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Savings Policy Statement Detailed StatementI. Introduction - Importance of Savings
Throughout time, all around the world, households have saved: as insurance against emergencies, for religious and social obligations, investment and future consumption. The importance that poor people attach to savings is also demonstrated by the many ingenious, but often costly, ways they find to save in addition to keeping small amounts of cash secreted at home. These include investing in assets that can be sold in case of emergency (for example corrugated iron sheets, livestock or jewelry), participating in local initiatives such as Revolving Savings and Credit Associations (ROSCAs) or funeral funds, or by lending between family and friends. But for a variety of reasons, including their inflexibility, these mechanisms fail to meet the needs of poor people in a convenient, cost-effective and secure manner. As a consequence, when poor households' desire and need to save meets a safe, easily accessible opportunity to do so, their capacity to save, commitment to saving, and the amounts they manage to save are remarkable.
Previously at microfinance institutions (MFIs), savings were the "forgotten half" (Vogel (1984)), and typically extracted savings from clients through compulsory systems. There was a prevalent notion that "the poor cannot save", and thus compulsory savings systems often required members to deposit small token amounts each week as well as levying more substantial amounts at source from loans. These compulsory savings were then often "locked-in" until members left the organisation - thus denying them access to their own money. Until recently, compulsory, locked-in savings systems, in one form or other, were an extremely prevalent model for MFIs throughout the world.
However, compulsory savings systems have come under increasing pressure not only from the professionals involved with financing, managing and reviewing MFIs but also from clients themselves. The Consultative Group to Assist the Poorest (CGAP), in its Note 2 (October 1995), stressed that "possibly the greatest challenge in microenterprise finance is to expand the provision of savings services to the poor." This is driven by the fact that, in the words of Marguerite Robinson (1995), "there is substantial evidence from many parts of the world that: (1) institutional savings services that provide the saver with security, convenience, liquidity and returns, and represent a crucial financial service for lower-income clients; and (2) if priced correctly, savings instruments can contribute to institutional self-sufficiency and wide market coverage."
Nonetheless, for MFIs with a history of credit-driven services which have levied compulsory savings as part of a package, the shift to flexible financial services including (even stressing) savings products is often hard to effect. MFIs need to acquire more sophisticated management capabilities to manage liquidity, risks and cost, as well as develop a more complex organisational structure and information and reporting systems in order to act as financial intermediaries.
Furthermore, several other factors often provide significant impediments to promoting savings. These include macroeconomics issues such as high inflation rates, as a result of political turmoil and/or economic imbalances, and financial repression through interest rate controls and subsidised credit schemes. In addition, in many countries there are no appropriate systems of regulation and supervision for MFIs - leaving them operating either outside a legal framework or pinned down by traditional formal sector banking laws. Thus, despite the huge demand for savings facilities for the poor, the supply of such services is inadequate, both in terms of quantity and quality.
II. Rationale of MicroSave
I. Overview
The concept of savings has now risen to the top of the microfinance community's agenda. In that context and under the leadership of the Special Unit for Microfinance (SUM), special attention has been brought to the key role that savings mobilization should play in UNDP/United Nations Capital Development Fund (UNCDF) microfinance interventions. Several UNCDF microfinance projects have successfully encouraged savings mobilization in the past, as in Uganda with the Centenary Rural Development Bank, or in Western Africa through UNCDF support to credit union movements. Based on the analysis of the huge potential of savings mobilization, and the inadequate supply of such services through most microfinance institutions, SUM designed a pilot programme to encourage efficient savings mobilization strategies. MicroSave - Africa will be developed with and implemented through SUM/UNDP Africa.
MicroSave Africa was initiated following the CGAP's Working Group Conference, entitled "Savings in the Context of Microfinance", that was held in Kampala, Uganda, on 10 - 13 February 1998. This Conference was jointly sponsored by UNDP, the German Technical Cooperation (GTZ), and the French Cooperation. It was attended by 155 participants from 26 countries and brought together representatives of financial and microfinance institutions from all over Africa, and allowed for a fruitful exchange of varied savings mobilization strategies.
