Strengthening savings services in the microfinance sector of Bangladesh
S. M. Rahman | Sunday, 27 July 2008
SAVINGS can be a very important ingredient for profitability and growth of a microfinance institution (MFI). It can provide stable, low cost means to finance the loan portfolio, instantly increase an institution's client base and also improve on the borrower's capacity to repay. Many microfinance institutions are well positioned to help individuals and entrepreneurs increase the amount, accessibility and security of accumulated savings. Challenges that institutions face to attract and retain depositors can encourage them to innovate products that are customer driven. Unfavourable macro economic and financial sector environment, coupled with political problems and high inflation rate, inhibit most institutions from attracting savings from the low income clients. The clients have uncertainty as to whether the institutions will be there or not. Interest rate control reduces the profitability of the institutions thereby making the savings mobilisation grossly uninviting.
The commercial banks in Bangladesh typically serve no more than 25% of the total potential account holders. The remaining enormous populace historically does not have access to formal financial services. Clients want to save mainly for the reasons of convenience, liquidity and future security. However, due to the regulatory reasons in the country, the MFIs are not legally allowed to mobilise deposits from the general public. Micro-savings has great potential to contribute to the national economy. It can be augmented and integrated with the mainstream domestic savings' use to accelerate the pace of performance of our economy. In order to raise the savings, the capacity of the poor including the general rural masses has to be tapped properly. The commercial banks are not effectively designed to mobilise savings from this market segment nor are they likely to serve this clientele population in the near future.
It is interesting to note that the banks and the post offices are now channeling remittances from the overseas countries to the recipients at home particularly in the rural areas. Approved by the central bank, some MFIs viz. BRAC's Microfinance Programme, BURO Bangladesh (erstwhile BURO Tangail) and TMSS are now officially engaged in channeling remittances to the customers of BRAC Bank, Bank Asia and National Credit and Commerce Bank Ltd. respectively. This is a landmark step on the fringes of normal microfinance activity.
In this context, the MFI network across the country is being utilised to serve the general public, regardless of their economic strata. The ratio of net micro-savings in the country compared with total bank demand deposits is reckoned to be 11%. Micro-saving's growth is considerably increasing each year. The average annual growth is about 23% during the last five years. The rural savings market potential is growing and is indeed huge that can raise the savings volume appreciably.
In terms of CDF Microfinance Statistics (2006), more than 20 million clients in 611 MFIs have amassed net savings of Tk 24,639 million (US $352 million), which accounts for 34% of the total loan outstanding. In the Grameen Bank, the savings outweigh the total loan outstanding. More than 9000 branches of different MFIs are providing savings, loan and insurance services.
Formalising the Access of the Near-poor to Savings Services: Distinguishing the near poor and the non-poor from the poor is sometimes an uphill task. This segment overlaps with the poorer sections. Microfinance is covering a huge portion of non-poor or near poor clients who cannot access banking services both in the rural and urban areas. This client segment is growing fast and crowding out the real microfinance clients in the industry.
Social zeal and development philosophy that were spotted in the past now-a-days do not work much in the MFIs as sustainability is the overriding issue. According to informed practitioners, the percentage of non-poor and near poor would be around 30% of the total clients. They have huge potential to save in different kinds of savings instruments. This fact tells us that the microfinance service that is chiefly intended for the poor is losing its significance rapidly as time goes by.
In the rural areas, practically there is no banking service. Question may arise where these people would go then to save their money? They are being served by some MFIs side by side the poor and the very poor. It would be politic to keep their entry formalised into the microfinance sector. In the past, there were as many as six savings products in the NGO-led microfinance industry. Some MFIs introduced diversified savings products like contractual savings deposits and fixed deposits but they cannot operate them now due to regulatory restrictions. This measure is undoubtedly having an adverse impact on the development of savings instruments for the low income communities. The overall savings volume is now poised to decline depriving the clients building the most valuable financial asset.
Micro-credit has reached every nook and corner of the country. Money has indeed gone to almost everybody's pocket. On average, one client holds loans from three to four MFIs. To be sure, the micro-credit clients use a portion of the credit for regular consumption purposes that is causing to zoom up the demand pull inflation. The current breakneck credit expansion of MFIs is likely to compound the inflationary situation further.
