Making the case for microsavings

Editor's Note: Jeanette Thomas is a Communications Manager at CGAP.

It’s never been too difficult to make the case for what savings can do for poor people. Stuart Rutherford’s work with SafeSave nailed that one fairly convincingly some years back. Since then, MicroSave and many others such as Women’s World Banking and the Portfolios of the Poor project have reinforced the message time and again: low-income clients see considerable consumption-smoothing benefits from savings.

But what’s always been much harder is convincing microfinance institutions that savings make good business sense. So news from a research study released last week is highly welcome. CGAP researchers Glenn Westley and Xavier Martin Palomas had full access to the 2008 books of two institutions offering savings—ADOPEM in the Dominican Republic, and Centenary Bank in Uganda.

Savings accounts with small balances are a very high-cost product for MFIs. And yet, when looking at the whole picture, the study found that offering savings to small savers can make good business sense. Profits generated by cross-sales of loans and other products and by the fee income from the savers turn out to be significant: 400% of the savings balances in Centenary, and over 1000% in ADOPEM. And without the small savers, these two very profitable institutions would lose about 30% of their total profits. The authors conclude that “there is a compelling case for serving small savers in these two MFIs.”
 
With a variety of ways to generate income for the institution by cross-selling other products, or through fees charged on the savings accounts themselves, the authors reckon that “many MFIs are already serving small savers profitably and many more could do so.” While the authors only got to peek behind the scenes at two institutions, the findings—if they can be generalized—look promising indeed for those looking to marry the business of microfinance with the realities of what poor people need.

Technology can play a role here too. One of the institutions studied, Centenary Bank, is using ATMs to attract and retain clients, boost savings levels, and cut costs. Westley and Palomas deconstruct the cost elements and show that by using ATMs, Centenary reaps significant cost reductions and income from fees. It’s a great illustration of how technology can be integrated as part of a business plan, and points to how going beyond expensive branches can make it a viable proposition to bank low income people.