Q&A with Madeline Hirschland

Madeline Hirschland, editor and author of Savings Services for the Poor, highlights the key messages of her book released by Kumarian Press.

Parts of this interview are excerpted from the book.

1. Your recently-published book Saving Services for the Poor is the definitive source of information about savings mobilization. What would you say is the main message of that book?

Madi Hirschland facilitating a workshop on savings in Mbarara, Uganda

Because the book is a guide to developing and managing savings operations, it contains many specific "how to" messages: how to manage liquidity, attract large as well as small depositors, balance assets and liabilities, prevent fraud, recover costs, motivate staff, and so on. All of these relate to the book's underlying premise: that managing savings well is critically important and significantly different than managing credit alone.

The book has another simple but critical message: Economically active poor people can and do save but they demand services that are close by and that do not require large opening balances or regular deposits. To provide these services while recovering costs, institutions must employ innovative, low-cost delivery channels.

To understand this message in concrete terms, let's look at the results of a year-long study from Bangladesh. Although the study was conducted in a highly competitive microfinance market, it found that microfinance institutions (MFIs) were handling just seven percent of the credit and savings transactions of the poor households in the sample - thirty percent of which were not using any MFI services at all. These households were conducting the bulk of their financial transactions in the informal sector - despite its unreliability and insecurity - for one basic reason: "the fixed weekly or monthly payments over a year-long period would be either impossible or very difficult to meet."¹

Furthermore, for many poor and rural savers, walking or paying to travel even five kilometers to deposit a small sum in an MFI or bank branch is not realistic. Yet, particularly in rural areas, developing a network of full-service branches that are located ten kilometers apart is rarely financially feasible. However, the deposits of banks, cooperatives, and non-governmental organizations across the globe have greatly increased when services are delivered in ways that cost less than full-service branches and brings services closer to clients.

Examples of alternative delivery channels include mobile units in Kenya and Thailand, customized ATMs in Bolivia and South Africa, tiny offices in rural Indonesia and remote Nepal, self-help groups in Zimbabwe and Mexico, deposit collectors in Ghana and India, and services that are "piggy-backed" onto postal or credit services throughout the world. The book illustrates each of these delivery options with a short case and assesses its advantages and disadvantages. Where the infrastructure is available, some of the most promising delivery channels may be electronic banking by mobile phones or through point-of-service (POS) devices in small, rural retail shops.

Using alternative delivery channels typically affects nearly every aspect of operations. In order to get close to clients and also be cost-effective, institutions often rely on staff with relatively little schooling which, in turn, requires greater simplicity and innovation in everything from products to controls. The operations that result rarely look like conventional banking - but they innovate to make up the difference. For example, MFIs that deploy mobile collectors make up for the absence of traditional internal controls with a whole set of alternative security measures. A small office or mobile unit may be open only a few hours a week but its sole employee or the parent branch may be accessible full-time for a depositor faced with an emergency. Deposits may not be liquid because staff or volunteers do not have the skills to manage liquidity, but to compensate for this, depositors may be provided with access to emergency loans.

What are the results of these unconventional sorts of banking? Many of the institutions that are employing these alternative delivery channels are reaping the benefits - from a better public image and a bigger and more diverse market to greater profitability and a larger volume of stable funds for lending.

I should start by saying that "getting the product right" is usually the least of the challenges institutions face as they develop small-balance savings operations. That said, one well-known recipe for success has three ingredients. First, know your market. Second, offer just a few generic products that meet a wide range of needs. And third, make sure that these products provide both liquidity and illiquidity. A product that is liquid can help the depositor to manage an unforeseen emergency (such as a sudden illness or flood) or take advantage of an unexpected investment opportunity. An illiquid product - one that provides access to funds only at a pre-determined time - protects savings from day-to-day demands. This helps enable the depositor to accumulate savings for expected future needs, such as school fees, home improvements, restocking a tiny enterprise, or a wedding.

Most MFIs that successfully mobilize deposits offer a combination of demand deposit and time deposit products that, together, provide the volume and stability of funds that these institutions require at an acceptable cost. For many of these institutions, most of their deposit accounts are demand deposit accounts with a relatively small average balance, providing a large, stable but fairly costly source of funds. A large portion of their funds also come from significantly larger, fixed deposit accounts that cost less but are more volatile.

Some institutions do not have the option to attract larger depositors. To control costs, these institutions often use manual information systems and staff with little schooling. For these institutions, a slightly different recipe is often appropriate. These institutions must offer products that are simple and easy to manage. Some key ingredients for success may be: 1) offer just a single liquid product or, if the group or institution cannot manage this, an illiquid product coupled with an emergency loan facility; 2) unless the market is made up of farmers who value a time deposit product, offer a contractual product (whereby the depositor makes a series of usually smaller fixed payments that can be withdrawn upon maturity) rather than a fixed deposit product; and 3) "grow" into a broader product mix gradually as the institution develop its management capacity.

Deposits are particularly vulnerable to credit risk; the risks of fraud, theft, and mismanagement; and liquidity and interest rate risks. To manage each of these risks, a financial institution must implement policies, tools, and procedures including credit management policies and portfolio monitoring; internal controls and internal audits; budgeting and monitoring of cash income and expenses; policies for managing excess liquidity and liquidity crises; ratio analysis and gap management. These policies and tools will be effective only if they are reinforced by the MFI's culture, which is established and reinforced through training and supervision of staff and information systems. Deposits will be secure only if all levels of an MFI - from board to field staff - prioritize risk management as an integral part of operations.

For MFIs, the biggest challenges tend to be building potential depositors' trust in the institution, developing the staff and management information systems to support the new product, and recovering costs. Of course, developing sufficient controls and financial management systems are also crucial tasks but these tend to be more straightforward challenges. Which challenges are most pressing depends a lot on the type of institution. For example, for a new institution or an MFI that has just transformed into a bank, becoming known and trusted is a huge and critical task. Conversely, a large state bank with an established reputation may grapple most with how to reorient a large staff.

The challenges differ even more for mainstream regulated institutions that seek to expand their savings services to smaller or more rural depositors. These institutions typically face three major obstacles: costs, controls and culture. As discussed above, to serve small depositors, most mainstream financial institutions and transformed MFIs must develop lower-cost delivery channels. Yet these channels can pose the significant challenge of maintaining standards of control and accountability. At the same time, the corporate culture of many regulated institutions - particularly private banks - is not oriented towards serving the poor. Using different delivery channels and staff can at least partially overcome this obstacle.

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¹ The research was done in 2000 as part of the 'Finance and Development' project executed by IDPM (the Institute for Development Policy and Management at the University of Manchester, UK) for DFID (British development assistance). Dr. David Hulme of IDPM managed the research from Manchester, and Stuart Rutherford supervised its execution in Bangladesh. Orlanda Ruthven and Sushil Kumar supervised a parallel study in India the same year. Further description can be found on the IDPM website at www.man.ac.uk/idpm.