Increased savings mobilisation with lucrative interest rates may arguably hem in the inflation rate, which is now running at more than 10% -- an all time high figure. Savings have other benefits as well. It has been found that the clients who save more in the MFIs are seldom found in defaulting their loans. The wholesaler microcredit organisations and other lenders to MFIs would profit directly in terms of loan repayment from increased savings mobilisation by their partner organisations.
Tapping the Micro-savings Market: The NGOs' microfinance network has emerged as a sizeable sector. It can be used by the commercial banks or other development financial institutions like agricultural development banks to raise the savings of the people from all walks of life. This network could be also used as a conduit for channeling resources for the development of the rural areas. This sector may be beefed up and supported by the government in order to serve the cause of the millions of rural people. Otherwise, a vast number of such people will always remain outside the periphery of savings services.
The central bank can deeply think to allow the formal financial institutions to use some efficient MFIs as an arm of the banks to provide savings services to the public including clients of MFIs who are eligible and interested. This is the only way for extending limited bank's savings services in the far flung areas of the country. The NGO-Bank collaboration will help develop the capacity of the MFIs substantially insofar as the savings services are concerned. We may try this as a test case to see how it works really.
For all intents and purposes, this would turn out to be a win-win situation for both the banks and the MFIs. We need now to devise an appropriate mechanism and carry out policy advocacy to court people at the political and government levels for its materialisation. Some good microfinance NGOs are likely to become micro-credit banks in the days ahead when a new law would be enacted.
It is imperative to build the infrastructure of the MFIs beforehand to pave the way for providing increased savings services. Recently while on a visit to a rural branch of a large microfinance NGO, the branch manager was asked as to who are their clients and the answer was "All are welcome to our branch". Perhaps similar is the situation with many other MFIs. Now-a-days, we notice clients who come to the branches contacting through mobile phone for making loan repayments. The traditional system is gradually fraying and we must be ready to embrace the upcoming change.
Concessionary Credit is a Disincentive for Savings Mobilisation: Concessionary credit funds or donated money supposedly contribute to the limited mobilisation of savings deposits. Because, the MFIs do not feel any strong urge to collect savings from the people. MFIs receiving low cost funding have little or no incentive to mobilise deposits, since they have funds available for on-lending from donors at zero cost. On the other hand, the concessionary interest rate of PKSF (the major funding agency for microfinance) is responsible for the passive drive of the MFIs for low savings mobilisation.
If MFIs are to mobilise savings effectively, a conducive socio-political environment must prevail in the country. Reasonable levels of macro economic management and political stability are of course pre-requisite, because they affect the rate of inflation, which hinders the ability of an MFI to offer savings services in a sustainable manner. What is more, a supportive regulatory environment is imperative. Low-income clients are often unable to access savings services from the traditional commercial banks as the banks are not designed to serve innumerable poor clients dealing with small deposits.
Bank -MFI Collaboration in Extending Savings Services: Bangladesh abounds with hundreds of MFIs dealing with millions of clients. This is a big success by any measure. The avenue to increased savings mobilisation, however, seems limited at the moment. MFI clients demand different types of long-term savings products like contractual savings usually monthly and in the manner of deposit pension scheme (DPS). At least, the licensed MFIs should be allowed to launch such products ranging from one-to-five years based on the size of the MFI. The smaller and the medium MFIs may operate from one-to-three years while the bigger ones from one-to-five years providing the clients with higher rate of interest than is given in the general savings (which is weekly in nature).
Current trend of MFI operations reveals that microfinance institutions are effectively moving towards a quasi banking type of financial service providers. The commercial banks are now pouring in more money to the micro-credit sector. Nevertheless, the quantum of fund that the MFIs need falls short of supply. The major source of funds of MFIs for microfinance is their interest earnings and operational surplus. Together this figure is around 56% (as per CDF Statistics, 2006), each component having a fifty-fifty ratio.
Access to banks and PKSF is generally a long haul and involves a tardy procedure. PKSF is a very demanding financial institution. Once an MFI has access to PKSF, it is rather difficult to sustain the fund flow stream as the MFIs are required to comply with certain indicators periodically. It has to be understood that holding continuity of good performance round the year and years after years is not always easy. The only cheapest source of fund for the MFIs is the savings of the clients. Again it is not possible to run a growing credit programme with small amount of savings at current pace. It is to be noted that without deposits from general public, the MFIs will not be able to build up their loanable fund. This is a defining issue for the rapid growth of the sector. All MFIs, however, should not be eligible for mobilising public deposits. Only the worthy ones may qualify and there must be a benchmark criterion for this.
