A Reinterpretation of Mandatory Savings – with Conditions...
This paper discusses the Premium loan offered by PMP, a Peruvian MFI working for women's empowerment, and illustrates that mandatory savings can be a useful risk-management tool not only for MFIs, but also for clients.
The Premium loan targets PMP's long-term, successful clients, requires less frequent payments and offers a lower interest rate. The paper identifies several strengths and benefits of mandatory savings schemes like the Premium loan. These include:
- Forced nature of savings, where voluntary savings are impossible for most clients due to claims on their funds;
- Barely noticeable extra cost spread among loan payments;
- Better trust level as commercial financial institutions are perceived to demand high minimum balances;
- Greater flexibility, with the option of immediate or deferred withdrawals.
The paper states that most clients end up saving more than necessary, which is a major drawback. Since Premium loan follows the group lending methodology, the MFI may appropriate savings balances to compensate for group members unable to make payments. Finally, the success of mandatory savings schemes depends greatly on the solvency of the group.
