What happened to the seven leading small-balance savings institutions GTZ studied in 1996 as part of the CGAP Working Group on Savings Mobilization? The institutions studied back then – BAAC (Thailand), BRI- Microbanking Division (formerly known as the Unit Desa System, Indonesia), BCS (Colombia), Centenary (Uganda), CVECA (Mali), FECECAM (Benin), RPB (now One Network Bank (ONB) in the Philippines) – represented a regionally and institutionally diverse set of financial intermediaries with a mission to serve low-income and/or rural clients. The CGAP Savings Initiative commissioned research to measure their progress from 1996-2003.
Trends and Issues
What are the lessons that can be learnt from the experiences of the seven deposit-taking institutions over the course of seven years? The study examines trends and issues common across the institutions in their mission to serve low income or rural clients.
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- All seven institutions have experienced massive growth, both in the number of individual savings and accounts and the volume of individual savings. Six of the institutions added collectively over 20 million savings accounts and over $4.3 billion in savings. The largest growth occurred in national banks with extensive branch networks. BRI-MD alone added 14 million of the new savings accounts, and BAAC added US$3.4 billion of increase in savings volume.
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Overall there has been faster growth in deposits than lending with a ratio of more than six savings accounts for every loan among the six institutions. Most of these financial intermediaries are savings-led institutions. BAAC has the lowest ratio as a result of its government funding, but the huge savings growth has allowed it to internally finance its portfolio for the first time. The ratio of savings accounts to number of loans for the six institutions has correspondingly increased from 4:1 (as originally estimated by GTZ) to 6:1.
- The institutions, with the exception of Centenary, have consistently maintained a small average deposit size that is between 10 and 27 percent of GNI per capita. This is particularly remarkable because large numbers of small accounts can be masked by a few large accounts.
- All institutions have showed strong financial performance. BAAC, BRI and BCS in particular have managed both their return on assets (ROA) and operating expense ratio to maintain a steady performance. Each of the six is performing significantly better than its respective Microbanking Bulletin (MBB) regional peer group.
- Consistently positive ROAs have proven their profitability. BRI-MD and ONB had the highest ROAs in 2003 at 5.7 and 5.0 percent, respectively. BCS and Centenary have also kept consistently positive ROAs in line with management objectives. FECECAM has had risk management problems, so although its ROA is one of the lowest, it is improving and is better than its regional peer group. BAAC manages its ROA to meet a low, government-established target.
- In comparison to credit institutions these institutions are more efficient. Available data did not allow for robust analysis on operating expense ratios and the cost of small balance savings operations, but the two institutions that showed efficiency declines did so due to factors outside of their savings performance. FECECAM experienced portfolio quality problems and ONB had a new cost structure of the consolidated bank. Centenary, the institution most heavily focused on savings, made significant efficiency gains.
Behind the Numbers: What Drives Institutional Performance
High-quality products and delivery systems, improved risk management, and competition were found to be the main drivers of the performance.
- Improved products and delivery systems such as technology-based service delivery designed to reduce transaction costs drove growth in both number of savings accounts and volume of savings deposits.
- Improved risk management. Liquidity risk management in particular has contributed to reduced costs, improved efficiency, and financial stability. The financial intermediaries have concentrated on improving their management information systems, tightening procedures and controls, and developing staff technical skills to improve their risk management.
- Competition. Increasing competition since 1996 has prompted several of the institutions to improve customer service and maintain their leadership positions.
Conclusion
The follow-up study demonstrated that there continues to be a strong demand for small-balance savings services by low income clients when products are designed appropriately and accessible. It also showed that small balance savings services can be managed profitably over time by a range of different institutional types but a key challenge is to keep focused on risk management. A laser focus on managing risks is needed to address problems before they get out of control. Another common challenge is to develop their lending capacity as fast as their deposit-taking capacity, to maintain appropriate loan-to-deposit ratios. A challenge for the analysis of institutions that provide small-balance savings is to develop indicators that can more effectively measure performance and build industry consensus around them. These are all challenges of a fast growing sector, which is good news for low income savers.
Would you like to read more about savings mobilization? Please visit our website at www.cgap.org/savings.