that is as both a current and future source of revenue for a financial institution," says Evelyn Stark, CGAP microfinance specialist. "In some cases, a simple deposit account is the gateway product that leads this low-income customer, over time, to other, more profitable products, like loans and money transfers. And the more services a client gets from a financial institution, the more likely that client is to stay for the long term."

Delivery cost: How expensive is too expensive? For many financial institutions, the biggest barrier to providing savings targeted to lower income clients may be perceived or real cost. "In 2006, CGAP conducted activity-based costing (ABC) exercises with five financial institutions that found that both small and large institutions can offer savings services, even to small savers, and still be profitable overall," says Jasmina Glisovic-Mezieres, CGAP microfinance analyst. In some institutions, small accounts were not profitable per se but were cross-subsidized with larger accounts. Also, the use of efficient delivery models and broad outreach can decrease the negative impact of the greater expense associated with small balance savings accounts.

Funding the portfolio and financing growth Depending on the environment, the institutional business model, and the available alternatives, savings can be an attractive funding source in terms of cost, stability and reduced dependence on external borrowing. A majority of microfinance managers in a recent CGAP-Grameen Foundation survey considered this to be the case.4
Meeting the double bottom line vs. maximizing profitability For double bottom line institutions—such as the five institutions in CGAP's costing study—the contribution of deposit services to a social mission makes up for their short-term impact on overall profitability. But even for purely commercial institutions, advantages like decreased external borrowing, opportunities for cross-selling, and client retention can be persuasive.

Assessing your business case
While there may be many compelling reasons for offering deposits services to poor people, the challenges are undeniable. The rationale for offering savings services is different for each market and for each individual institution—and always requires that resources and investments support long-term profitability. CGAP has developed two tools to help providers make their own assessments: the Country-Level Savings Assessment Tool and the Microfinance Product Costing Tool.

In the end, taking a broader and longer-term perspective - including business, mission, and/or social responsibility concerns - can help financial institutions better weigh the full costs and benefits of providing deposit services to their clients.