For long, some MFIs are collecting deposits informally from the non-poor and near poor considering them as vulnerable poor to meet the needs of the clients and serving the purpose of the MFIs. This should be taken into cognisance and formalised as soon as possible as it is a felt need.
The commercial banks inevitably cannot go to the remote areas to provide saving services to the vast segment of people. On the other hand, MFIs that have the capacity to serve such people should not be barred from providing this service. They should be permitted accommodating under the existing law. We have no right to stave off such people from enjoying their rights decades after decades. It is the duty of the state to make this happen and instruct the agencies concerned for proper facilitation and oversight.
Experience of MFIs indicates that flexible savings enhance savings eventually. Initially withdrawal increases if savings is made open but soon it stabilises. The MFIs should be progressive in designing their savings services. But before that there must be room for that. It is true that the amount of money that the industry needs now for on-lending cannot be just procured from the donors, PKSF and the commercial banks alone, because it is incredibly hard in view of demand outpacing the supply. The most viable alternative lies in tapping the members' savings prodigiously. It is indeed possible.
The traditional principle of one person from one household with regard to doing savings has to be given up. More savings instruments should be introduced to increase savings. Non-members should be encouraged to save with the MFIs in banking mode. The licensed MFIs should be allowed to operate contractual savings in the manner of deposit pension scheme (DPS). In the rural areas, people sometimes have to hold cash money out of sale proceeds from land, crops, cattle head and other properties. This is highly risky and unsafe in the rural areas. Introduction of current savings account or any other suitable savings account with the MFIs will help them immensely.
There is no denying that practical impediments exist in enhancing savings. Financial transactions being a risky and touchy issue, people often fear and do not tend to trust all MFIs on an equal footing. Besides, up till now, there is no legal protection of savings devised by the MFIs or enforced by Microcredit Regulatory Authority (MRA), though PKSF-funded MFIs have to make certain provisions in this respect. The commercial banks should come up to mobilise savings not least from the rural markets with collaboration with MFIs.
Under bank-MFI collaboration, the branches of MFIs that will collect deposits from the public should have a different look in approach. The clients should enjoy checking facilities. MFI branches might be designated as booths of the bank and the MFI. This will create more confidence among the people to proffer deposits.
The MFIs should be allowed to use at least 40% of the total public deposits for funding their microfinance programme. On the other hand, the banks will be able to generate more savings for investing them in trade and commerce to promote macro-economic development. Savings mobilisation is a crucial factor in the development of sound financial markets. To mobilise savings effectively, the micro finance NGOs need to operate in a more liberalised financial environment with increased accountability.
The writer is a microfinance
specialist and practitioner
The commercial banks in Bangladesh typically serve no more than 25% of the total potential account holders. The remaining enormous populace historically does not have access to formal financial services. Clients want to save mainly for the reasons of convenience, liquidity and future security. However, due to the regulatory reasons in the country, the MFIs are not legally allowed to mobilise deposits from the general public. Micro-savings has great potential to contribute to the national economy. It can be augmented and integrated with the mainstream domestic savings' use to accelerate the pace of performance of our economy. In order to raise the savings, the capacity of the poor including the general rural masses has to be tapped properly. The commercial banks are not effectively designed to mobilise savings from this market segment nor are they likely to serve this clientele population in the near future.
It is interesting to note that the banks and the post offices are now channeling remittances from the overseas countries to the recipients at home particularly in the rural areas. Approved by the central bank, some MFIs viz. BRAC's Microfinance Programme, BURO Bangladesh (erstwhile BURO Tangail) and TMSS are now officially engaged in channeling remittances to the customers of BRAC Bank, Bank Asia and National Credit and Commerce Bank Ltd. respectively. This is a landmark step on the fringes of normal microfinance activity.
In this context, the MFI network across the country is being utilised to serve the general public, regardless of their economic strata. The ratio of net micro-savings in the country compared with total bank demand deposits is reckoned to be 11%. Micro-saving's growth is considerably increasing each year. The average annual growth is about 23% during the last five years. The rural savings market potential is growing and is indeed huge that can raise the savings volume appreciably.
In terms of CDF Microfinance Statistics (2006), more than 20 million clients in 611 MFIs have amassed net savings of Tk 24,639 million (US $352 million), which accounts for 34% of the total loan outstanding. In the Grameen Bank, the savings outweigh the total loan outstanding. More than 9000 branches of different MFIs are providing savings, loan and insurance services.
