CGAP-MicroSave Virtual Savings Exchange
"Serving Small Depositors: Meeting Demand while Managing Costs"
Draft Summary of Dec. 9, 2005 Virtual Discussion of Environmental Factors1
Regulated institutions enjoy more credibility. Where there is no regulation in place, is it not worthwhile for the MFIs operating in a region to voluntarily set up a regulatory body as well as a common risk fund that would provide some comfort to savers? These could then become USPs in a marketing effort.
Only a stable political system and strong macroeconomic management can ensure the proper functioning of financial liberalization initiatives and provide the prudent legal and regulatory frameworks, deposit insurance mechanisms, supervision, liquidity management mechanisms, etc. required for the sustainable growth of the microfinance sector to better serve the poor and excluded (Dhakal, Nepal).
Industry factors:
Technical assistance and training (by donors) can improve internal processes, product design, and skills (Lab-oyan, The Philippines). In Nepal, adequate technical support is needed to improve the accessibility of savings services to the rural poor (Simkhada, Nepal).
Industry culture: The prevailing culture in the financial sector excludes clients that staff is now trying to serve. MFIs must learn to communicate in new ways that a client deprived of financial services will understand. (Walden)
The failure of some cooperatives involved in small savings mobilization creates a negative perception among potential clients providing an environmental challenge for other cooperatives (Lab-oyan, The Philippines; Asare, Ghana). In Nepal, a cooperatives' failure is often a result of poor liquidity management. When a cooperative is unable to provide a saver with a withdrawal, word of mouth spreads, immediately resulting in savers demanding withdrawals, borrowers not repaying, and the collapse of the institution (Simkhada, Nepal).
Recommended strategies to manage this negative perception include: regulations regarding assets-liability matching, and the financial and management skill requirements for board and staff (Simkhada, Nepal). Affiliation with a regional, national or international network can improve the public image and credibility of the institution which can help in maintaining or regaining public trust. Being supervised by a credible larger institution also can increase the level of trust of savers (Lab-oyan, The Philippines; Thornton, Papua New Guinea). Member education is also crucial so that they can select cooperatives where their money will be safer (Simkhada, Nepal).
Regulatory and Legislative Factors
Legal status: In some countries, the legal path is unclear for an NGO or MFI to transform into an institution legally able to mobilize deposits (El Ghormli, Morocco). In some countries, the organizations that do reach the poor or rural areas—such as self-managed groups and MFIs in India—cannot mobilize savings from non-members or they cannot mobilize savings at all (Sharma, Nepal, India). The lack of clear-cut government policy on microfinance and, in some cases, internal inconsistencies in government policies, does not promote the growth of the sector. In most cases, a segment of the industry is regulated while other parts operate in the dark or the government turns a blind eye to their operations. Lack of regulations could provide institutions operating in the sector with the flexibility to optimize their businesses. However, unregulated MFIs may fail to adopt prudent liquidity management practices or may be fraudulent. This lack of regulation and policy can give the industry a negative reputation. (Asare, Ghana)
Capital adequacy and liquidity reserve requirements: High minimum capital requirements, capital adequacy ratios and liquidity reserve requirements increase the cost of deposit mobilization and can restrict the ability of MFIs to branch out (Manrique, Columbia; Asare, Ghana; Ayo, Cambodia). Finding the additional capital necessary to maintain prudential ratios is not easy. Furthermore, it is difficult for MFIs to cede control to outside investors as outside investors can have very different ideas on the value of an institution (Cracknell). On the other hand, high minimum capital requirements force MFIs to be serious—which is good for depositors (Thornton, Papua New Guinea). The experience from West Africa shows that a flexible capital regime is more appropriate than a fixed capital regime. Often high minimum capital requirements cartelize the market (as in Uganda). Opening up the market for new, smaller entrants to serve local markets is the socially responsible thing to do (Jazayeri).
Staff, board and systems requirements: Requiring that suitably qualified people manage and oversee financial institutions is a plus for depositors. However, requiring new institutions to have all key functions and management in place from day one, rather than building these up over time with your portfolio, makes it hard for completely new institutions to enter the market (Thornton, Papua New Guinea).
Financial liberalization: Financial intermediaries should be free to set their lending and deposit interest rates with an appropriate spread between them to operate at a profitable and sustainable level (Dhakal, Nepal). Therefore, external funding policies are also highly important. Institutions will mobilize deposits only if this source of funds costs less than others (Islam). So, for example, the liberalization of agricultural credit policy in Thailand allowed commercial banks to reduce their mandatory deposits with the Bank of Agriculture and Agricultural Cooperatives (BAAC). This substantially stimulated BAAC's savings mobilization efforts. In 1987, mandatory deposits from commercial banks represented about 40% of funds and deposits mobilized by BAAC accounted for one fourth of BAAC's funds. By 2001, BAAC's source of funds consists of only 4.6% from borrowings while customer deposits represented 76% (Haberberger, Thailand).
Infrastructure requirements: Establishing a deposit-taking infrastructure that meets regulatory requirements can be extremely expensive. Urban infrastructure may attract more customers, but is often subject to more competition and is more costly (Cracknell). Being regulated increases branch costs (because it increases security requirements, etc.), but it also brings the bank or MFI recognition as a trustworthy institution, enabling it to attract large deposits from companies, institutions, and public sources. This recognition can help a lot in compensating for the additional costs (Moelders, Bosnia and Herzegovina).
