PAPER WRAP-UP: CGAP: The True Cost of Deposit Mobilization: Deposit Costing Project Draft Report, December 2007

Prepared by Rani Deshpande and Jasmina Glisovic-Mezieres for Consultative Group to Assist the Poor (CGAP) (CGAP) and released in December 2007 as a 13-page draft report presenting data collected by CGAP in December 2005 of deposit costs at five different microfinance institutions, using activity-based costing (ABC). This document is available at: http://microfinancegateway.org/files/45789_file_THE_TRUE_COST_OF_DEPOSIT_MOBILIZATION.pdf

The Consultative Group to Assist the Poor (CGAP) investigated the cost of deposits at five different microfinance institutions using activity-based costing (ABC), a method that traces costs of activities to specific products or cost objectives, to determine the expenses involved in mobilizing deposits and how they could be reduced.

The five institutions selected for the study were from Ethiopia, Peru, Pakistan, Philippines and Bangladesh. Institutions varied in size, type, and client-base, however all five institutions used deposits as an important source of funding.

Deposit costs at institutions included financial (interest) costs and administrative costs. Administrative costs associated with deposits were broken down into four core processes: opening deposit accounts, servicing deposit accounts, handling cash transactions and sustaining activities (page 3). For most of the institutions investigated, the major costs were sustaining activities (operational costs such as audits, risk management, internal control, etc.) and interest rates paid on deposits.

The Bangladeshi institution’s servicing costs were highest single cost of the investigation, 16.7 percent of their total deposit balance, due to their exclusive use of roving deposit collectors. By limiting use of deposit collectors, the Filipino institution was able to service the same number of clients as the Bangladeshi institution using only 1.2 percent of their total deposit balance (page 4).

Interest paid was a major cost for all the institutions investigated. Most interest was paid on time deposit accounts. These costs varied from 17 percent to 80 percent of total costs. The three institutions with interest making up over 50 percent of total costs also had the lowest overall deposit costs, thus clients were reaping the benefits of the institutions’ operational efficiency (page 4).

While some institutions can attract more clients with higher interest rates, other institutions may need to do the opposite and use saved interest costs to improve their products or services. The Ethiopian institution’s clients were more concerned with lower minimum deposits and convenience of branch locations (page 5).

Though large initial investments are needed to launch deposit products because of information technology, Management Information Systems (MIS) and staff, operational costs are relatively inexpensive. Smaller accounts are less cost-efficient than larger accounts. Analysis of the Peruvian institution showed accounts of less than USD 100 cost more to administer (20-120 percent) than the total average administrative cost of 7.1 percent (page 7).

Deposit accounts may be used as a gateway product, leading a low-income customer to seek other more profitable services like loans or money transfers. There is an important distinction between profitability and viability of savings mobilization. If savings services are more expensive than the next best available source of funds, it is considered unviable, but if savings can allow an institution funding to loan at a profit, it can still be profitable.

Deposits can benefit microfinance institutions by offering stability of funds, reduced dependency on external borrowing, opportunities for cross-selling, and client acquisition and retention benefits.

By Melissa Duscha

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