Formalising the Access of the Near-poor to Savings Services: Distinguishing the near poor and the non-poor from the poor is sometimes an uphill task. This segment overlaps with the poorer sections. Microfinance is covering a huge portion of non-poor or near poor clients who cannot access banking services both in the rural and urban areas. This client segment is growing fast and crowding out the real microfinance clients in the industry.
Social zeal and development philosophy that were spotted in the past now-a-days do not work much in the MFIs as sustainability is the overriding issue. According to informed practitioners, the percentage of non-poor and near poor would be around 30% of the total clients. They have huge potential to save in different kinds of savings instruments. This fact tells us that the microfinance service that is chiefly intended for the poor is losing its significance rapidly as time goes by.
In the rural areas, practically there is no banking service. Question may arise where these people would go then to save their money? They are being served by some MFIs side by side the poor and the very poor. It would be politic to keep their entry formalised into the microfinance sector. In the past, there were as many as six savings products in the NGO-led microfinance industry. Some MFIs introduced diversified savings products like contractual savings deposits and fixed deposits but they cannot operate them now due to regulatory restrictions. This measure is undoubtedly having an adverse impact on the development of savings instruments for the low income communities. The overall savings volume is now poised to decline depriving the clients building the most valuable financial asset.
Micro-credit has reached every nook and corner of the country. Money has indeed gone to almost everybody's pocket. On average, one client holds loans from three to four MFIs. To be sure, the micro-credit clients use a portion of the credit for regular consumption purposes that is causing to zoom up the demand pull inflation. The current breakneck credit expansion of MFIs is likely to compound the inflationary situation further.
Increased savings mobilisation with lucrative interest rates may arguably hem in the inflation rate, which is now running at more than 10% -- an all time high figure. Savings have other benefits as well. It has been found that the clients who save more in the MFIs are seldom found in defaulting their loans. The wholesaler microcredit organisations and other lenders to MFIs would profit directly in terms of loan repayment from increased savings mobilisation by their partner organisations.
Tapping the Micro-savings Market: The NGOs' microfinance network has emerged as a sizeable sector. It can be used by the commercial banks or other development financial institutions like agricultural development banks to raise the savings of the people from all walks of life. This network could be also used as a conduit for channeling resources for the development of the rural areas. This sector may be beefed up and supported by the government in order to serve the cause of the millions of rural people. Otherwise, a vast number of such people will always remain outside the periphery of savings services.
The central bank can deeply think to allow the formal financial institutions to use some efficient MFIs as an arm of the banks to provide savings services to the public including clients of MFIs who are eligible and interested. This is the only way for extending limited bank's savings services in the far flung areas of the country. The NGO-Bank collaboration will help develop the capacity of the MFIs substantially insofar as the savings services are concerned. We may try this as a test case to see how it works really.
For all intents and purposes, this would turn out to be a win-win situation for both the banks and the MFIs. We need now to devise an appropriate mechanism and carry out policy advocacy to court people at the political and government levels for its materialisation. Some good microfinance NGOs are likely to become micro-credit banks in the days ahead when a new law would be enacted.
It is imperative to build the infrastructure of the MFIs beforehand to pave the way for providing increased savings services. Recently while on a visit to a rural branch of a large microfinance NGO, the branch manager was asked as to who are their clients and the answer was "All are welcome to our branch". Perhaps similar is the situation with many other MFIs. Now-a-days, we notice clients who come to the branches contacting through mobile phone for making loan repayments. The traditional system is gradually fraying and we must be ready to embrace the upcoming change.
Concessionary Credit is a Disincentive for Savings Mobilisation: Concessionary credit funds or donated money supposedly contribute to the limited mobilisation of savings deposits. Because, the MFIs do not feel any strong urge to collect savings from the people. MFIs receiving low cost funding have little or no incentive to mobilise deposits, since they have funds available for on-lending from donors at zero cost. On the other hand, the concessionary interest rate of PKSF (the major funding agency for microfinance) is responsible for the passive drive of the MFIs for low savings mobilisation.
If MFIs are to mobilise savings effectively, a conducive socio-political environment must prevail in the country. Reasonable levels of macro economic management and political stability are of course pre-requisite, because they affect the rate of inflation, which hinders the ability of an MFI to offer savings services in a sustainable manner. What is more, a supportive regulatory environment is imperative. Low-income clients are often unable to access savings services from the traditional commercial banks as the banks are not designed to serve innumerable poor clients dealing with small deposits.
