MICROFINANCE MATTERS - Reinventing Postal Savings Institutions in Africa

By Hugues Kamewe, Adviser Financial Sector Development, World Savings Banks Institute

In 1861 the first postal savings bank was established in Great Britain. The success of this experience in popularising savings values among less affluent groups encouraged replication of the model in many other European countries (e.g., France and Netherlands 1881, Austria 1883), Japan (1875) and the United States (1910).

In Africa, postal savings institutions are the legacy of pre-independence times (e.g., Ghana 1886, Nigeria 1888, Kenya 1910 and Senegal 1922), and in most countries, they even pre-dated commercial banks in laying the groundwork for a modern financial system. Even today, the postal retail network represents a unique infrastructure: the number of post offices usually matches or exceeds the total number of branches of mainstream banks.

The rationale of this model has been to use the convenience of post office outlets to minimise the cost of mobilising small savings and to maximise outreach. In addition, the main attraction for postal savings banks has been safety, since they usually enjoy a state-guarantee on their liabilities, which is sometimes combined with tax-exemption on interest rates paid to depositors.

Going Beyond Passive Small Savings Collection

The performance of postal savings institutions in mobilising resources varies from modest to impressive across African countries. Reliable evidence suggests that postal savings banks have been successful in countries where the operators combine efficient management of the resources collected with a dynamic commercial policy. To this extent, the traditional model of postal savings institutions established as departments within postal systems and operating as treasury units responsible for the passive collection of deposits to support the government budget no longer seems sustainable.

The process of reinventing African postal savings institutions started in the early 1908s (e.g., Kenya, Togo), but the pace accelerated in the 1990s, driven by financial sector reforms in the framework of IMF and World Bank country economic programmes. The general trend is towards granting postal savings institutions a higher degree of operational freedom in carrying out their activities. Gradually, the range of financial services offered by postal savings institutions has been extended to include payment facilities, insurance and even credit facilities (although very few). Some have introduced microcredit operations or are seriously considering this business option.

The Variety of Financial Services Available to Postal Savings Institutions' Clients

Postal savings institutions have a longstanding record of social responsibility and with the growing recognition of the undisputable role of microfinance as a tool for poverty reduction, this concept is seeing a new momentum in postal savings institutions' agendas. In fact, many of these institutions believe that microfinance fits naturally into their institutional mission. Says Robert Annibale, Global Director, Citigroup Microfinance Group: "For decades postal savings banks have often had the most extensive national networks providing access to basic financial services in rural and urban areas. Today these institutions are investing in innovative technology and they are forging strategic partnerships with banks and financial institutions to expand the range of products and services offered to thier customers. Postal savings banks frequently reach more customers, especially small savers, than the banking sector and they are well positioned to be the leading provider of microfinance products in a number of countries."

As they are often restricted from lending and therefore offering microcredit, postal savings institutions' microfinance activities are usually overlooked, despite their significant role in providing financial services to the underprivileged. Two decades after R. Vogel talked of savings as the "forgotten half" of rural finance, there is no longer any doubt that beyond credit services, the continuum of financial services desired by microfinance clientele includes a high demand for other financial products such as savings, money transfers, payment and insurance services.

In view of what we have just written, it is obvious that postal savings institutions are relevant microfinance providers in Africa. In some countries, the number of postal savings accounts overtakes all deposit accounts with mainstream banks. For instance (see table 1), in Benin, the postal savings bank managed roughly 360,000 savings accounts compared to only 162,000 deposit accounts with conventional banks. Another prominent example is that of Kenya, which enjoys a pretty diversified and advanced banking system in Sub-Saharan Africa, but where the number of postal savings accounts (1.837 million) almost matches the total number of banks' deposit accounts (1.97 million in 2003). Postal savings institutions have a vital role to play in the economic and social infrastructure of African countries where the majority of the active population does not have access to mainstream banks.

Table 1: Provision of deposit services

A key feature of postal savings accounts is the predominance of low balance accounts (see table 2). These accounts have small values but generate high transaction volumes. By illustration, for approximately three quarters of postal savings accounts in Kenya (1999) and Tanzania (2003) the deposit balance was below USD15. But these accounts represented only 6% and 5% of the total deposit value respectively.

Table 2: Structure of postal savings accounts

Postal savings bank	Accounts with balance below USD 15 (%)
Postal savings bank	Number	Value
Benin (2001)	62%	-
Burkina Faso (2001)	36%	-
Kenya (1999)	74%	6%
Tanzania (2003)	75%	5%

Source: WSBI members

Over recent years, some postal savings institutions have expanded their offer of financial services. Taking advantage of their large retail networks, many have entered into partnership with international money transfer service providers to channel migrant remittances to local communities and more effectively to rural areas. More interesting however, is the growing awareness by postal savings institutions about the potential of domestic and cross-border money transfers markets and the attempts to capture these opportunities. In the West African Economic and Monetary Union (WAEMU), postal savings institutions are aggressively tackling this market using an internet-based money transfer system "Money Express" to allow very small transactions at very competitive rates[1]. In East Africa, prospects by postal savings institutions to introduce a competitive system for domestic and cross-border money transfer services are also promising.

