Savings, which promote liquidity, are vital to the survival of a microfinance institution. It is often the case that microfinance institutions (MFIs) pay scant attention to mobilising savings due partly to the nature of the operating environment, the seeming drudgery in deposit mobilisation and the perceived multiple challenges associated with savings programmes. But almost always, as their operations expand, service providers find that keeping pace with demand for credit requires a stable flow of savings.
The first rule in savings product design is to make sure that the deposit instrument is appropriate to local needs. This requires a clear understanding of the conditions in which the client lives, and the nature of their economic activities. This is where market research becomes important. Many operators do not value on market research, because they are either not quite sure of the value it brings or, quite often, they do not have the capacity to carry out such studies.
However, it is advisable for operators to engage the market and understand where the clients are coming from while designing deposit products. Luckily they do not have to do the research themselves. There are professionals who can read and interpret any market today.
Again, there must be proper market segmentation. Operators often do not realize that the market, no matter how simple it may appear, is not usually homogeneous. There must be variety in the products on offer so as to respond effectively to the liquidity requirements of different kinds of markets and clients. Appropriate mix of deposit and savings instruments must therefore be provided to capture the differing circumstances of clients.
Surely, this calls for intimacy with, and appreciation of, the operating environment of both the institution and its clients. To be able to offer a good mix of deposit products, operators must properly segment the market and adequately reflect the seasonality and liquidity differences of all segments of the market. Unfortunately, the conventional foolishness (not wisdom) is for an operator to open shop and lend to all manner of people. The result is what we are talking about today in very low tones – non-performing accounts.
The disdain for research and, sometimes, knowledge in general, is a national challenge that is reflected even at the highest level of leadership in our country. Many of us believe that theory is “grammar” that adds little or no value, while practice is everything. The result is that we find it very hard to accept costs that may arise from any effort to inquire and understand the theoretical underpinnings of what we do.
Unfortunately, those who change the course of history through inventions or innovations would confirm the fact that no successful practice is devoid of sound theoretical foundations. Many of the failed programmes of this country did so because we went into them without an analysis of the “what ifs” and “supposings” that interrogate processes and reveal possibilities ahead of implementation. To make us accept the cost and patience entailed in research and development should be a worthwhile national project.
A successful savings product design begins with an understanding of the existing savings services or opportunities available to clients in the informal sector. This will reveal the limitations of such existing services and the new product would simply attack those shortcomings. Studies in the Far East and South America have shown that voluntary savings are more successful than group savings.
Voluntary savings has contributed to the growth of some of the leading microfinance institutions in the world. Both Bank Rakyat Indonesia (BRI), probably the oldest and most profitable bank in Indonesia and Grameen Bank, the flagship of microfinancing, all place serious value on voluntary savings and market research as a precursor to the launch of their services.
Many of the MFIs in Nigeria that became micro-commercial banks did so because they had the wrong idea of the business into which they got. They looked in the wrong place for clients and when they found none they went for the customers of regular commercial banks.
The result, expectedly, is the regular breach of single obligor lending limits and a mirroring of the failed conduct of commercial banks – misplaced overhead expenses, high staff and infrastructure costs and undue profit orientation leading to finagling with clients’ accounts. Many banks are now learning that they can no longer continue to steal client’s money by spurious charges as the courts will give back every kobo wrongly taken from customers.
Many operators, perhaps due to poor knowledge of the business, introduce savings products in all branches at the same time. This may not be the optimal approach. A lot of leakages occur when savings mobilisation is democratised in all the branches. Some seasoned operators therefore prefer to do pilot savings schemes on savings products. Such pilot schemes normally review the acceptability of the scheme, value addition to clients, security of funds, particularly handed over to officers, as they travel from the client through the account officer to the bank.
Furthermore, savings products must take account of the need for liquidity. People save for emergencies as for other reasons. In that regard, there is need for a mix of savings products reflecting different levels of liquidity – liquid, semi-liquid and time deposit products.
Interest rates on savings should be attractive enough to provide both financial incentive and risk premium to savers. For commercial MFIs, especially those operating in competitive markets like Nigeria, this should reflect in rates that are slightly above the prevailing market rate to provide a risk premium and a financial incentive to savers.
On the other hand, and as a reward for their work, operators may exclude from interest payment, savings account balances that fall below a certain minimum. This action has two possible effects. It incentives the clients to save rather than withdraw their money, and helps the operator to cover the administrative costs of managing such accounts. These are some of the features of a successful voluntary savings programme.
In all, operators must not neglect the need for deposit mobilization because of its relative drudgery compared to fixed deposits. At the end of the day, financial intermediation is not complete until surplus and deficit unit have a handshake.
Emeka Osuji
