Savings in the Context of Microfinance - State of Knowledge

Provides a brief overview of the state-of-knowledge on savings in the context of microfinance.

Looks at microfinance institutions (MFIs) and explores:

• The main factors that determine depositor demand for savings facilities and savings capacity, with emphasis on transaction costs;
• Institutional requirements for deposit-taking and the effects resulting from it;
• Requirements for cost, liquidity and risk management and their consequences on the financial institution;
• The regulatory framework and the necessity of self-regulatory measures;
• Forced savings in contrast to voluntary savings;
• The socio-cultural dimensions of financial intermediation;
• Savings compared to other sources of financing;
• Time and sequencing of savings mobilisation.

Posits that MFIs offering only credit to microentrepreneurs face problems of inefficiency and instability. MFIs mobilising savings are also likely to have a better governance structure than credit-only MFIs because their leadership is not required to answer to a long chain of government officials, development practitioners and donors, but just answer directly to their clients, depositors and borrowers.

The paper concludes that:

• Poor people have a significant capacity to save;
• The volume of institutional savings mobilised in a given location is dependent on the availability of demand-driven savings services supplied by appropriate financial institutions. Thus the geographic and socio-cultural proximity of institutions to their clients is important;
• A much larger number of clients can be reached through savings operations than through credit operations.

Recommends that because savings mobilisation is crucial to provide the poor with financial services and that donors wish to support the development of viable and sustainable MFIs to supply the poor with such services, donors need to co-ordinate to offer these forms of assistance.

[Adapted from author's abstract]