Anti-money laundering legislation: Complying with identification and confirmation-of-residence requirements can be a challenge for customers without electricity or water bills, and it can make opening an account expensive for clients and institutions (Larcombe, Mozambique; Cracknell; Manrique, Columbia). These increased costs and tighter restrictions may drive low-income clients out of the formal sector (Isern).
E-banking and regulations: E-banking will pose policy and regulatory challenges in a number of areas including communications policies, infrastructure, and the definition of roles such as that of a deposit taker (i.e., the person who can accept a deposit on behalf of a bank or MFI).
Some strategies for dealing with regulatory challenges: Some situations are best dealt with "technically and globally" with international best practices, and some situations only "socially and locally." Usually the situation we face is a hybrid, and therefore a balance is needed between the technical/global and the social/local (Jazayeri). Policy makers are more responsive to regulatory concerns when it is discussed in terms of impact on areas of policy concern (such as economic growth) rather than in terms of "need" (Mary George, India). MFIs may organize into a network where they can lobby with the government on certain issues, for example, withholding tax on deposits, (Ayo, Cambodia) but these may have little possibility of succeeding (Moelder, Bosnia and Herzegovina).
Costing might rightly be used 1) to support a challenge to government regulations that set a floor for interest payments for deposits or 2) to justify a request for government or donor help in managing the costs of working in poor areas. This might involve removing regulatory bottlenecks, infrastructural development, et cetera (Gobezie, Ethiopia).
Macroeconomic Factors
Inflation: Loss of value due to inflation is a disincentive to save, even for MFI clients (who might be considered less sophisticated in their analysis of returns on their investments) (Asare, Ghana). An inflation-targeting system can keep core inflation within a low range (Haberberger, Thailand).
Equitable and sustainable rural development: A stable and growing economy coupled with equitable and sustainable rural development results in households and enterprises with potential financial savings. These households and enterprises could be a potential market (Dhakal, Nepal).
Economic and political stability: A reasonable level of political stability is required. In general, households and enterprises will voluntarily deposit their savings only when they have trust in the broader political and economic system (Dhakal, Nepal). The stability of the banking system, the behavior of the banks, and the regulatory framework for banks have a larger impact on deposit mobilization than do the political circumstances (Moelders, Bosnia and Herzegovina). The Asian currency crisis adversely affected some rural and thrift banks, resulting in their closure (Lab-oyan, Philippines).
Absence of investment opportunities: In the absence of other financial instruments, the MFI has to invest the savings mobilized into its loan portfolio or face a great risk of not being able to serve withdrawals (Ayo, Cambodia).
Deposit insurance can be valuable if it covers the average deposits of small and medium savers (Lab-oyan, Philippines; Ayo, Cambodia). However, a deposit insurance scheme does not necessarily have a huge impact on the level of deposits mobilized (Moelders, Bosnia and Herzegovina). In fact, the absence of deposit insurance might ensure that the banks are on their toes and will not merely pass the risk on to insurance companies.
Infrastructure: Poor rural telecommunications, lack of electricity and internet service providers, and poor rural road networks raise costs, pose challenges, and inhibit the growth of the industry. Without these, internet banking and the use of ATMs or mobile phone banking are not available options for serving the rural poor. Financial support from donors for portfolio growth is good, but the platform for delivering reliable microfinance service is critical (Asare, Ghana; Metz; Thornton, Papua New Guinea). A reasonable road infrastructure and road conditions can stimulate frequent savings mobilization (mobile units and collectors) at a reasonable cost. Rural clients need to be able to reach the nearest branch or service outlet within a reasonable amount of time (Haberberger, Thailand).
Operating the MIS in stand alone branches rather than networked branches limits services but allows branches to continue to provide basic services when the "coms go down." Branches download general ledger data to the head office daily and this is used to assist in liquidity management as well as general management (Thornton, Papua New Guinea). Without a centralized clearing system for MFIs, clients spend a lot more time accessing their checking accounts (Asare, Ghana).
External Factors
Seasonality of cash flow: Reliance on one major seasonal cash crop presents liquidity management challenges to MFIs, because savings increase during harvest periods but fall during the lean periods. And MFIs must have liquid resources to meet withdrawals at a time when loan repayments are not forthcoming because there are no crops to sell to repay loans (Asare, Ghana).
Conflict and natural disasters: Conflict hinders savings mobilization because cash will not be delivered due to the high risk (Manrique, Columbia). Under a conflict environment, existing MFIs adopt coping strategies to continue their existence rather than expand their outreach and maintain viability. The only viable way to grow the microfinance sector is during peacetime. In a post-conflict environment, the extent of re-construction (infrastructure) efforts, rural development, political and economic stability, and monetization of the economy determines the emergence and growth of the microfinance sector (including small deposit mobilization) (Dhakal, Nepal). Natural disasters have only a very limited, short-term effect (Moelders, Bosnia and Herzegovina).
Resources:
- "The Rush to Regulate" by Bob Christen and Rich Rosenberg, www.CGAP.org.
- CGAP / World Bank paper on the implications of the international framework for anti-money laundering and combating the financing of terrorism for financial service providers working with low-income people. Focus Note No. 29
1Summarized by Exchange Facilitator, Madi Hirschland