As an instrument to promote secure, appropriately regulated, supervised, and flexible savings systems for poor people, the MicroSave will be co-financed by the United Kingdom (DfID), and based in Kampala, Uganda. It will focus on promoting savings mobilisation and work in the fields of: (i) research, (ii) the dissemination of best practices, (iii) technical review of proposals from UNDP field offices, and (iv) institutional development, training and technical assistance. These components are described in further detail under the section "Proposed Activities of the MicroSave - Africa". Through MicroSave and with the technical support from SUM, UNDP Africa will play a catalytic role in promoting secure and appropriately regulated, supervised, and flexible savings systems for poor people.
This initiative will address the following universal considerations on savings:
A. Macroeconomic Factors
Several key macroeconomic factors should be in place before poor people will be able to participate in institutionalised savings schemes, and before MFIs are likely to offer customer-responsive savings facilities. The most obvious of these is economic and social stability, a reasonable level of inflation as well as the essential need for a market environment that fosters competition. The latter requires reduced barriers to entry into the financial services market, the removal of interest rate controls, the elimination of subsidised credit programmes and the adoption of regulations in line with international banking standards.
B. Supervision and Regulation
"Prudential financial regulation" refers to the set of general principles or legal rules that aim to contribute to the stable and efficient performance of financial institutions and markets. These rules represent constraints placed on the actions of financial intermediaries to ensure the safety and soundness of the system" (Chaves and Gonzalez-Vega (1994)). Thus financial regulation should serve macroeconomic goals by ensuring the solvency and financial soundness of all financial institutions. In addition, regulation should provide clients (in particular those making deposits) protection against excessive risks that may arise from failure, fraud, or opportunistic behaviour on the part of the financial service institution. Finally, regulation should also promote efficient performance of financial intermediaries and competitive markets.
"Financial intermediary supervision" consists of the examination and monitoring mechanisms utilized by authorities to verify compliance and enforce either financial repression or prudential financial regulation. Supervision includes the review of specific procedures adopted in order to determine the risks faced by an intermediary and that of regulatory compliance (Chaves and Gonzalez-Vega (1994). Financial intermediaries could put savings deposits at risk by, for example, investing in excessively risky loans at high interest rates. Savings deposits usually offer fixed interest rates, and so owners of the financial institution would benefit and take profits if the risky loans turn out well, but have only a limited exposure to potential losses. This is referred to as moral hazard - the incentive for someone who holds an asset belonging to another person to risk the value of that asset because the person holding the asset does not bear the full consequence of any loss. The main instruments of regulation and supervision are:
1. Executive Committee/Board of Trustees (or in the case of publicly owned institutions, the Annual General Meeting) which meets to review the progress of the institution and its strategic planning;
2. Board of Directors that establishes good business, financial, and risk management policies and procedures, and holds management accountable for the effective implementation of those policies;
3. Internal Controls and Internal Audit Departments which operate to ensure that policies and procedures are implemented promptly and effectively;
4. External Auditors who are knowledgeable and competent in microfinance as an objective, check on the institution's policies, procedures and systems of control and audit to protect against fraud and mismanagement; and,
5. External Supervision by a central bank or its agent to ensure that management maintains industry standards (usually in terms of "CAMEL": Capital adequacy, Asset quality, Management capability/systems, Earnings ratios and Liquidity) and does not misuse its power to use depositors funds for its benefit.
The promotion of effective supervision and regulation systems appropriate for MFIs is essential if they are to provide trusted and secure savings facilities.
D. Savings and Poor People
Evidence from all over the world-wide suggests that poor people want to save, and indeed are saving in a wide variety of ways. In addition to traditional ways of saving "in-kind", they have created an extraordinary variety of their own systems for saving money: peripatetic savings collectors, reciprocal arrangements between family, friends and neighbours, marriage and funeral funds, annual savings clubs, Revolving Savings and Credit Associations (ROSCAs), Accumulating Savings and Credit Associations (ASCAs), credit unions and so on. (See Rutherford (1996) for an overview, and Miracle et al. (1980) for an Africa-specific review of informal sector systems).