Bank -MFI Collaboration in Extending Savings Services: Bangladesh abounds with hundreds of MFIs dealing with millions of clients. This is a big success by any measure. The avenue to increased savings mobilisation, however, seems limited at the moment. MFI clients demand different types of long-term savings products like contractual savings usually monthly and in the manner of deposit pension scheme (DPS). At least, the licensed MFIs should be allowed to launch such products ranging from one-to-five years based on the size of the MFI. The smaller and the medium MFIs may operate from one-to-three years while the bigger ones from one-to-five years providing the clients with higher rate of interest than is given in the general savings (which is weekly in nature).
Current trend of MFI operations reveals that microfinance institutions are effectively moving towards a quasi banking type of financial service providers. The commercial banks are now pouring in more money to the micro-credit sector. Nevertheless, the quantum of fund that the MFIs need falls short of supply. The major source of funds of MFIs for microfinance is their interest earnings and operational surplus. Together this figure is around 56% (as per CDF Statistics, 2006), each component having a fifty-fifty ratio.
Access to banks and PKSF is generally a long haul and involves a tardy procedure. PKSF is a very demanding financial institution. Once an MFI has access to PKSF, it is rather difficult to sustain the fund flow stream as the MFIs are required to comply with certain indicators periodically. It has to be understood that holding continuity of good performance round the year and years after years is not always easy. The only cheapest source of fund for the MFIs is the savings of the clients. Again it is not possible to run a growing credit programme with small amount of savings at current pace. It is to be noted that without deposits from general public, the MFIs will not be able to build up their loanable fund. This is a defining issue for the rapid growth of the sector. All MFIs, however, should not be eligible for mobilising public deposits. Only the worthy ones may qualify and there must be a benchmark criterion for this.
For long, some MFIs are collecting deposits informally from the non-poor and near poor considering them as vulnerable poor to meet the needs of the clients and serving the purpose of the MFIs. This should be taken into cognisance and formalised as soon as possible as it is a felt need.
The commercial banks inevitably cannot go to the remote areas to provide saving services to the vast segment of people. On the other hand, MFIs that have the capacity to serve such people should not be barred from providing this service. They should be permitted accommodating under the existing law. We have no right to stave off such people from enjoying their rights decades after decades. It is the duty of the state to make this happen and instruct the agencies concerned for proper facilitation and oversight.
Experience of MFIs indicates that flexible savings enhance savings eventually. Initially withdrawal increases if savings is made open but soon it stabilises. The MFIs should be progressive in designing their savings services. But before that there must be room for that. It is true that the amount of money that the industry needs now for on-lending cannot be just procured from the donors, PKSF and the commercial banks alone, because it is incredibly hard in view of demand outpacing the supply. The most viable alternative lies in tapping the members' savings prodigiously. It is indeed possible.
The traditional principle of one person from one household with regard to doing savings has to be given up. More savings instruments should be introduced to increase savings. Non-members should be encouraged to save with the MFIs in banking mode. The licensed MFIs should be allowed to operate contractual savings in the manner of deposit pension scheme (DPS). In the rural areas, people sometimes have to hold cash money out of sale proceeds from land, crops, cattle head and other properties. This is highly risky and unsafe in the rural areas. Introduction of current savings account or any other suitable savings account with the MFIs will help them immensely.
There is no denying that practical impediments exist in enhancing savings. Financial transactions being a risky and touchy issue, people often fear and do not tend to trust all MFIs on an equal footing. Besides, up till now, there is no legal protection of savings devised by the MFIs or enforced by Microcredit Regulatory Authority (MRA), though PKSF-funded MFIs have to make certain provisions in this respect. The commercial banks should come up to mobilise savings not least from the rural markets with collaboration with MFIs.
Under bank-MFI collaboration, the branches of MFIs that will collect deposits from the public should have a different look in approach. The clients should enjoy checking facilities. MFI branches might be designated as booths of the bank and the MFI. This will create more confidence among the people to proffer deposits.
The MFIs should be allowed to use at least 40% of the total public deposits for funding their microfinance programme. On the other hand, the banks will be able to generate more savings for investing them in trade and commerce to promote macro-economic development. Savings mobilisation is a crucial factor in the development of sound financial markets. To mobilise savings effectively, the micro finance NGOs need to operate in a more liberalised financial environment with increased accountability.
The writer is a microfinance
specialist and practitioner