by Matthew Fox - Trends/Challenges -

MICROFINANCE PAPER WRAP-UP: It’s Time to Address the Microsavings Challenge, Scalably, by Bob Christen and Ignacio Mas, Published by Practical Action Publishing

By Bob Christen and Ignacio Mas, published by Practical Action Publishing, December 2009, 20 pages, available at: http://www.microfinancegateway.org/gm/document-1.9.45939/Meeting%20the%20microsavings%20challenge.pdf

The authors of this paper begin their argument for microsavings by claiming that it will not only expand the livelihoods of poor people, but will help microfinance institutions (MFIs) secure a stable source of funding. Citing the recent global credit crisis, the authors argue financial institutions that offer savings services were largely unaffected because they do not rely on international investment funds or local banks. They suggest that since MFIs have already mobilized large numbers of borrowers, they only need to offer the savings service to existing customers.

Concerning the challenges of deposit taking institutions, the authors note that MFIs must be able to capture the savings ‘at source,’ where the money is earned, because poor people are financially unable to regularly travel to deposit money at distant branches. Admitting that expanding financial access by building new infrastructure is too costly, the authors propose that MFIs leverage existing retail outlets. For this to be a viable solution, the authors note that a common, secure technology platform is necessary, where all transactions can be authorized and recorded in real time. Addressing the difficulties with this business model, the authors note that activities such as finding eligible retail outlets, providing necessary transaction devices and training employees, may be too costly as well. They suggest that MFIs must not only tap into existing retail stores, but distribution channels as well.

Noting that distribution channels such as the postal service are not always reliable in developing countries, the authors suggest turning to mobile operators as business correspondents. They argue that “mobile operators ought to be allowed to run the payment and account management platforms on behalf of banks, leveraging their experience with handling low-value, high volume prepaid platforms.” The authors propose creating special licenses for mobile operators on the condition that they invest all deposits in low-risk liabilities issued by the government or regulated banks, maintain a high ratio of liquid assets and submit themselves to supervision on technical and operational risk. Citing the success of current mobile wallet/payments service of M-PESA in Kenya, the authors argue that there is already strong customer willingness to trust this form of service.

According to the authors this is a more scalable business model, but it must be tied together with “cascading or back-to-back contracts between each layer, whereby a contract between the parties higher on the chain governs the contracts that can be implemented at lower levels of the chain. Thus by appropriately specifying a set of minimum requirements on a bank retailer contract, the banking regulator can retain full visibility of and supervisory control over financial institutions’ entire channels.”

The fundamental challenge outlined in this paper for MFIs adopting savings services is “the need for MFIs to upgrade their management information systems (MIS) to handle real-time accounting in a secure and robust manner.” The authors claim that if MFIs are able to adopt this new business model, they will create two parallel banking channels. The first will be an indirect retail channel based solely on handling cash transactions. This will allow the second channel, bank branches, to focus more on customer service and financial education, necessities if MFIs are to introduce savings services.

By Matthew Fox, Research Assistant

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