Savings Mobilization Strategies for Effective Microfinance

1. Savings Mobilization Strategies for Effective Microfinance The Nigeria 5th Annual Microfinance Conference and Entrepreneurship Awards Abuja,January 17 - 18, 2011

2. This presentation explores some of the challenges & strategies in savings mobilization strategies, for effective microfinance. The presenter is an Associate of the Alliance for Financial Inclusion and founder of K-Rep Bank Limited, the first NGO microfinance institution, in Africa, to transform into a regulated commercial bank specializing in microfinance. He has devoted close to three decades to designing and instituting viable and sustainable micro credit and savings strategies. Kimanthi Mutua - AFI Associate

3. Areas covered • Savings & Microfinance • Challenges in Savings Mobilization • Importance of savings to microfinance institutions • Methodological considerations for savings mobilization (Factors for successful mobilization of small & micro-savings) • What to consider in making savings attractive to customer • Institutional, governance and management structures that support savings • Policy & Regulatory Consideration Kimanthi Mutua - AFI Associate

4. Savings & Microfinance • Savings has always been central in microfinance • But never seen as the driver • Most MFIs evolved as micro-credit organizations • Savings complimentary to credit • Not a funding source • Often mandatory & used as collateral • MF business models did not evolve as savings institutions. • Conventional commercial banks operate at average savings levels that exclude the bulk of the people in developing economies. • Accessible savings accounts tend to be at specialized institutions: NGO-MFIs, Deposit taking MFIs, co-ops, NBFIs & Banks with microfinance focus. • Despite realization of the demand & importance, savings mobilization remains a challenge for many MFIs. Kimanthi Mutua - AFI Associate

5. Challenges in Savings Mobilization • Traditional MFI - face several challenges in Savings Mobilization:- • Legal capacity to mobilize savings – although many do collect savings • Recent initiatives to enact special legislation aim at addressing this – but challenges persist. • Traditional credit led business model has contributed to:- • A poor savings mobilization organization-culture in many MFIs • Lack of capacity to develop and implement good savings mobilization strategies • Perception by management/staff that poor people don't save • Perception by customers – borrow from MFI save with other. • Most MFIs pursue a narrow savings customer base of credit customers • Service delivery channels are not suitable for savings mobilization. Kimanthi Mutua - AFI Associate

6. Challenges in Savings Mobilization • Deposit Taking MFIs mostly suffer from their heritage: • Capacity, culture, perception & image issues impairs ability to scale up savings mobilization. • Cost inhibitions prevent quick change of delivery challenges – new branches, ATMs & systems to support savings products. • Access to payment systems & clearing houses • Skills needed to manage savings are different & more complex that those needed to manage micro-credit & come at high costs that most MFI structures cant afford. • Quick fix attempts to hire staff from conventional banks to fill the bank often ends up in conflict of culture & poor strategies. • After transforming MFIs face new challenges in deposit mobilization: • What type of deposit customers to pursue – their traditional market niche or open market? • The type & size of deposits products to introduce – large, small, fixed, current?. Kimanthi Mutua - AFI Associate

7. Challenges in Savings Mobilization • Deposits from the traditional market niche:- • Small in size, grow slowly & pause funding problems. • BUT they are stable, less costly & predictable. • Large deposits • Provide liquidity , fuel growth, grow fast • BUT can also go out quickly chasing other opportunities. • Requires high investment in branch network, connectivity etc. • Demand large loan facilities that MFIs have no or limited capacity to appraise & manage. Kimanthi Mutua - AFI Associate

8. Challenges in Savings Mobilization • Co-ops: • In addition to some of challenges faced by MFIs:- • Closed membership (common bond) model – which is gradually changing with introduction of new deposit taking legislation for co-ops. • Weak governance & management impair capacity. • Weak regulatory framework detracts depositor confidence. • Public image - those that save in co-ops do so to get cheap loans. • Other Challenges facings NBFIs & Banks • Excess liquidity in financial system limits incentives. • Unfair competition from cheap & easy wholesale funds mostly to government owned apexes. • Uneven regulation: Very restrictive to some institutions & permissive to others – Banks considered ‘safe’ have no incentive. Kimanthi Mutua - AFI Associate

9. Importance of Savings to MFIs • Deepening & expanding outreach: • Large numbers of customers choose to use savings services instead of credit, but limited access. • Savings help the poor to better organize their financial lives and deal with emergencies. • Accumulation of assets from savings, helps improve quality of life. • Savings is equally if not more important that credit in development. • Low usage of savings services is not an indication of low demand. • Access to savings is the key to financial inclusion. Kimanthi Mutua - AFI Associate

