MICROFINANCE PAPER WRAP-UP: Is There a Business Case for Small Savers? by Glenn D Westley and Xavier Martin Palomas, published by CGAP (Consultative Group to Assist the Poor)

By Glenn D Westley and Xavier Martin Palomas, published by CGAP (Consultative Group to Assist the Poor) as Occasional Paper 18, September 2010, 23 pages, available at: http://www.cgap.org/p/site/c/template.rc/1.9.47356/

In considering the sustainability of microfinance institutions (MFIs) and the microfinance sector as a whole, discussions often focus on the reduction of costs associated with loan recovery and charging high lending rates, since microfinance has traditionally been identified with credit. Recently, more MFIs have begun to diversify by offering services such as savings and insurance. In this study, the authors use data collected in 2008 to examine whether small savings accounts are profitable and what impacts they may have on the sustainability of MFIs.

The study examines two MFIs, Asociacion Dominicana para el Desarrollo de la Mujer (ADOPEM), an MFI that was founded in the Dominican Republic in 1982, and Centenary Rural Development Bank Limited, a Ugandan MFI that was established in 1983. The authors define small savers as “the half of all savings clients with the smallest deposit balance,” with the balance for ADOPEM calculated as the average daily balance over the 366 days in 2008 and the balance for Centenary Bank defined as the balance on the last day of 2008. Marginal cost analysis is used to measure the costs associated with small savings accounts and eliminate fixed and quasi-fixed costs such as compensation for the board of directors and personnel as well as office rent, electricity and maintenance.

Dr Westley and Mr Palomas identify five sources of small-saver profits, which they call the five “Pathways to Profitability”: (1) Loans, which are identified as a source of small-saver profit since the average loan size of small savers is almost as large as the average loan size of all borrowers; (2) other cross-sold products such as insurance; (3) savings account fees; (4) technology such as automated teller machines (ATMs), which can help MFIs attract and retain clients, leading to an increase in the profitability of Pathway One through Pathway Three; and (5) higher rates charged on small loans relative to the rates charged for average-sized loans, which allow MFIs to more than cover the costs of the smaller loans demanded by small savers. While in Pathway One the authors find that the average size of small-savers’ loans at ADOPEM was 61 percent of the average loan balance of all borrowers and the average loan balance at Centenary was 74 percent of the average loan balance of all borrowers, they assert that these loan sizes are still small enough to justify the higher than average loan rates described in Pathway Five.

The study finds that, although the annual operating cost for deposit services was between 59 percent and 241 percent of the deposit balance of small savers, these costs were more than offset by the profits generated by loans, cross-sales of other products and fee revenue. According to this methodology, small-saver accounts generated a profit of over 400 percent at Centenary Bank and over 1,000 percent at ADOPEM in 2008.

The authors also identify a sixth potential pathway to profitability. Using data from the end of 2006, 2007 and 2008, they found that the average size of small-saver savings accounts and loans grew quickly. During this time period, the size of ADOPEM’s small savings accounts grew by 105 percent while loan sizes grew by 83 percent. Dr Westley and Mr Palomas maintain that this in itself could make previously unprofitable small savers profitable in future years.

By Julie Moksim, Research Associate

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