Best Practices in microsavings for successfully and sustainably reaching the poor

Transcription

1 Best Practices in microsavings for successfully and sustainably reaching the poor Written by: Chris De Noose, Managing Director World Savings Banks Institute (WSBI) With Assistance from: Anne-Françoise Lefèvre, Mina Zhang, Mamadou Diallo, WSBI 1

2 TABLE OF CONTENTS Introduction...3 Section 1 Savings Banks success factors in serving the low-end of the market...5 Section 2 Regional experiences and core characteristics of micro-savings services in Asia, Africa and Latin America...8 Section 3 Challenges and opportunities on the way forward

3 Best Practices in micro-savings for successfully and sustainably reaching the poor Introduction In the eyes of the general public, microfinance tends to be limited to microcredit. The United Nations naming 2005 Year of Microcredit and the award of the Nobel Peace Prize 2006 to the microcredit icon, Professor Mohammad Yunus, contributed to this recognition of microcredit in particular as a core tool to drive sustainable development. However, the scope of microfinance is broader and there seems to be a welcome shift lately, with a number of stakeholders, policy-makers and donors rediscovering the benefits and the crucial role of savings, as a core basic banking service. This is undoubtedly connected to the global crisis context, and the value of building a safety net to be used in case of extreme need. It is also linked to the fast expansion of microcredit, and the evidence that to reach its full effectiveness, microcredit has to be accompanied by micro-saving, as a key enabler to support income-generating activities. WSBI welcomes the growing consensus according to which financial access should not be looked at from a purely credit perspective, and should equally focus on the saving needs and abilities of individuals. WSBI member institutions have indeed an historic experience in giving access to safe deposit-taking services to the low-end of the market, all over the world, which clearly evidences the demand for convenient and accessible small savings products. It is clear that, contrary to what one could think, low income and poor people can and are willing to save 1. In this respect, the international community s support to encourage the promotion of a savings culture, especially for households and young people, and the development of an enabling 1 Perspectives 56 Who are the clients of savings banks? A poverty assessment of clients reached by savings banks in Thailand, India, Mexico and Tanzania 3

4 framework for the collection of low-value, unpredictable and irregular savings in formal institutions is still needed. More generally, poor people in the developing world just like wealthier people in developed countries have diversified financial needs and should get access to an entire range of affordable financial services. This includes access to credit and to savings accounts, but also to payment services, insurance products and the ability to send and receive money cheaply through remittances. 4

5 1. Savings banks success factors in serving the low-end of the market WSBI supports a broad understanding of microfinance services, which should include both: - the ability to accommodate the needs of small scale savers or giving access to small credits as part of the regular banking offer, - and supporting the socially vulnerable people and microentrepreneurs through ad hoc microfinance vehicles or programmes. WSBI members are large stakeholders in the microfinance market. Research work 2 has shown that of the approximately 1.4 billion accounts existing at institutions across developing and transition economies of the world with an explicit mission to foster access to finance, some 1.1 billion of the total are provided by savings banks. WSBI members are also significant providers of loan accounts (30+ million). They have indeed essential assets that make them ideally equipped to be the leading providers of savings services in their home countries: - They are accessible and proximity banking institutions given their widespread branch networks and nationwide coverage. In many countries, savings and postal savings banks are the only financial institutions that reach extensively remote areas. In Ivory Coast for example, Caisse Nationale des Caisses d Epargne manages 160 outlets versus 320 outlets for all other banks together (2010). - Requirements for accessing their services are relatively low and they have the ability and expertise to collect small deposits and offer low value services. Today National Savings Bank of Sri Lanka requires for instance a minimum value of 0.9 USD to open a post office savings account and in Tanzania, the deposit balance is below 15 USD for more than 3/4 of savings accounts with the PostBank (2011). 2 WSBI Perspectives 49 Access to Finance What does it mean and how do savings banks foster access 5