Despite this evidence, most MFI programmes have been driven largely by a focus on providing credit facilities for poor people, and provided only compulsory, locked-in savings requirements rather than client-responsive savings facilities. Poor clients view compulsory, locked-in savings not as a service, but as part of the cost of borrowing and therefore significantly reduce their deposits. Furthermore, there is increasing evidence (Montgomery (1995); Rutherford (1998), CGAP Working Group (1998)) that offering voluntary and accessible savings facilities may result in the inclusion of the poorest 10-15% of the population, who are averse to risk (and thus to taking credit), and are therefore not being served by most MFIs.
For poorer households, savings can serve as invaluable reserves, such as insurance and crisis factors such as illness, natural disaster and theft that can so easily drive the poor into destitution. Indeed, there is a strong case for developing savings products designed specifically to help them insure themselves against these and life cycle factors such as marriage and death. In short, there is a growing understanding and acceptance of the diverse nature of the financial service needs, and an awareness that not all of these are addressed by "productive loans".
What has been lacking until very recently, among most MFIs, are the facilities to allow poor people to save in a way that can meet their current needs and opportunities as well as their savings potential for the future. The majority of MFIs have instead concentrated on providing credit facilities at the lowest sustainable interest rates, and on capturing compulsory savings in order to do so. Given the demand for flexible savings facilities, and the fact that it appears that most people (including the very poor) want to save, while not all want to borrow all the time, MFIs should look at optimising the savings facilities they offer.
Such a policy could allow MFIs to offer services to a larger number of the poor, and encourage the participation of the very poor in the MFI's programmes. Research (Robinson (1995); Wright et al. (1997)) shows that there is a clear preference amongst the poor for voluntary, open-access savings, although compulsory minimum weekly deposits (particularly when they are client-defined) are also often welcomed, since they provide savings discipline and an opportunity to safeguard savings from "trivial" spending.
E. Savings, Outreach and Institutional Sustainability
The desire and capability of poor people to save, when met with flexible and responsive savings facilities, can result in large-scale savings mobilisation. Indeed, voluntary, open-access savings schemes can generate more net savings per client per year, (thus greater capital for the MFI) than can compulsory, locked-in savings schemes, while providing a useful and well-used facility for clients (Wright et al. (1997)). Introducing a secure, liquid, convenient savings facility that offers a positive rate of return can result in startling increases in client base and capital mobilisation for the MFI.
For example, Bank Rakyat Indonesia (BRI) has mobilised over U.S.$ 2.7 billion in voluntary savings through 16.1 million savings accounts and provides services to 30% of Indonesia's households. Furthermore, BRI does attract the poor: a 1993 BRI study found that over 30% of BRI clients had a monthly income of $78 or less. At any time there are five savers for every borrower, and their savings provide the capital for all of BRI's loans. To achieve this extraordinarily level of market penetration and capitalisation, BRI offers three savings facilities: (i) the Liquid, which permits unlimited number of withdrawals, (ii) the Semi-liquid, with a restricted number of withdrawals per month, and (iii) the Fixed Deposit. These products were developed based on research on savings motives and preferences of rural people that demonstrated that, as with traditional banking, savings facilities should allow clients to balance liquidity and returns.
BRI's experience is now being shared throughout the world as MFIs move increasingly toward becoming full-fledged financial intermediary organisations and formal sector banks seek to deepen their services and include poorer sections of the community. Examples from Asia include ASA, BAAC, BURO-Tangail and SANASA; from Latin America, BancoSol and PAHNAL; and, from Africa, ADAF/Village Bank Network, CERUDEB, CPEC, CVECA-Pays Dogon, and FECECAM. These organisations have demonstrated that for every borrower there are many savers, many of them extremely poor. "It is scale, not exclusive focus, that determines whether significant outreach to the poor is achieved" (Christen et al. (1996)).
