In development policies as practiced, emphasis on the mobilization of rural savings deposits is a fairly recent occurrence, dating basically from the 1980s. As commented upon earlier, from the viewpoint of rural households sometimes access to reliable savings facilities can be more urgent than access to loans:
Often the need for safe, liquid, and remunerative savings facilities takes precedence over the need for credit, because saving improves clients' ability to smooth consumption with their own resources, and allows them to avoid having to carry the burden of debt repayments during income downswings.137
Marguerite Robinson has cited the experience of an Indonesian villager with regard to savings:
134. J. J. Boomgard and K. J. Angell, 1994, p. 214.
135. Mohini Malhotra and James Fox, 'Maximizing the Outreach of Microenterprise Finance: The Emerging Lessons of Successful Programs', Focus, Note No. 2, The Consultative Group to Assist the Poorest, Washington DC, USA, October 1995, p. 2.
136. J. Yaron, M. P. Benjamin and G. L. Piprek, 1997, p. 78.
137. J. Yaron, M. P. Benjamin and G. L. Piprek, 1997, p. 77.
I used to save in goats, but goats take a lot of work. Now the shepherds are all in school and the parents have jobs. Now we have no time to save in goats. We prefer to save in the bank.138
Nevertheless, as noted earlier, most externally funded, small-scale rural financial institutions commence their operations with lending only. If they are to achieve sustainability, eventually they have to confront the issue of making a transition to a savings institution as well. The rationale for giving priority to savings deposits has been summarized in Joyita Mukherjee's synopsis of work by Marguerite Robinson:
Locally mobilized voluntary savings is potentially the largest and the most immediately available source of finance for some microcredit institutions. Another important reason for undertaking the institutional mobilization of voluntary savings is the vast unmet demand for institutional savings services at the local levels of developing countries.139
However, when participation in savings schemes goes beyond a very small local circle, then the issue of the potential need for bank supervision has to be weighed, although as mentioned above there are arguments against introducing supervision requirements too quickly:
For the protection of their clients, especially depositors, financial institutions that mobilize voluntary savings should come under government supervision. This, of course, requires a government that is willing to modify its banking supervision so that the rules for microcredit institutions are appropriate for their activities, and to ensure that the supervisory body is able to monitor these institutions effectively. . . . Before mobilizing savings, a microcredit institution should have demonstrated consistently good management of its own funds. In other words, it should be financially solvent with a high rate of loan recovery, earning attractive returns. This established record is important because in many countries low-income people who have entrusted their savings to small unsupervised financial institutions have lost their lifetime savings.140
Robinson and Mukherjee underscore the importance for savings mobilization of sound macroeconomic policy and an appropriate legal and regulatory environment, including sufficient capacity to supervise deposit-taking institutions. In addition, they draw together several important lessons about how the introduction of savings deposits into lending institutions changes the nature and operations of those institutions. Those lessons are best presented in their words:
Adding voluntary savings to a microcredit program will fundamentally change the program
The institution should be prepared for these changes and should not believe that adding savings is like adding 'just another product'. In countries with large, unmet demand for savings services, microfinance institutions that offer loans and well-designed savings instruments have many more deposit accounts than loans. At BRI's local banking system, there are about six times as many deposit accounts as loans. At Bank Dagang Bali, the ratio of savings accounts to loan accounts is over 30 to 1. This pattern occurs primarily because most microfinance clients want to save all the time, while most want to borrow only some of the time.
The introduction of voluntary savings services thus implies the addition of many new customers - which in turn means increases in staff, management, offices, systems, communications, staff training, security. . .. interest rates on loans may have to be changed to ensure that the spread between interest rates for loans and deposits is sufficient to cover all costs and to return a profit.
140. Ibid. [emphasis added].
Compulsory savings and voluntary savings are incompatible
The requirement for compulsory savings [to qualify for loans] and the mobilization of voluntary savings reflect two very different philosophies. The former assumes that the poor must be taught to save, and that they need to learn financial discipline. The latter assumes that the poor already save, and that what is required are institutions and services appropriate to their needs. Microfinance clients may not feel comfortable putting voluntary savings ... in compulsory savings accounts, or even in other accounts with the same institution. They know that they cannot withdraw the compulsory savings until their loan is repaid. . . and they fear that they may also not have easy access, de facto, to their voluntary savings.
The lesson learned in mobilizing savings is to train the staff, not the clients!
An institution aiming at full self-sufficiency must... set a spread between loan and deposit rates that enables institutional profitability.. . . adjusting the interest rates requires some experimentation. ... a savings instrument that features quick and easy access (liquidity) and is in high demand can be labor-intensive to manage. It is, therefore, costly to a microfinance institution, especially if there are a large number of very small accounts. .. . Labor and other non-financial costs must be considered when setting interest rates on deposits. These costs are difficult to determine in advance, so pilot tests are needed to estimate costs accurately.
The introduction of voluntary savings will also require some changes on the lending side. For example, if a microfinance institution offers only group loans, it should consider introducing individual loans to its portfolio.
limits on loan sizes will have to be increased when deposit services are added.. . . Larger savers tend to qualify for and want larger loans. Borrowers who are forced out by the institution's loan limits before they can qualify for loans from commercial banks find themselves in difficulty. In contrast, microfinance institutions that help long-term borrowers to obtain larger loans and recommend them to other banks when they qualify will continue to have the client's goodwill, and at least some of their savings. Bank Dagang Bali retains its good borrowers, offering them increasingly larger loans as their enterprises grow. Eventually some of these borrowers find better loan terms elsewhere, but usually they remain savers in Bank Dagang Bali.
Deposit instruments should be appropriate for local demand
savings services [must] meet local demands for security, convenience of location, and a choice of instruments with different mixes of liquidity and returns. In the case of BRI, the same banking system that mobilized US$17 million in its first ten years of operation (1973-1983), mobilized US$3 billion from 1984 to 1996. . .. Deposit instruments were designed specifically to meet different types of local demand.
There is a substantial need to develop human resources
Managing a financial intermediary is more complex than managing a credit operation, especially since the size of the organization tends to increase rapidly. Training for staff and management becomes an urgent need. For commercial banks venturing into the microfinance market, the tendency to down-load commercial and corporate banking instruments, spreads, training, and attitudes must be assiduously avoided. Bank staff must also learn to treat poor clients with respect, a lesson that comes hard to some bankers.
BRI's most liquid savings account (called SIMPEDES) featuring both interest and lotteries was an instant success because extensive research had been done on what features cus tomers wanted in a liquid instrument and why they wanted these. Moreover, BRI conducted market research to determine what kind of lottery prizes were popular, what kind of bank book was wanted, and what kinds of publicity were effective. The results were excellent. .. .
Careful attention must be paid to sequencing
The following steps are relevant to many microcredit institutions that are planning to introduce voluntary savings:
(1) Enhance the knowledge of the institution's board and managers on the experience of other microfinance institutions with regard to voluntary savings mobilization.
(2) Carry out market research and train staff selected for the pilot phase.
(3) Conduct and evaluate a pilot project (a crucial step because, until the extent of the demand and costs of different products, including labor, are known, only temporary interest rates can be set).
(4) Where necessary, second pilots should be carried out and evaluated. . ..
instituting a voluntary savings program is a prime illustration of 'haste makes waste'. A microfinance institution that does it the wrong way will lose the trust of its clients, and eventually its own viability.14
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