Significant progress has been noticed with regard to payment services. Often blamed for the queues at post office counters, some postal savings institutions have introduced smart cards to provide their clients with convenient transaction services (deposit and withdrawal operations) as well as other payments. This is the case with the "Warry Carte" and "Flexi Card" introduced by postal savings institutions in Côte d'Ivoire and South Africa respectively. It is also worth pointing out that some postal savings institutions have either invested (e.g., Zimbabwe) or are planning to acquire (e.g., Kenya and Tanzania) Automatic Teller Machines (ATMs).

Micro-insurance schemes have been introduced or are in the pipeline in a few countries. Although successful experiments remain limited, the "Thuso Plan", commercialised by the Postbank in South Africa in partnership with an insurance company, could be considered as a good example.[2] Thuso (which means "help") is a multi-package life insurance plan, which also provides funeral coverage at very affordable premiums.[3]

Table 3: Products and services offered by selected African postal savings institutions

Prospects in Microcredit and Rural Finance

Postal savings institutions enjoy a variety of institutional structures across Africa (department/profit centre of/within the postal enterprise, statutory body, agent of a bank/national savings bank, parastatal, licensed financial institution or bank). However, in general, they are either owned by governments directly or indirectly through the postal enterprise and in most cases are not regulated by central banks. In fact, many postal savings institutions are governed by postal laws and as such operate outside the scope of bank and financial institutions Acts. Consequently, they are often restricted to expand their operations into risky activities (e.g,. lending, foreign exchange) and constrained in their investment policy to entrust their funds with national Treasuries or to hold public securities. Government ownership combined with the lack of prudential supervision has always raised anxiety that increased opportunities for political interference could undermine effective governance. These weaknesses support the opinion that postal savings institutions are ill suited for lending services, particularly microcredit.

Against this background, relevant evidence supports the view that when restructured successfully and having built up sufficient capacity, postal savings institutions could then engage in lending. While some financial experts still believe that narrow banking is the only feasible option in revamping postal savings institutions, an increasing number of these institutions have been successfully transformed into licensed financial institutions or banks (e.g., Algeria, Botswana, Cape Verde, Seychelles, Tanzania), thus allowing a broader scope of activities, including credit services.

There is no doubt that mobilising resources for the purpose of funding government deficits has become unsustainable for many postal savings institutions. Reinventing them may lead to increasing their role in retail banking and microfinance consistent with their social mandate and business strategy. But microcredit remains at a conceptual stage for several institutions and so far only the Tanzania Postal Bank (TPB) has really managed to run a microcredit programme under central bank supervision.

TPB applies a group lending methodology where male and female members are required to form separate groups. No tangible collateral is required but the members must fulfil compulsory savings requirements. The programme has been rolled out both in rural and urban areas targeting micro and small entrepreneurs in urban settings and rural people engaged in small-scale business activities. Loan size varies from USD 50 to 600 while repayment periods range from 6 to 12 months. TPB charges a flat interest rate of 2.5% per month and a small amount to cover administrative costs.

At end December 2002, the programme had successfully canvassed 676 groups representing 4,235 members of whom 80% were female clients. Total outstanding loans stood at USD 1.9 million for a total income of about USD 197,100 and the programme recorded a repayment rate of 98.5%. It is worth stressing that the expansion of the programme is constrained by the central bank's prudential requirements stating that as unsecured loans, the microcredit portfolio should neither exceed 25% of the bank's core capital nor 100% of conventional credit portfolio.

Evidence suggests that TPB has managed to overcome governance problems inherent to public ownership. Nevertheless, it must apply and maintain a high level of discipline to avoid any threat related to microcredit operations. Moreover, even if postal savings institutions are not suited for retail microlending, wholesale lending to promising microfinance institutions for on-lending to micro clients is an option to be explored in the framework of strategic partnerships. In addition, post offices could be used to offer cash handling services and money transfer services to microfinance institutions, particularly those based in rural areas.

Finally, in countries where strong rural finance institutions have been established to extend loans for rural activities, strategic partnerships could also be formed with the underlying objectives to bring together deposit and lending functions and to use the convenience of post offices to maximise service delivery points.

Conclusion

The potential role of viable postal savings institutions in facilitating mass scale access to financial services in Africa is strongly advocated by the WSBI (World Savings Banks Institute). Proposals have been issued on how to address governance issues affecting these institutions and to strengthen their operational efficiency. Indeed, the scope of financial sector policies should be extended to benefit postal savings institutions and efforts should be made to value the synergies with microfinance institutions.

As the global representative of the savings banks' community, the WSBI is active in information exchange, dissemination of best practices and policy dialogue with national and international decision makers. The WSBI would welcome further exchange, as it believes that more attention should be paid to the reform of postal savings institutions in the process of building inclusive financial sectors in Africa.

(1) Money Express is presently operated by (postal) savings banks in Benin, Côte d'Ivoire and Togo, with plans for expansion to Burkina Faso, Mali, Niger and Senegal.

(2) Postbank's partner is Safrican Insurance Company. Premium collections would be made in post offices either in cash or through customer's savings account.

(3) Life insurance cover is provided up to R100,000 (~USD15,000) and funeral cover up to R10,000 (~USD 1,500) per individual.