F. Organisational Culture and Systems
The move from a credit-driven to a savings-led system is complex and challenging - it requires a fundamental change in organisational culture and systems. "Voluntary savings contrast sharply with compulsory savings required as a condition for credit; these reflect two different underlying philosophies. The latter assumes that clients must be taught financial discipline and "the savings habit". The former assumes that most of the working poor already save, and that what is required for effective savings mobilisation is for the institution to learn how to provide instruments and services that are appropriate for "local demand" (Robinson (1995)). In addition, managing a financial intermediary organisation is considerably more complex than managing an organisation focused on delivering and recovering credit. Liquidity must be managed, risk and costs must be balanced, and the complex information systems necessary to do so must be maintained. Therefore, staff training, attitudes and practices, book-keeping, monitoring systems, and many other aspects of the organisation must also change - a transformation that is not easy to effect.
G. Product Development
Hulme and Mosley (1997) note that "the need for the designers of financial services for poor people to recognise that 'the poor' are not a homogeneous group with broadly similar needs...recognising the heterogeneity of the poor clearly complicates matters for scheme designers". But it is clearly extremely important. Thus, there is a pressing need to examine the best ways of designing and introducing new financial service products into MFIs. The methods used to develop these products broadly follow four key phases:
1. Research to identify needs and opportunities
2. Design and pilot testing
3. Monitoring and evaluation of the pilot test
4. Revision and scaled-up implementation
However, the process of financial service development, from research to identifying demand for new products through to the organisational adjustments necessary to implement them, is extremely complex. It remains a process with which few MFIs have experience and with which still fewer have expertise.
I. Description of MicroSave - Africa
UNDP Africa is committed to a long-term involvement in the promotion of secure, cost-effective, client responsive savings facilities for the poor - through the deepening of formal sector outreach and the broadening of MFI activities and outreach. To this end, and with the technical support of SUM, UNDP Africa is MicroSave as part of the recently approved regional project "Strengthening the Capacity of Microfinance Institutions and the MicroStart Pilot Programme in Africa". In order to place appropriate emphasis on the development of poor-responsive savings products, the ARSMI will research ways of deepening the outreach of savings services and their impact on the ability of the poor to manage their household budgets, particularly through Postal Savings Banks (PSBs).
MicroSave will analyse legal, operational and institutional aspects of PSBs, and formulate recommendations for donors, policy-makers, regulators and MFI practitioners to facilitate and optimise savings mobilisation. In addition, UNDP Country Offices will identify opportunities to support the micro-savings initiative to be incorporated into the project and receive support through technical review and advice offered by MicroSave. Finally, the Initiative will provide training and technical assistance to selected MFIs and formal sector banks seeking to introduce poor-responsive savings facilities.
In order to increase the impact of its work and play a central role in promoting secure and properly regulated, supervised, and flexible savings systems for the poor, SUM will develop a series of strategic partnerships with other donor agencies. These include DfID (who will co-fund the MicroSave Africa), GTZ (through the Working Group on Microsavings in Uganda), USAID (through collaboration with the PRESTO project's Centre for Microfinance in Uganda) and DfID-CGAP (through the AFCAP initiative).
Proposed Activities of MicroSave - Africa
To lead the MicroSave, SUM/UNDP Africa will field a microfinance team in Africa, comprising a Senior Regional Microfinance Advisor (to be co-financed by DfID) and an African counterpart based in the Centre for Microfinance, Kampala, Uganda. Together, these two experts will undertake the following:
(i) Research MicroSave will work with GTZ to initiate a comparative study on key issues in micro-savings in Africa, conduct a comparative analysis of the Postal Savings Bank systems in Africa (with IPC and the German Savings Foundation), and initiate other complementary studies as required.
(ii) Dissemination of Best Practices MicroSave will participate in and support regional and international initiatives to assimilate and disseminate best practices. These include continuing participation on the CGAP Savings Mobilisation Working Group, the DfID-CGAP AFCAP initiative, the Working Group on Microsavings in Uganda and others.