6 Besides, savings banks embody a "stakeholder" model, seeking to bring value and return to the whole community of stakeholders which surrounds them, including investors, suppliers, customers, employees and the local communities in which they operate. In so doing, savings banks are motivated by the conviction that alongside their banking and financial activities and traditional financial intermediation role, they also have a social, and even a societal, responsibility. Financial returns and profitseeking is not an end in itself but is turned to giving back to the local communities. Supporting social cohesion, economic development and improving living conditions are key pillars of this commitment to society activities. The double bottom-line business approach of savings banks is a powerful driver for financial inclusion. The promotion of access to financial services, especially microsavings, for all unbanked communities and individuals and maintaining a broad retail distribution network are parts of this social approach to banking. In this regard, research conducted by WSBI has recently evidenced that: - The savings bank business model is ideally suited to easing its way into as many local markets as it can possibly reach. The way in which savings bank capital is generally managed with less of the overriding commercial imperative to create and distribute surplus capital back to shareholders makes it easier to sustain marginal branches that only need relatively small amounts of capital. On top of this, savings banks can easily adapt their business model to the demands of each local community by deploying only the services which are really needed (just savings services or savings and lending services, etc.) 3. - Institutional commitment is a prerequisite for providing low-income people with financial services. One of the main elements of corporate governance that seems to contribute to broader outreach is a clear reference to access to finance in the institution s mission statement: it seems to ensure that policies 3 WSBI Perspectives 57 Measuring the social dividend in WSBI members activities Revealing the hidden elements 6

7 implemented by the bank stay on target, especially in the case of public institutions 4. Extending the outreach to the poorest groups Savings banks are large providers of financial services in all socio-economic segments. They balance their breadth of outreach -the proportion of the population they serve- with a significant depth of outreach, reaching a large number of the poorest households, especially in rural zones, and among women. For example, one of WSBI members in India, the National Savings Institute, reaches 6 million of the poorest households and WSBI member in Thailand, the Government Savings Bank (GSB), reaches 4.5 million 5. Two elements seem crucial to turn a passive commitment to universal access into an active reach into the poorest segments of society: - Distribution mechanisms appear to affect the extent of outreach. WSBI members with their own branch network and thus direct distribution channels, like Bansefi in Mexico or GSB in Thailand, have a client profile that more closely reflects the population: they serve a greater percentage of the poorest households. While an inexpensive and simple savings account, a large distribution network, or adding a microcredit component are important, direct ownership of distribution networks and control of customer interface appear to be critical factors in reaching poorer clients. - Staff incentives are also clearly important. Staff of banks with significant depth of outreach know that the pro-poor products are helping to build a stronger client base into which they can sell other services. By contrast, pro-poor outreach is more limited when maximizing the value of savings, not the number of customers reached, is rewarded. 4 WSBI Perspectives 62 Corporate Governance and Access to Finance 5 WSBI Perspectives 56 Who are the clients of savings banks? A poverty assessment of clients reached by savings banks in Thailand, India, Mexico and Tanzania 7

8 2. Regional experiences and core characteristics of micro-savings services in Asia, Africa and Latin America 2.1. Asia Large outreach in rural areas, through innovative channels, to serve small and remote savers Savings banks in Asia use innovative ways to further expand their outreach through carrying out banking transactions not at bank branches but directly in the villages, or sending out staff to rural communities to collect small savings. For example, National Savings Institute (NSI) in India trains unemployed citizens and educates them to collect small savings from rural villages. They work with 500,000 agents, out of which 150,000 are women, who have been living and working in the same area for the last 2-3 decades. This direct approach of potential savers can substantially reduce the costs of small savings collection. Savings banks in the region have also built on technology solutions to secure small deposits through branchless banking approaches. For example, National Savings Bank (NSB) Sri Lanka uses banking units on wheels (mobile banking units) that travel to strategic locations with high consumer traffic (schools, market places, weekly fairs, festivals, etc) during non conventional banking hours and days. NSB staff uses a small hand-held device with online connection to the bank through GPRS (General Packet Radio Switching) to collect small savings at the doorstep of customers. Linking informal small savings to the formal banking sector The linkages between informal savings groups and banks help small savers access formal banking services. One of WSBI members in India, the National Bank for Agriculture and Rural Development (NABARD), has introduced a Self-Help Group (SHG) -bank linkage program. SHGs are clusters of people, most of whom are women. They save as a group and each of the members get access to loans from the group. Every group member save a small amount regularly and the pooled savings is kept in a bank account in the SHG s name. Loans from financial institutions are disbursed to the group on the 8

