MICROCAPITAL.ORG STORY: The Importance Of Taking Deposits And A Return To Community Based Microfinance? Views From The Gates Foundation, Grameen Bank And Oxfam America In Time Magazine

In an article entitled ‘The Next Step for Microfinance: Taking Deposits’ in a recent issue of Time magazine [1], writer Ms Barbara Kiviat highlights the importance of deposit taking in the field of microfinance or what has been referred to by some development experts as the “forgotten half of rural finance.” Ms Kiviat, a staff writer for Time magazine, reiterates the point that whilst microloans are important, the service that a lot of the poor need ‘more than business loans, is a safe place to save their money’.

The article observes that whilst ‘in most parts of the world anyone can make a loan, including the non-profits that trek into developing countries to reach people traditional financial institutions have ignored’, the provision of savings accounts and other banking products (which are typically heavily regulated) has not been as widespread.

The fact that there is a greater need among the poor for a ‘safe place to keep their money’ rather than a business loan is a view that is supported by many participants in the microfinance sector. Bank Rakyat [2] in Indonesia, for instance, is quoted to have 10 savers for every one borrower. “Low-income people need a variety of financial services,” says Mr Bob Christen, director of the financial services group at the Gates Foundation [3], which has given tens of millions of dollars in grants to savings initiatives. Data from a survey by Bank Rakyat suggests that in 30 percent of cases, micro-borrowers use funds for consumables and household needs, like school fees, home repairs and holiday expenses. The issue, as pointed out in the Time magazine article, is not that poor people don’t have savings, but that they tend to save in ‘hard-to-tap assets, like livestock and jewellery’. To free up cash, the solution is often to pawn possessions-and to pay someone a significant fee in the process.

The article in Time magazine goes on to observe that efforts have been made to make savings a viable product for some MFIs and accounts less costly to maintain. For instance, ‘agent-based banking’ in which financial services are delivered though existing institutions-like pharmacies and newsstands-is one key area of research as is mobile banking. In Kenya, Vodafone’s M-Pesa [4] has seen significant headway with its mobile-phone-based banking system, which includes a way to save. A number of traditional MFIs, many of which have evolved into formal banks, are also assigning renewed importance to gathering deposits. Grameen Bank [5] was quoted as an example and it is stated in the article that the well-established MFI recently relaxed its rules on savings accounts to better accommodate clients’ saving needs.

Ms Kiviat also makes reference to recent efforts by Oxfam America [6] which is stated to have been creating savings groups in villages in Mali, Cambodia, Senegal and El Salvador since 2005. Each group has about 20 members, almost all of whom are women. The members contribute a small amount of money each week, and then, from this pool of savings, on-lend sums to members who need loans. The program is based on a model that is not uncommon n the microfinance world-such groups are called ‘tandas’ in India and ‘tontines’ in West Africa. The program is designed to promote group independence, with Oxfam eventually reducing its involvement over time. Mr Jeffrey Ashe, Oxfam America’s director of community finance was quoted as stating ‘we’re creating autonomous groups and defining sustainability in a whole new way.’ In many ways it’s microfinance back to its roots-small, rural and community-based. Whether this also represents ‘the next step forward’ in microfinance, as stated in the Time magazine article, remains to be seen.

The role of savings in microfinance was also the subject of a recent blog by Mr Nicholas Kristof entitled ‘Putting the Microsavings in Microfinance’ in the New York Times [7]. The blog has attracted a variety of comments. A comment by the publisher of Microcapital and Microcapital.Org, Mr David Satterthwaite, is noteworthy. Mr Satterthwaite reiterates the views of many micro-bankers that the ‘local intermediation of funds’ or the use of local savings deposits is an effective funding strategy for microbanks. However, he cautions that articles that attempt to discuss the issue of micro-savings run the risk of presenting a ‘false choice’ between credit and savings. Microbanks cannot offer savings products to clients unless they are also effective at providing microloans. As Mr Satterthwaite stated, ‘you cannot have savings without credit’ as loans are the major source of income for micro-banks where deposits ‘are on the other side of the ledger’ and are essentially an expense. It is important to note that micro-banks must generate the revenue necessary to safely manage deposits.

Related publications on the issue of savings and deposits in microfinance have been set out in the Bibliography section below [8], [9], [10].

By Chinq Yee Chong, Research Assistant

Bibliography

[1] Time magazine article entitled ‘The Next Step for Microfinance: Taking Deposits’: http://www.time.com/time/business/article/0,8599,1918733,00.html

[2] Bank Rakyat Indonesia: www.bri.co.id/

[3] The Gates Foundation: www.gatesfoundation.org/

[4] M-Pesa: http://www.vodafone.com/start/media_relations/news/group_press_releases/2007/safaricom_and_vodafone.html

[5] Grameen Bank: www.grameen-info.org/

[6] Oxfam America: www.oxfamamerica.org/

[7] New York Times blog entitled ‘Putting the Microsavings in Microfinance’: http://kristof.blogs.nytimes.com/2009/05/26/putting-the-microsavings-in-microfinance/

[8] MICROCAPITAL PAPER WRAP-UP: Asset and Liability Management for Deposit-Taking Microfinance Institutions, Kara Bloom

[9] MICROFINANCE PAPER WRAP-UP: Are Deposits a Stable Source of Funding for Microfinance Institutions? By Julia Abakaeva and Jasmina Glisovic-Mezieres