Savings: FAQs

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Yes. Poor people save because they must: their income is rarely sufficient to manage crises (such as a sudden illness or a flood), to invest when opportunity strikes, or to pay for large expenses, such as school fees, a wedding, or home repairs. While access to savings accounts in formal financial institutions is limited in some countries, poor people frequently use informal savings devices, even though these are often neither reliable nor secure. Initiatives such as the financial diaries in India, Bangladesh, and South Africa have documented savings practices among the poor.

Access to formal or semi-formal deposit services is often limited in developing countries so people turn to informal mechanisms —storing cash under the mattress, buying animals or jewelry that can be sold at a later date, or giving money to neighbors for safekeeping. Informal methods can be risky— cash and jewelry can be stolen and animals can get sick. They can also be inflexible and/or illiquid. For example, if only a small amount of cash is needed one still has to sell the entire cow. 

Savings groups provide informal but organized mechanisms for people to save. Groups are typically formed with assistance from an external party and operate independently after approximately one year of training. These groups aim to provide a safe, convenient place to save, offer ready access to small loans, and a small insurance fund. Each member decides how much she can save each week and contributes it to the core group fund. Group members lend to each other at interest rates they decide on collectively, thus generating an accumulating capital sum made up of member savings, interest, fines for missing payments, and late fees. The accumulated capital is distributed to members at the end of each cycle in proportion to the members’ respective contributions to the fund. Since the group fund is financed entirely by tapping the savings of the group members, there is no external loan fund to manage and oversee. 

Typically, the poor want their savings to be secure, with low transaction costs, appropriate design, and, if possible, constant in value (i.e., should keep up with inflation):

Security - Secure savings are not in jeopardy from fraud, theft, fire, and relatives’ demands. Safety is paramount, even in the face of inflation.

Low transaction costs - Proximity is essential to reduce the high transaction costs of making deposits and withdrawals. Convenient opening times and minimal paperwork are also important.

Appropriate product terms - Individual voluntary deposit products that allow frequent deposits of small, variable amounts and quick access to funds are best. Contractual savings are also useful for planned future lifecycle expenditures such as weddings, funerals, and birth celebrations.

Interest rates - If transaction costs are low, rural savings takes place even with negative real returns – indicating that the poor can be relatively insensitive to interest rates as a priority when evaluating savings options. Nevertheless, demand for savings products does increase as real interest rates rise. 

An institution should have:

  • The legal authority to mobilize deposits.
  • Effective governance.
  • Financially sustainable operations.
  • A sound business plan showing continued viability and indicating where savings can be invested profitably.
  • Adequate capital.
  • A history of rigorous credit management.
  • A system for measuring and monitoring financial performance.
  • Sufficient internal controls supported by a culture, policies and human resource management that prioritize the security of funds.
  • The technical capacity to manage liquidity and interest rate risk.
  • A management information system, whether manual or computerized, that can handle the volume of anticipated transactions and can provide information that is sufficient, accurate, timely and transparent.
  • The necessary physical infrastructure including secure premises in safe and convenient locations, a strong room or vault, and sufficient office space with counters.

For a credit-based institution, managing the shift to being a full-fledged financial intermediary is a complex challenge, bigger than simply developing new products and adapting some management systems. The transformation to a full financial intermediary fundamentally changes a financial institution. Some of the biggest challenges include:

Sufficient staff commitment - Savings-oriented human resource management is crucial. If the existing institutional culture, staff incentives, and evaluation system reward only strong credit performance, management must change these to prioritize savings.

Cost recovery - There are two keys to viable savings mobilization: 1) attracting an adequate volume of deposits and 2) managing operating costs. Achieving this volume and level of cost control requires rigorous management, appropriate incentives, effective mechanisms for accountability, and an appropriate management information system.

Information management - Savings operations usually require an information system that can handle a huge volume of transactions, balance accounts frequently, and meet the audit and reporting requirements of regulators. Adequate information management requires expertise and is often costly and time-consuming. In particular, finding the right software, migrating to it, and optimizing it can be major on-going challenges.

Sufficient governance - To safeguard the savings of depositors, a board or other governance body must exercise reasonable oversight, ensure sufficient discipline, and serve as a check on management performance. This body must be knowledgeable, engaged, and sufficiently powerful to be able to step in if management puts either savers’ deposits or the institution’s viability at risk.

Developing trust - People will entrust their savings to an institution only if they perceive it as secure, honest, professional, and stable. To gain trust, a financial institution will need to consciously develop staff, quality of service and a consistent brand image in the market. A key and costly element of developing this image can be upgrading physical facilities to instill a sense of security in existing and potential clients.

Implementing adequate internal controls - Savings operations can be more vulnerable to fraud and errors than credit operations because of larger amounts of cash in the institution, and the unpredictability of the size and timing of deposits. Some institutions discover that their internal controls are not sufficient to reliably detect mismanagement or fraud.

Some regulatory policies undermine the viability of savings operations while others place services out of reach of rural and poor savers. Prohibitions against unsecured lending and interest rate caps on loans can make it impossible to invest savings at volumes and interest rates that cover costs. High reserve requirements also make it hard to generate sufficient revenues. High capital adequacy and some types of detailed reporting requirements make it difficult to establish small financial institutions such as rural banks or small credit unions that can serve rural areas.

In practice, small and rural depositors may also be excluded by regulations that govern branches, including:

  • Where branches can be located.
  • Transactions may only be conducted in the office and not in the field.
  • Accounts must be cleared daily.
  • Each branch must have a strong room or be open certain hours.
  • Two employees must handle each transaction (rather than allowing for other methods of internal control, such as verifying passbooks against branch records after the transaction).

These branch regulations preclude the use of mobile units, small offices, and deposit collectors – delivery systems that can be the key to serving small depositors on a viable basis.

Donors can help develop sound savings operations by:

  • Helping to strengthen regulation and supervision.
  • Improving regulators’ understanding of microfinance issues (such as the high volume of small-value transactions, alternative collateral, interest rate policy, and human resource needs).
  • Providing technical assistance grants.
  • Supporting visits to successful deposit institutions.
  • Funding savings-focused market research.
  • Supporting a range of institutional types and delivery channels to extend services to poor and rural markets.
  • Investing in physical or technological infrastructure to jumpstart savings mobilization in rural areas.