9 assessment of the SHG s performance. This program leverages the strength of the formal banking system and the flexibility of informal self-help groups in providing adequate financial services to the rural poor. NABARD in cooperation with the government, financial institutions (commercial banks, cooperatives, rural banks, etc), NGOs etc, has successfully transformed SHGs into a channel for formal banking services to hundreds of millions of poor. Today about 7 million SHGs have been linked with the banks in terms of savings accounts and the aggregate savings is USD 1.4 billion. Empowering women through small savings WSBI members have developed innovative approaches to reach vulnerable women who in the Asian tradition are not supposed to go to formal financial institutions. The National Savings Institute of India recruits local women to collect small savings at the grassroots level and facilitates regular subscriptions particularly from other women from the same condition. This does not only enable rural women to have access to basic financial services, but it is also an effective way to empower women. The SHG model supported by NABARD, of which 90% members are women, enables poor households, especially rural families counting illiterate women, to establish banking relationships with formal financial institutions. Promotion of thrift, to inculcate the habit of savings WSBI members in the region do not only offer savings products but also consider inculcating the habit of savings to the population at large. In the microfinance People Bank Program promoted by the Government Savings Bank of Thailand (GSB), the savings efforts of the individuals are taken into account for eligibility for the microloans. In NSB Sri Lanka, a higher interest rate is applied to the savings account if its balance is maintained above a certain level or if there is no withdrawal within a given time. Savings banks believe that savings habits should be introduced at a young age. Therefore, children and young people are one of savings banks core target groups for education to savings. For example, school banking initiatives in Sri Lanka or in Thailand introduce the concept of savings and the management of money at an early stage, with the provision of 9

10 the relevant tools and support, to enable students to get familiar with the basic functioning of the money chain. Programs highlighting the concrete and practical benefits of savings for the households are also developed, through live demonstrations rooted in the local context through community banks (e.g. Government Savings Bank of Thailand), or through education pamphlets or campaigns, making tailored vehicles to best resonate to the local habits, e.g. TV spots by National Savings Institute in India, street parades by National Savings Bank in Sri Lanka, etc Africa Savings banks in Africa have been successful in providing convenient basic small value savings account by taking advantage of their accessibility and proximity to their clients. Utilization of post offices to provide small balance savings accounts More than two-thirds of WSBI members in Africa are postal financial institutions. The convenience of post offices to minimize the cost of mobilizing small savings and to maximize outreach is one of the key assets for postal savings banks in the region. In most cases, the network of postal savings banks is very competitive in terms of number of outlets. For example, Kenya Post Office Savings Bank makes use of over 350 Post offices, which is more than 40% of Kenya s 840 bank branches (2010) 6. Savings as a core business line Savings mobilization is the core financial services business of most African WSBI members. Two third of WSBI Africa members started as savings-only institutions (national savings banks or postal financial services), set up to provide savings services to low income populations but also cheap funding to the National Treasuries. Today, only a few members remain restricted to savings while most of others still continue to fund their activities from collected savings. In many countries (i.e. Benin, Cameroon), the savings bank serves more than 30% of banks customers in the country. This large customer base 6 Data source: 10

