Financial services focus mainly on the ability to give loans and allow the lender to pay back afterwards with a little more time, more flexibility, but with interest. But what if we reverse this cycle and think more about financial services as a means to save money safely, in order to help us plan how to use it in the long run, almost as insurance for the future?
Of course, I understand that the point is many people do not have the luxury to save and often need more money than they currently have, but nonetheless, would it be so wrong to focus on encouraging the culture of saving? As I have mentioned previously, whether it be high-street commercial banks, or microfinance institutions, there should be a shift in perspective to ensure that the services provided offer real credit rather than accumulated debt. To do so, focusing on deposit mobilisation is a powerful tool to allow institutions to dispense more loans in a more sustainable manner.
David Cracknell, the managing director of Microsave, which is a consultancy that helps microfinance institutions and the like, build market-led services for their customers, including deposit collection, spoke at the London office of Allen & Overy to the Microfinance Club UK members about how deposit mobilisation is currently evolving in some developing countries.
Deposit mobilisation differentiates itself from the savings groups because its model needs external agencies to collect these deposits from the customers and, therefore, it is not a solely community-led activity. As a matter of fact, deposit mobilisation commonly takes place, not in areas of extreme poverty, but rather, in developing countries, where minimum infrastructure already exists in order to facilitate the work of the agencies.
For example, a good example of success is that of M-PESA in Kenya, where together with Safaricom, they created a system of mobile banking for the poor to both withdraw and deposit money, which, on average, has over 40 million transactions per month and an average transaction worth $30. In fact, Cracknell commented that M-PESA is used for more transactions than Western Union.
This is a unique business model, where the organisation maximised an infrastructure that already existed in the country, which was not even related to financial services. This success is closely related to the credibility that is given to their partner, Safaricom, which is the biggest network operator in East Africa and has a sufficient number of agents and resources to cover vast areas of the Kenyan population.
Similar to the M-PESA model, Cracknell argued that the new agenda for the microfinance sector is to use agency banking. In countries like Kenya, where the regulators have authorised some microfinance institutions to use agency banking, there is evidence that more transactions take place in these agencies than in the actual branch offices.
With agency banking, we are referring to the use of non-bank premises, where together with a logo painted on the walls, there is often an agent or an ATM machine installed. Compared to the option of setting up numerous branch offices, agency banking drives costs down and also allows the microfinance institutions to reach out to the more excluded, typically in rural areas.
However, deposit mobilisation comes with its own set of issues. Firstly, for the small amount of deposit that customers want to save, the operational costs are high. One has to consider that when an institution chooses to keep money for others, they have to ask for regulatory authorisation and also recruit staff.
Plus, credibility has to build up, in order for potential customers to trust their savings will be stored safely and that they will be able to access them whenever they need to. Lastly, Cracknell argued that many institutions are still focused on loans and, for this, he said that some may collect deposits, but do not know exactly what to do with them, and sometimes succumb to the pressures of loan officers to pay the loans with the collected deposit.
In all, Cracknell said, there is a need to build a proven model of deposit mobilisation at the institutional level. He is encouraged by the success stories gathered, mainly in the African continent, and believes that regulators are finally understanding what financial inclusion truly entails. Momentum is gathering. Also, we no longer live in the 80s or 90s, when donors handed millions of dollars to microfinance institutions without fail. As Cracknell said; “You save today to borrow tomorrow, or borrow today to save tomorrow.”