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

Written by Julia Abakaeva and Jasmina Glisovic-Mezieres, published June 2009 by the Consultative Group to Assist the Poor (CGAP), 4 pages, available at: http://www.cgap.org/gm/document-1.9.34820/CGAPBrief_Deposits.pdf

New research has found that the aggregate savings balance of low-income deposit holders increases slowly and are not prone to unexpected month to month swings. This information should make liquidity management by financial institutions easier once they have analyzed typical savings patterns in their deposit portfolios. Microfinance Institutions (MFIs) which also take deposits should perform the same type of analysis in order to plan their liquidity and operation funding.

Research Study

The Consultative Group to Assist the Poor (CGAP) commissioned a study by the Frankfurt School of Finance and Management to examine the stability of small deposits. Five financial institutions were studied and the actual behavior of deposits was reviewed. Three questions were posed: Are there recurring seasonal savings patterns? How volatile or predictable are the aggregate balances of demand and term deposits? How do external events (e.g. natural disasters, political turmoil, war) affect deposits?

The full report of the study is available here:

http://www.cgap.org/gm/document-1.9.34819/SmallBalanceDeposits_TechNote.pdf

Methodology

The five institutions studied were Allied Bank (Pakistan), VTB (Georgia), BPR Kebomas (Indonesia), Equity Bank (Kenya) and Banco Sol (Bolivia). They each serve poor individuals in large markets and hold deposits for low income savers.

A ‘small balance’ deposit for each country is defined based on the account size of products, customer demographics, the poverty line and income per capita.

Small Balance Demand Deposits Provide Relatively Stable Aggregate Balances

When compared to a German Bank, Equity Bank and Allied Bank both had similar deposit behavior patterns. Savings accounts were the least volatile, term deposits more volatile as people deposit and withdraw in large amounts, and current accounts were the most volatile as these are used for frequent transactions.

The other three financial institutions exhibited a different behavior as ordinary savings accounts were more volatile than term deposits. The research showed that this was due to total term deposits being several times larger than the total balance of ordinary savings accounts. Therefore this may have distort the volatility of savings. However, in general the stability of deposits will depend on the size and frequency of transactions, institutional reputation, and interest rates.

Deposit Balances Are Not Seasonal

The data showed that there was no seasonal pattern in deposit withdrawals.

Deposits Are Not Very Sensitive to External Macro Events

There was no effect on deposit balances when there were natural disasters such as the October 2005 Kashmir Earthquake or December 2004 Tsunami. During some sociopolitical crisis in some countries deposits did drop. Neither was there an increase in deposits during periods of positive macro change.

Conclusion

A portion of small balance deposits from any financial institution can be considered a stable source of funding. To determine what proportion can be considered for long-term loans banks and MFIs must analyze their depositor base. The analysis should cover three years of monthly and one year of daily data to ensure long term trends, seasonal effects and daily volatility patterns are covered.

By Sally Levy, Research Assistant

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