11 is explained by their understanding of customer needs, ability to deal with all types of customers but also the trust that has been built with customers over time. Product offer specifically targeting small balance savers Poor people know the value of savings and recent studies 7 have evidenced that a large part of poor households actively save. Savings banks in Africa are providing savings opportunity to a significant proportion of low income people. With low minimum balance requirements and low transaction fees, WSBI members offer simple products (most of the time, a savings account and a checking account) to low income customers, including passbooks to help illiterate customers understand the movements in their accounts. In most of savings banks, the proportion of low balance savers is very large (i.e. 75% of customers hold 25% of deposits in Postbank Tanzania). Often there is no specific product dedicated to low income customers. An exception is the South Africa s Mzansi account 8 for which Postbank has 40% market share. Research has shown however that the success of this product is altered by the high number of dormant accounts. Serving women micro-entrepreneurs Part of the WSBI membership in Africa is made of microfinance institutions that target women micro-entrepreneurs (i.e. women account for more than 70% of the portfolio of Uganda Finance Trust in 2010). The microcredit services provide women in urban area an opportunity to start a productive enterprise Latin America WSBI members in Latin America are large and long-established providers of microfinance services. They are experiencing impressive growth both in terms of clients, portfolio and savings collection, and offer specific support to microentrepreneurs. 7 The Poor and Their Money at and Portfolio of the Poor at 8 developed as a joint initiative by the four big banks in South Africa and Postbank, to offer a suitable savings account to the lower end of the market, with a comparative low requirement to open the account, that is USD

12 Micro-services offer through dedicated entities Some of WSBI members in Latin America have establish specialized entities to serve the microfinance sector. In Colombia, BCSC who traditionally serves the microfinance market, created in 2004 a specialized microfinance division. According to BCSC s own estimates, in 2009 its microcredit portfolio represented 18.21% of the total Colombian microcredit market, and 62% of the bank s portfolio comes from clients with a monthly income of less than USD 667. In Chile, BancoEstado created a subsidiary called BancoEstado Microempresas with 194 dedicated microfinance branches, more than 360,000 customers, which represent more than 50% of the microfinance market in Chile (2009). 9 Expansion of distribution channels through non banking agents Latin America is the region which is at the forefront of leveraging the banking beyond branches model to advance financial inclusion. WSBI members in the region are actively deploying non banking agent networks as a solution to expand distribution channels and reach unbanked groups in rural areas, in a cost-effective manner. For example, Caixa Economica Federal (CEF) Brazil has developed an extensive and wide delivery network to serve their 51.9 million clients with presence in 5,564 Brazilian municipalities (2009), composed mainly of lottery shops but also of other retailers such as supermarkets, pharmacies, etc. connected in real time. Bansefi Mexico has installed 4,805 terminals in rural shops to channel government social payments and developed 22,000 banking correspondents to provide financial services to localities (2009) 10. BancoEstado Chile, through the Caja Vecina agent banking channel, has developed a powerful model with 5 million transactions per month and 1.2 million clients reached. Half of Caja Vecina s transactions are financial service transactions (deposits, withdrawal, loan repayment, account-based money transfers) and not only bill payments. This reflects Banco Estado s commitment to increase financial inclusion through this approach. 9 Data source: 04/BancoEstado_Microempresas_gives_Awards_to_Entrepreneurs.aspx 10 Data source: Presentation by Bansefi at 2009 WSBI GRULAC 12

13 Remittances as an entry point to give access to savings accounts Latin America is the first region to leverage on remittances cash flows through a link with savings accounts. This is seen as a promising way to introduce basic banking services to unbanked people. To encourage remittances to move away from cash, WSBI member Banrural, which represents more than 50% of the 4 million dollars of the remittances market share in Guatemala (2011), offers its remittances customers the option of depositing their remittances into a bank account. Bansefi in Mexico is also a large remittances service provider in US-Latin America corridor. Bansefi offers a remittance facility called Directo a Mexico, which is a partnership between some US and Mexican financial institutions that allows customers located in the US to benefit from an accountto-account service and from preferential fees and exchange rate. Since 2006, customers from U.S. financial institutions enrolled in the Directo a México remittance scheme can use Bansefi s Beneficiary Account Registration (BAR) Website and pre-open an account for the beneficiary in Mexico 11 in Bansefi or another financial institution enrolled in Bansefi s Red de la Gente network. Unbanked beneficiaries have then access to a bank account. 3. Challenges and opportunities on the way forward The banking landscape is currently evolving in all its dimensions. With a reorganization of the regulatory and supervisory framework as a follow-up to the global crisis, new banking practices using technology innovations, the diversification and customization of products to meet the changing needs of clients, the introduction of new delivery channels including through non bank outlets, an increasing competitive environment to tap the unbanked market especially with mobile phone operators and microfinance institutions. This raises a number of challenges and opens up opportunities for the banking sector in general, and savings banks and their business model in particular. It can specifically impact their market positioning and their ability to serve the most vulnerable and low income parts of their clientele, in a sustainable way. 11 Data source: 13

