Savings Mobilization Strategies for Effective Microfinance The Nigeria

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

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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 2

Areas covered 1. Savings & Microfinance 2. Challenges in Savings Mobilization 3. Importance of savings to microfinance institutions 4. Methodological considerations for savings mobilization (Factors for successful mobilization of small & micro-savings) 5. What to consider in making savings attractive to customer 6. Institutional, governance and management structures that support savings 7. Policy & Regulatory Consideration 18 -01 -2011 Kimanthi Mutua - AFI Associate 3

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: NGOMFIs, Deposit taking MFIs, co-ops, NBFIs & Banks with microfinance focus. • Despite realization of the demand & importance, savings mobilization remains a challenge for many MFIs. 18 -01 -2011 Kimanthi Mutua - AFI Associate 4

Challenges in Savings Mobilization q 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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 5

Challenges in Savings Mobilization q 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: 18 -01 -2011 • 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 6

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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 7

Challenges in Savings Mobilization q 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 coops. • 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. q 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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 8

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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 9

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 18 -01 -2011 Kimanthi Mutua - AFI Associate 10

Methodological Consideration for Savings Mobilization q 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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 11

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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 12

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 18 -01 -2011 Kimanthi Mutua - AFI Associate 13

What to consider in making savings attractive to customers q 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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 14

What to consider in making savings attractive to customers q 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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 15

What to consider in making savings attractive to customers q 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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 16

Institutional, Governance & Management Structures that support Savings q 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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 17

Policy & Regulatory Consideration q Economic Reforms & Liberalization of market: – Increases competition – Broadens array of financial products. – Eliminates subsidized financial products from the market. q 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. 18 -01 -2011 Kimanthi Mutua - AFI Associate 18

Policy & Regulatory Consideration 18 -01 -2011 Kimanthi Mutua - AFI Associate 19

End 18 -01 -2011 Kimanthi Mutua - AFI Associate 20