10. Important of Savings to MFIs • Sustainability & growth • The main Funding source for sustainable growth is savings, it is • Its less costly than loans which many MFIs rely on. • Stable source of funding • Improves public image & confidence. • Organization Culture • Instills strong demand oriented business model. • Creates the desired organization culture • Forced MFI to improve product variety & efficiency of service. • Intermediation • Provides an environment for effective financial intermediation Kimanthi Mutua - AFI Associate

11. Methodological Consideration for Savings Mobilization • Factors for successful mobilization of small & micro-savings: • Organization & Delivery Channels • The closer the MFI gets to its customers the better the chances for mobilizing a large number of depositors – Branch network & Access points. • Savers need convenient & ease of frequent access to their deposits. • Technology to support branch connectivity & ease access. • Products: Individual, voluntary and open access accounts have proven to be the most successful. • Lower costs of savings mobilization essential: e.g. Lean branch structure supported by technology solutions. Kimanthi Mutua - AFI Associate

12. Methodological Consideration for Savings Mobilization • Management • Strong & skilled management team • Avoid quick fix – gradual process of recruitment & training, • Ensure buy in of business model • Capacity to Manage risks & liquidity to guard reputation • Strategy • Re-engineer business processes, model & organization • Develop & implement good marketing & promotion program to address perception. • Identify & focus on market niche. • Develop loan & advances products to support savings customers. • Plan growth of credit portfolio to avoid adhoc decisions on loans to new savings customers. • Don’t promise what you cant deliver. Kimanthi Mutua - AFI Associate

13. Methodological Consideration for Savings Mobilization • Know your market • Conduct research, document & share widely in MFI • Base products on research finding. • Learn from others – don’t re-invent the wheel. • Focus on front office services • Delivery of Credit services requires strong back office to control risks. • Delivery of Savings services requires very strong front office skills to not only attract customers but most importantly to listen & know what they want  savers vote with their feet. • Interest Rate policy • Set appropriate interest policies for savings accounts • Avoid blind competition for deposits • Plan to scale-up savings portfolio to at least 8 times that of credit portfolio Kimanthi Mutua - AFI Associate

14. What to consider in making savings attractive to customers • To attract micro-savers consider that:- • Micro-savers are intensive money managers • They manage money day to day • Prefer to build relative large sums of deposits for asset acquisition & life cycle events & emergencies. • Choose informal savings systems because of flexibility – Study the competition. • Reliability, convenience, frequency & Reliability is key. • Micro-savers are bankable – don’t struggle to make them so, adapt MFIs operations to make it accessible. Kimanthi Mutua - AFI Associate

15. What to consider in making savings attractive to customers • Priorities for Micro-Savers: • Security – from fraud, collapse of MFI is paramount even in the face of inflation. • Low transaction costs – Proximity & Convenience • Appropriately Designed Products – Frequent deposits of small variable amounts, quick access – Contractual Deposits • Interest Rates – When transaction costs are low, savings takes place even with negative real returns. • Connectivity – Ability to transact at different branches or parts of the country. • Payment transaction – facilities to pay school fees or transfer money. Kimanthi Mutua - AFI Associate

16. What to consider in making savings attractive to customers • Recent Innovations with potentials • Mobile Banking – Especially when connected to savings accounts and bill payments • Agency Banking – Allowing banks to appoint agents that can make certain transactions on behalf of banks or MFIs. • A combination of the two has great potential. Kimanthi Mutua - AFI Associate

17. Institutional, Governance & Management Structures that support Savings • Savings Customers’ Confidence is greatly influenced by: • Type of Institution • Savers are cautious about unregulated institutions • Being regulated & transparency improves customer confidence • Ownership • Well known & perceived trustworthy owners improve image • As does Government ownership because of guarantees on deposits. • NGOs, Co-ops a challenge. • Governance & Management: • Experiences, visible & trusted top leadership essential. • Accountability for results. Kimanthi Mutua - AFI Associate

18. Policy & Regulatory Consideration • Economic Reforms & Liberalization of market:- • Increases competition • Broadens array of financial products. • Eliminates subsidized financial products from the market. • Other reforms: • Legislation for deposit taking MFIs & Co-ops to level playing field. • Revive branch specifications to allow for smaller branches to deepen outreach. • Open new delivery channels, e.g. agency banking • Open access to payment systems & clearing houses - • Strict but appropriate prudential guidelines for deposit taking MFIs • Embrace new technology based service delivery solutions. Kimanthi Mutua - AFI Associate

19. Policy & Regulatory Consideration Kimanthi Mutua - AFI Associate

20. End Kimanthi Mutua - AFI Associate