14 Part of the lessons learned on how best to reach poor people are based on the programme WSBI is running with the support of the Bill and Melinda Gates Foundation Doubling the number of savings accounts opened with the poor 12. They stimulate the reflection on the strategic approach to fill the financial access gap and provide relevant and affordable services to the still unbanked Overcoming the attractiveness of informal savings vehicles Low income populations use a number of informal means to save their money: buying livestock/jewelry/clothing, keeping the money under the mattress, participating in tontines (rotating savings club), and consigning part of the money to trustworthy individuals in their communities. In some countries, the preference for these informal savings solutions has to do with the lack of trust of the population in the formal banking system as they have witnessed in the past some mismanagement and frauds. Besides, a number of people are not willing to keep their cash within formal banks because the inflation rate is so high that the money will be worth nothing after a certain time (ex. Zimbabwe some years ago). A lack of knowledge and understanding of people on the role and status of formal banking institutions also explained their reluctance to engage in formal banking relationships. So how can banks, and savings banks in particular, compete with the mattress, and offer a safe place to save to the still unbanked parts of the population, amounting in some African countries to 90%? Opportunities to offer suitable and flexible products, at a reasonable price, with the appropriate level of security and the right incentives, using convenient delivery means and provided though a proximity network would be the right assets to reach this goal

15 3.2. Improving the business environment Regulatory framework Savings banks in developing countries are actively advocating for better proportionate rules and regulations, adapted to local contexts, to the level of risks customers and the financial system are exposed to and also taking account of financial inclusion objectives. At international level, positive initiatives are being developed to reconcile the protection of the integrity and soundness of the (micro-)finance sector, and the financial inclusion target. It is now for example acknowledged that the application of the same Customer Due Diligence (CDD) requirements to all segments of the population, as part of the Anti Money Laundering/Combating the Financing of Terrorism (AML/CFT) clearance process, is one of the factors that explain the exclusion of many of low income populations from the formal banking system. The problem is even larger when a given country does not have a formal ID system. WSBI welcomes and is contributing to FATF s ongoing discussions for guidance in the implementation of AML/CFT rules in a financial inclusion context. Regarding the regulation of microfinance, WSBI welcomed the Basel Committee on Banking Supervision guidelines on the supervision of microfinance (2010) 13, and the draft CGAP Guide on Regulation and Supervision of Microfinance. 14 Both initiatives addressed the need to develop an adequate framework for the supervision of deposittaking institutions, on the basis of the existing framework developed for the supervision of banking institutions. This will provide the relevant background and structure to ensure that the soundness and reliability of savings-led non bank microfinance institutions are assessed against similar criteria and principles than banks active in the microfinance field. 13 WSBI contribution to Basel guidelines: 14 WSBI contribution to CGAP Guide: 15

16 Institutional reform A number of providers of savings services to low income populations which form the majority of WSBI members in Africa- are Post offices via their Postal Financial Services (PFS) division. These PFS have different institutional types, ranging from being a profit center of the Post to a full retail bank. Some key reforms have to be done in order to ensure the sustainability of these institutions when they are profit centers of the Posts: ring-fencing of the accounting between PFS and the Post, putting in place skilled and independent management for PFS, placing PFS under the supervision of banking supervisors, etc. These reforms have been initiated in a number of countries (Mali, Kenya, Senegal, South Africa, Uganda, etc.) and the results are positive in terms of the enlargement of outreach and the improvements in products and services to low income customers. The model that is mostly used is to create a holding composed of several subsidiaries including the banking subsidiary (independently managed, supervised by banking authorities). Another model used is the merger between PFS and commercial banks, as evidenced by Vietnam Postal Savings Services Company (VPSC). The new bank will take advantage of the reputation of the postal savings brand and the banking expertise of the commercial bank. More people in rural areas will hopefully benefit from the transformation of VPSC Entering partnerships and building on complementary skills In order for savings banks to expand their businesses in the provision of small scale savings, it appears more and more that appropriate partnerships should be built with market players that have complementary skills and expertise. Banks should however ensure that these partnerships are win-win relationships. There are at least two key partnerships: Banks Mobile network operators: As mobile phone banking is becoming more and more popular, savings banks should enter into partnerships with mobile network operators to offer mobile phone banking services. The interests for banks are reduced investment costs, increased quality of service for their customers, 16

