Managing for Profitability

Transcription

1 Managing for Profitability Case Studies from DEPROSC Development Bank (DD Bank) in Nepal and Banco Caja Social BCSC in Columbia Building Financial Systems for the Poor

2 About This Project The case studies focus on how institutions have managed their operations in order to maintain or increase profit. This series looks at two institutions, DEPROSC Development Bank (DD Bank) in Nepal and Banco Caja Social BCSC in Columbia to examine the steps they have taken to remain profitable in challenging situations. In Keys to Cost Management, DD Bank has managed costs by focusing on integrating its financial services, training staff in savings services and providing incentives to deliver them, and standardizing its operating procedures and savings products. As a result, DD Bank has lowered its costs for deposit mobilization (from 3.2% to 1.8% over three years) and increased the number of clients per staff member (178 to 215). In Balancing Customer Satisfaction and Profitability, Banco Social BCSC has created low-cost savings products by encouraging clients to use less-expensive delivery channels and by designing products that limit the number of transaction and reward consistent savers. 1

3 Table of Contents Case 1: Keys to Cost Management DEPROSC Development Bank (DD Bank), Nepal Case 2: Balancing Customer Satisfaction and Profitability Banco Caja Social BCSC, Columbia About CGAP

4 Case 1: Keys to Cost Management DEPROSC Development Bank (DD Bank), Nepal Source: Nara Hari Dhakal Prepared by Gretel Figueroa Guzmán with inputs from CGAP staff Founded as an NGO in 1996, the DEPROSC Development Bank (DD Bank) transformed into a forprofit institution in DD Bank primarily serves people living below the poverty line. The Nepalese market features an abundance of relatively low-cost lending capital made available to MFIs through the government's Deprived Lending Sector. As such, very few MFIs 1 have made a substantive effort to develop savings programs that move beyond the compulsory savings that accompany the group lending methodologies favored by poverty lenders in this country. In contrast, DD Bank recognized early on that government policies can change frequently, and so it developed its capacity to mobilize savings as a way to ensure the long-term viability of the institution. Today, DD Bank is the only Microfinance Development Bank (MDB) in Nepal that is gradually diversifying Technique: Managing costs by standardizing product features and procedures, building staff capacity, and designing efficient incentive schemes. Takeaway: Although operating in a market with abundant government subsidized lending capital, DD Bank still sees value in mobilizing voluntary savings in order to develop a reliable long-term source of capital to support the institution's rapid growth. DD Bank has contained the costs of its savings program by 1) integrating its financial services; 2) by training its existing credit staff in savings services and providing strong incentives to deliver those services; 3) and by standardizing its operating procedures and savings products. Results: DD Bank's operating costs for deposit mobilization have declined from 3.2% in July 2003 to 1.8% in July Staff productivity has improved from 178 clients per staff member in June 2003 to 215 clients per staff member in July Community-based MFIs like the Savings and Credit Cooperatives in Nepal are savings driven institutions. However, their size and local focus limits their potential to mobilize large volumes of deposits. Nepalese Microfinance Development Banks (MDBs) were created to help MFIs become regulated and more readily access the capital to expand their outreach and capture savings from the public. However, until now, most have not given sufficient attention to savings. Their credit-centered services remain concentrated in the plains of Nepal and the more accessible hill areas. And their savings products are mostly compulsory in nature. 3

5 and expanding its savings product line while maintaining a clear focus on cost management in order to create a low-cost source of lending capital. DD Bank offers clients group savings, compulsory savings, voluntary savings, and contractual or recurrent savings products. Today, DD Bank serves 20,322 group accounts (with an average balance of USD 5); 16,759 compulsory accounts (USD 8 average); 2,589 voluntary accounts (USD 40 average); and 1,260 contractual accounts (USD 21 average). DD Bank delivers its services to groups of women who are often located in geographically dispersed and hard-toreach locations. It does so through a decentralized network of branches and by employing a manual management information system. Its level of operating self-sufficiency is 112.6%. Standardized operations and product features DD Bank has learned that the best way to keep operating costs low is to standardize processes and employ the same staff to deliver both savings and credit services. To ensure a high degree of standardization and control in the field, DD Bank keeps staff numbers at the branch level to a minimum. It backs up these essential staff members with an information management system that allows for continuous evaluation, monitoring, and technical advice to be delivered from management to the branch staff. And DD Bank prepares detailed manuals for branch operations and trains the staff on all aspects of branch operation to ensure consistent processes throughout the organization. As staff time is the largest cost for most MFIs, the DD Bank has designed products that limit the number of times clients perform transactions to twice a month. Deposit collection and withdrawals take place every fifteen days, during staff visits to the village when they disburse loans and collect payments. DD Bank has also introduced greater standardization in their savings program by introducing a contractual savings product. A contractual savings product is essentially an accumulated fixed-term deposit savings product where clients commit themselves to depositing a fixed amount of money over a fixed period of time (1 to 3 years) and to 4

