The True Cost of Deposit Mobilization

15 December 2007

Microfinance institutions (MFIs) seem to be of two minds about the cost of mobilizing savings. In a recent CGAP study, the majority of institutions interviewed perceived deposits as the cheapest form of funding available, as well as stable and plentiful.
Microfinance institutions (MFIs) seem to be of two minds about the cost of mobilizing savings. In a recent CGAP study, the majority of institutions interviewed perceived deposits as the cheapest form of funding available, as well as stable, plentiful, and a valuable service to clients. However, many institutions perceive savings mobilization to be a very high-cost activity, necessitating fees and/or minimum balance requirements that can exclude poor clients.

Actual data on the true costs of mobilizing deposits from poor people, however, are in short supply. Few institutions calculate the all-in cost of deposits (including financial costs and administrative costs), and even fewer figures are available publicly. This data is essential for institutions to make appropriate decisions regarding product pricing and capital structure. Knowing the major drivers of cost is also crucial to taking appropriate cost-cutting measures.

With this in mind, CGAP investigated the true, all-in cost of deposits at five different financial institutions serving poor clients using activity-based costing (ABC). The goal was to determine a) how expensive it really is to mobilize deposits from poor people, and b) where costs can be reduced by identifying major cost drivers.

The institutions selected for this study are of different institutional types and serve different types of clients on different continents. However, they all use deposits as an important source of funding (see table 1). This paper presents comparative findings related to deposits from all five ABC exercises.

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