17 diversification in distribution channels, and increased customer base with the subscribers of mobile phone services. For mobile network operators, the interests would be the diversification of products and services, the existence of a wide network of bank branches that may act as treasury managers or super agents of mobile phone agents. Banks Agents (retailers, pharmacies, gas stations, etc.): Agency banking is the second route to providing large scale financial services to low income populations. Policymakers should establish clear rules regarding the responsibilities of different actors and the types of activities the agents are allowed to perform (i.e. collecting deposits). The objective of banks should be to have one agent per village. Indeed capacity building efforts will be needed to train and oversee agents, so it is important that this process is encouraged by Governments Strengthening the savings products and services offer The savings products and services offer can no longer be based on a generic type of products but has to be designed having in mind the needs of the targeted client segments. This has to be balanced with the requirement to provide an affordable range of products, in a sustainable manner for the bank. Usability: The products should be flexible enough to adapt to non regular, scarce and low revenues but also to the informal economy, and one of the core features should be easy deposit of surplus money. The institution should also consider offering a variety of products that suit several groups of the target segment (farmers, small merchants, part-time/occasional workers, etc.). Visibility: One of the constraints to access to finance is low awareness and lack of information about financial services and service providers. Efforts by financial institutions should also be focused on raising awareness on what financial institutions, and in particular savings banks, can really do for the poor, and informing them of the availability of specifically designed savings services, to encourage them to open accounts and use them. 17

18 Sustainability: The classical pricing method of banks seems inappropriate for poor people. For example, flat maintenance fees deducted directly from savings accounts can lead to a total loss of the original amount deposited. It is not acceptable for any customer, and specifically not for a poor customer to lose his/her savings even though he/she has not done any transactions. We expect that poor customers are more willing to be charged per transaction instead. In any case, the pricing should be fair for customers and sustainable for the institution Developing alternative distribution networks The ongoing initiatives to optimize the potential of innovation for the delivery of financial services to the most vulnerable parts of the population are to be supported. The opportunities offered by technology, and in particular mobile phones and the development of branchless banking solutions, mainly through retailers (petrol stations, pharmacies, lottery kiosks etc), are promising routes to providing competitive and adapted services to clients and enlarge the outreach to the unbanked and underserved segments. To reach this objective, a number of core policy and regulatory principles should be promoted and in particular: - The status of the agent (be it a lottery kiosk, a pharmacy, a newsagent or any other kind of retailer) vis-à-vis the bank has to be unambiguously disclosed to the clients, as well as the scope of the activities undertaken on behalf of the bank; - Given that one of the main objectives of working through non bank agents is to bank people and to integrate them into the formal banking system, the scope of services to be delivered by the agents should extend to the opening of accounts and the collection of deposits. They should not be restricted to transactional operations such as withdrawals or payments; 18

19 - Any regulation should be service-based rather than provider-based. This would ensure that all financial service providers, whatever the distribution channel they use and whatever their institutional status, operate in a level playing field; - The outsourcer always remains fully accountable towards supervisors, regulators, and customers or the provision of the service(s) in general, and in particular with respect to compliance with AML/CFT obligations; - Risk mitigation and the challenge of ensuring high level consumer protection should be carefully balanced with the needs for innovation and market access. For WSBI banking institutions, the use of new technologies and the development of partnerships with non bank agents come as an addition to the physical network of branches, not only to improve accessibility for existing customers, but more importantly to reach new groups of people. Branchless banking outlets come as extensions of the physical branches for a greater banking penetration, and not as substitutes to the local coverage. This is a key pillar of the proximity banking model of savings banks, which has proved its effectiveness for the development of relationships customer/bank based on long-term trust and confidence. 19