6 leaving the funds in the account for a fixed term (1 to 3 years). A client can withdraw the entire amount plus interest on maturity. Early withdrawal is prohibited or penalized. Contractual products have the advantage of being more predictable for the institution, and collections can therefore be more carefully controlled by management. Moreover, clients using these products tend to save more, and they do so with greater consistency which, in turn, has raised DD Bank's average savings balance and has allowed the institution to spread its administrative costs over a much greater volume of savings. Training and staff incentives DD Bank's leadership has worked hard to motivate its staff to be more productive. Now that the field staff offers both savings and credit services, they are held to a productivity target of 400 clients (borrowers and savers combined). This target is closely tied to staff incentives which include both financial remuneration and promotions. As a result, DD Bank has been able to mobilize a higher volume of savings while keeping their operating costs in check. These incentives have also engendered a spirit of competition among the staff, pushing them to reach higher levels of efficiency and productivity. As of July 2006, five years after its creation, DD Bank's total savings deposits reached upwards of USD 360,000. The voluntary and contractual savings products, which are not directly linked to their group lending product, were introduced three years ago and have seen similarly strong growth. Today, DD Bank is actively servicing 3,849 of these accounts. By fully integrating their credit and savings services, maintaining a high degree of standardization in savings delivery, and motivating staff, DD Bank has been able to lower its operating costs and maintain strong internal controls. This, along with the introduction of contractual savings product, has helped DD Bank to increase its absolute deposit balances from less than USD 7 to USD 18. Its operating costs for deposit mobilization have, in turn, declined from 3.2% in July 2003 to 1.8% in July And staff productivity has improved from 178 clients per staff in July 2003 to 215 clients per staff in July

7 Case 2: Balancing Customer Satisfaction and Profitability Banco Caja Social BCSC, Colombia Source: Elsa Patricia Manrique Prepared by Gretel Figueroa Guzmán with inputs from CGAP staff Originally established as the savings unit of an NGO (Círculo de Obreros), what is today known as BCSC has supported low-income workers and microentrepreneurs with savings services at its core for over 90 years. In 2005 Banco Caja Social merged with Banco Colmena and became BCSC. Today, the BCSC network serves more than a million clients through its 122 offices in 42 cities in Colombia. The microenterprise sector continues to be one of BCSC s primary focuses, and the bank prides itself on offering these clients products and services that have been tailored to their needs. Colombian usury laws and taxes charged on all financial transactions have lead to widespread use of fees in the banking sector. These fees, coupled with the taxes, can act as disincentives for small depositors who make frequent, small deposits and withdrawals. Technique: --Using incentives and promotion to motivate clients to use lowcost delivery channels, and --Designing a no-frills savings product that rewards consistent savers with a higher interest rate and access to lower-cost consumer loans. Takeaway: Financial institutions can create attractive low-cost savings products by promoting less costly delivery channels, by using fees as incentives for clients to use those channels, and by designing savings products that limit the number of transactions and reward consistent savers. Results: BCSC has seen a 9% increase in the use of low-cost delivery channels in the last two years. BCSC s efforts included promoting low-cost delivery channels through radio ads, promotional flyers, and raffles; employing temporary staff in branches to help clients use ATMs and Debit Cards; and lowering fees for transactions performed at ATMs (versus using tellers which are a higher-cost delivery channel). By limiting the number of transactions while still offering a high interest rate, rewarding clients who make consistent deposits, and offering access to low-interest consumer loans, BCSC has designed a savings product that is both attractive to low-income clients and profitable for the bank. In the 4 years since an innovative basic savings product Progrese was launched, 183,000 of these savings accounts have been opened and 102,400 are actively being served today. 6

8 BCSC s fees are lower than their competitors, but they still generate an important income, which the bank then uses to offset the high cost of operating its network of traditional branches. Fees represented 16.5% of financial income in 2005 and 17.9% of financial income as of October This is not atypical in Colombia where fee income represents about 11.7% of total income for the financial sector and amounts to 90% of net profits. Because of its strong social mission, BCSC has found a way to keep fees low and customer satisfaction high while profitably serving low-income clients. Using incentives to motivate clients to use lowcost delivery channels Having successfully applied a fee structure that reflects the delivery cost of making cash withdrawals, BCSC is now seeking to create similar incentives for other channels. This helps the bank to remain profitable while still keeping its fees lower than its competitors. BCSC has learned that the price difference between delivery channels has to be significantly large in order to radically change client behavior. A small difference only increases the income earned by fees. For example, the bank now charges a fee of US$ 0.50 to debit card clients who withdrawals under US$ 500 using a branch teller while it charges low or no fees for using an ATM. To further encourage ATM use, BCSC builds all its new branches with an ATM, and it places satellite ATMs in locations of interest to their clients. BCSC allows clients to use ATMs to check account balances, to make electronic payments, and to transfer funds from one account to another within Colombia. And BCSC has produced targeted communication and customer education efforts to encourage and train clients on ATM use. These efforts included hiring temporary staff to approach clients waiting in line for a teller to see if their transactions could be done at the ATM and then showing them how to use it. Another incentive entered clients in a raffle each time they completed three transactions at an ATM. 7

9 Designing attractive and viable savings products for low income clients While the widespread use of fees may have made them more acceptable to clients, it has also acted as disincentive for small depositors. To address this problem and remain true to its mission, BCSC created a unique savings product called Progrese. Progrese savings accounts are easy to access, have a low opening minimum balance, have no minimum monthly contributions, and have an interest rate that increases as the client reaches specific deposit balances. Progrese offers an effective interest rate of 1% for deposits ranging from US$ and 2.5% for accounts from US$ The market rate for similar non-fixed term savings accounts is only as much as 1%. Yet Progrese s most unique feature is that clients who make six steady and consistent deposits are eligible to receive a consumer loan at a discounted rate that does not require a guarantor or real guarantees. To date, the product has been well received by the market. In the four years since the product was launched, 183,000 of these savings accounts have been opened and 102,400 are actively being served today. While Progrese accounts for only 14% of BCSC s total volume of savings, the annual growth rate (36% in July 2006) is higher than the rate of its other savings products (17% in July 2006), and its volume has grown to US$ 65.4 million. 8

10 About CGAP CGAP is a global resource center for microfinance standards, operational tools, training, and advisory services. Its members including bi-and multilateral development agencies and private funders of microfinance programs are committed to building more inclusive financial systems for the poor. For more information on CGAP and its work, visit Building Financial Systems for the Poor 9