Poor people worldwide want safe, accessible savings mechanisms. How do we know? For one thing, they’ve told us so - in numerous market studies and household surveys. For another, they’ve shown us so—by opening up savings accounts by the millions, leading to strong and consistent growth in deposits at leading deposit-taking institutions serving low-income clients. Equity Bank in Kenya, for example, has seen a tenfold increase in both accounts and the value of savings in the last five years, now managing over US$1.2 billion in customer deposits across 5 million accounts.
However, though demand is high, only around half of the world’s households have access to a savings account. Most poor people use a variety of informal savings instruments—from mattresses to savings clubs to investing in gold or livestock—to manage their small and unpredictable incomes, often at the risk of loss, theft or depreciation.
Why is this? First of all, there’s the expense. The smallest savings accounts—those held by poor and low-income clients—are also the most costly for financial institutions to maintain. On top of that there’s the geographical isolation of many of the poor, living in areas far removed from banks’ branch networks.
So what can we do about it? The good news is that economies of scale and technology-based innovations can bring down costs. A recent CGAP study shows that the high operating costs linked with small-balance savings mobilization can be more than offset by the profits generated through cross-sales of loans and other products to the small savers, as well as by fee income from savings accounts and the use of technology.
Technology also helps with the proximity problem. In Brazil, major banks are working through over 50,000 banking correspondents authorized to open accounts and handle deposits, who turn neighborhood corner stores, lottery outlets, post offices, and petrol stations into a kind of bank branch using inexpensive point-of-sale terminals. In other countries, poor people are starting to use mobile banking as a sort of savings service, despite its not being designed for that purpose. Though M-PESA, operated by Safaricom in Kenya, is not a licensed deposit-taking institution, M-PESA clients have begun to store money in their virtual “wallets” in an innovative attempt to maintain safe access to savings.
Financial institutions can bring much-needed savings services to poor people by engaging in innovations with technology and economies of scale. However, they must also remember that in order to cover their costs and be sustainable, full financial intermediation—including a sound credit business—is necessary. To design more appropriate savings services, institutions must also actively work to better understand poor people’s needs. Demand studies are still in short supply, and more research is greatly needed to help institutions better design and market their savings products to poor clients.
Topic Contact: Jasmina Glisovic
- A Penny Saved: How Do Savings Accounts Help the Poor? (Social Science Research Network)
- Gateway Financial Innovations for Savings - Focus Note 1 (Gateway Financial Innovations for Savings)
- The Poor and Their Money: An Essay About Financial Services for Poor People (DFID)
- Savings Groups: What Are They? (The SEEP Network)