The importance and role of savings with respect to the economic and social development of developing countries and of African countries in particular have long been recognized. Savings are quite often the primary source of financing for small individual projects. They are also the main source of funding used to meet daily needs such as education and health costs, purchase inputs needed for agricultural crops, or survive lean periods in rural areas. In sum, savings are essential for protecting and boosting the assets of rural and urban populations.
While the range of savings needs of rural populations is apparent, do savings services offered by microfinance institutions meet these needs in an equally clear manner?
The institutions’ perspective
Mobilizing savings is a long-term strategic decision for an MFI. Savings are an independent resource for financing the credit activities of an MFI that are not subject to fluctuations in interest rates and external financing sources. An MFI must build trust between itself and its depositors and be prepared to adhere to the principles of sound and professional management, as it bears responsibility for protecting the savings of these clients. Savers are primarily looking for a system that guarantees the security of and access at all times to their savings and, second, an attractive interest rate. Borrowers from the same institution seek easy access to credit at the lowest interest rates possible.
How then can the interests of these various actors be reconciled?
The design of savings products should take the following into account:
- Understanding client demand, for which market studies are required; and
- Understanding the necessary trade-off by the MFI between liquidity to guarantee access by savers on one hand and profitability on the other.
The cost of collecting savings essentially includes the MFI’s administrative and financial expenses. These costs vary among MFIs and are depend on how effectively and efficiently the MFI can manage its overheads.
Data from the MicroBanking Bulletin (MBB) indicate that the estimated cost of collecting savings varies between 4.5% and 6% for MFIs deemed efficient, of which between 1% and 2.5% cover administrative costs associated with savings mobilization and security. Generally speaking, at this rate, savings are a less expensive source of funding than bank refinancing, which ranges between 8% and 12% in markets in the WAEMU sub region.
However, a distinction must be drawn for small amounts, the exclusive collection of which would prove more costly than refinancing. The best strategy would be to combine the collection of small and large sums in order to offset the collection cost by providing services in both rural and urban areas to diverse client segments.
Savings in rural areas – a special challenge
A collection system for savings in rural areas is highly customized. Rural incomes are unstable and irregular because of the nature of agricultural work. Climate conditions and the cyclical or unpredictable nature of agricultural markets have a major impact—at times violent and often unexpected—on the savings capacity of rural populations, thus hampering savings accumulation and collection.
Furthermore, in Africa, the costs incurred as a result of the geographic dispersal of the rural clientele can be considerable. This explains why financial institutions often show less interest in this client segment and exercise prudence with respect to the financial services, including savings products, targeting this client group.
Solutions – the experience of Kafo Jiginew
Which options should therefore be accorded priority and which strategies should be adopted to address the challenge of collecting savings in rural areas, while ensuring the profitability and viability of financial institutions?
Building on its myriad achievements in the area of savings collection in rural (or poor) areas over the past 25 years, Kafo Jiginew has determined that:
- Savings collection in rural areas involves providing local services at permanent or temporary rural branches. Therefore, of Kafo Jiginew’s 166 branches, 135 are located in rural areas in five of Mali’s nine regions. Facilitation and awareness-building activities on the importance and role of savings are also frequently conducted by personnel accompanied by elected officials.
- Savings products and collection methodologies must be tailored specifically for agricultural systems to adequately meet the needs of the rural populations. In order to take regional specificities into account, the conditions established for savings products offered by Kafo Jiginew are flexible, in terms of minimum amounts and frequency of deposits, for example. New products such as on-site collection in markets are in pilot phase with a view to bringing services closer to people. Kafo Jiginew also improved the quality of the services provided at its rural branches by computerizing its operations using solar-powered energy in the absence of electricity, which has led to speedier processing of transactions and greater transparency in the information submitted to clients. Branch networking also helps improve accessibility to savings through remote withdrawals.
- Risk management and sharing mechanisms must be put in place to increase the assets of rural populations and secure agricultural credit portfolios against climate risk. Kafo Jiginew established partnerships with agricultural companies and small farmer organizations, to facilitate access to technical data and information on agricultural products and to secure loans reimbursement.
- A stable macroeconomic environment facilitates financial intermediation, providing viable interest rates for clients and institutions alike.
Certain major networks of savings and credit cooperatives (SACCOs) have often been criticized for gradually pulling out of rural areas, thus no longer providing services to rural populations that are among the poorest, and have been neglected by traditional formal institutions. The reality is that many of these large l networks of SACCOs have implemented geographic and sector diversification programs, with a view to diversify their financial services and reduce their dependency on crisis-prone agricultural industries. This strategy does not imply a withdrawal of services from rural areas but the creation of synergies between rural and urban areas. For example, Kafo Jiginew in Mali diversified its operations in urban areas and in rice-growing areas following the cotton industry crisis. This strategic choice enabled Kafo Jiginew to collect savings in urban areas and transform them into credit in rural areas. This adjustment helped revive rural banks that were previously in difficulty.
Structuring demand in rural areas by building the capacity of small farmer organizations is critical to permanently reverse this trend of strategic withdrawal to urban areas. Moreover, the implementation of approaches that take value chains into account will facilitate access to credit and the other financial services, particularly savings.
Dear Alou Sidibe
Collection of savings in rural area is as important as provision of micro credit services. Linkage with agricultural operation period for collection of savings is an ideal one. However agricultural credit portfolio has to face climate risk (covariant ) and in such case why not we consider covering it under micro insurance like crop insurance as a part of risk management. This would ensure rejuvenation of the livelihood activity and eventually continuity of financial transaction or services gainfully both by the lender and poor farmers.
For promoting savings in rural areas, structuring the demand coupled with financial litearcy taking cognizance of the social and cultural needs of the target people is inevitable. Following areas may of some use in this regard
- linking saving with credit product
- -linking with credit product with insurance
- -linking savings with incentives/bonus/lottery
- - variety of demand based saving products – for accessing livestock, gold ornaments , small piece of land, farm equipment, meeting social and religious ceremonies etc.,( what ever the preference of Mali people)
- Savings products exclusively for conduct of marriage of children
Profitability of the institution can be facilitated through effective diversification of financial products appropriately matching the socio cultural needs of the rural and target people and well protected by insurance coverage against any risk. (not necessarily moving to the urban areas)
Savings services are an important part of an MFI and something that may be overlooked by the general public. As an intern with Opportunity International this summer, I have learned about the importance of savings accounts even in the most impoverished areas. Opportunity has the resources and facilities to provide savings services, but for smaller MFIs, this seems like it could be quite a task. How does one deal with the geographic expanse of subsaharan Africa and the lack of good roads and transportation which can make even a short journey be an immense trek?