(iii) Technical Advisory Input MicroSave will provide technical assistance with appraisal, design and monitoring of UNDP MFI projects in Uganda, and advice on savings-related proposals made by UNDP Country Offices throughout the region in support of the "Strengthening the Capacity of Microfinance Institutions and the MicroStart Pilot Programme in Africa".
(iv) Institutional Development, Training and Technical Assistance MicroSave will work with DfID and USAID to conduct a series of seminars and on-site practical training and technical assistance to promote and facilitate the development and introduction of poor-responsive savings facilities in MFIs and formal sector banks.
V. Expected Results
Through the MicroSave, and close collaborative partnerships with other donor agencies, SUM and UNDP Africa expects the following results:
(i) A clear, well-documented understanding of key issues in micro-savings in Africa, and lessons to be learned from the experience of the postal savings bank systems;
(ii) A clear understanding of best practices and an active programme to document, disseminate and promote these practices among supervisory, regulatory and practitioner institutions, thus influencing and improving their policies and practices;
(iii) Coordinated and improved savings components in microfinance programmes implemented by SUM and UNDP Africa;
(iv) A series of training workshops and seminars on savings mobilisation covering: regulation and supervision, product development and the institutional and operational issues arising from introducing savings mobilisation into MFIs. These workshops and seminars will be followed-up with practical on-site technical assistance and training in selected MFIs and;
(v) A number of strategic partnerships, with donors as well as technical institutions, on the theme of savings mobilization. The partnerships will enable SUM and UNDP Africa to access technical expertise and improve coordination among donors on ways and means to disseminate best practices and support the development of effective savings mobilization strategies.
References
1. Chaves R. and C. Gonzalez-Vega, "Principles of Regulation and Prudential Supervision and Their Relevance for Microenterprise Finance Organizations", in Otero, Maria, and Elizabeth Rhyne, The New World of Microenterprise Finance, Kumarian Press, West Hartford, 1994, and Intermediate Technology Publications, London (1994).
2. Christen, Robert Peck, Elisabeth Rhyne, Robert C. Vogel and Cressida McKean, "Maximizing the Outreach of Microenterprise Finance - An Analysis of Successful MicroFinance Programs", Centre for Development Information and Evaluation, USAID Program and Operations Assessment Report No. 10, Washington (1996).
3. CGAP Working Group on Savings Mobilization, "Savings Mobilization Strategies - Lessons From Four Experiences", CGAP Working Group, Eschborn (1998).
4. Miracle, Marvin P., Diane S. Miracle and Laurie Cohen, "Informal Savings Mobilization in Africa", Economic Development and Cultural Change, 28 (1980).
5. Montgomery, Richard, "Disciplining or Protecting the Poor ? Avoiding the Social Costs of Peer Pressure in Solidarity Group Micro-Credit Schemes", Working Paper for the Conference on Finance Against Poverty, Reading University (March 1995).
6. Robinson, Marguerite S., "Introducing Savings Mobilization in Microfinance Programs: When and How ?", Microfinance Network, Cavite, Philippines, and HIID, USA (November 1995).
7. Rutherford, Stuart, "A Critical Typology of Financial Services for the Poor", ActionAid Working Paper #1, London (1996).
8. Rutherford, Stuart, "The Savings of the Poor: Improving Financial Services in Bangladesh", Journal of International Development, London (1998).
9. Vogel, R.C., "Savings Mobilization: The Forgotten Half of Rural Finance", in Undermining Rural Development with Cheap Credit, edited by D.W. Adams, D. Graham and J.D. Von Pischke, Westview Press, Boulder (1984).
10. Wright, Graham, Mosharrof Hossain and Stuart Rutherford, "Savings: Flexible Financial Services for the Poor (and not just the Implementing Organisation)", prepared for the International Workshop on Poverty and Finance in Bangladesh: Reviewing Two Decades of Experience, Dhaka, 1996, and published in Who Needs Credit? Poverty and Finance in Bangladesh, University Press Ltd., Dhaka (1997) and Zed Books Ltd., UK (1997).
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