Savings

Relevant Work We Have Done

Demand-side analysis of financial instrument usage (2008)
(Africa)

Analyzed detailed household surveys of financial instrument usage from seven African countries (Finscope) and a micro-level household panel from South Africa (Financial Diaries) to prepare a report informing Foundation’s strategy to dramatically increase access to savings for the poor. The analysis, which included econometric tests and other detailed interrogation of datasets, suggested methods for segmenting the market for savings among the poor, as a basis for multi-phased rollouts of large-scale, savings instrument offerings in developing countries.

Fund manager for action research project (2010-->)
(Global)

BFA is managing and implementing this 'action research' project in order to support 5 banks promote 'gateway' financial products (i.e., products that catalyze deeper financial inclusion - savings in particular - either leading to additional distinct products or more intensive use of a single product).

Research and report on low-income commercial savings product (2009)
(South Africa)

Led a team in the comprehensive review of the supply- and demand-side experience with the “Mzansi” bank account initiative. Mzansi is a unique initiative in that it was a collaboration between the country’s “Big four” private banks and the state-owned Postbank, which led to the opening of six million accounts in four years (2004-08), mostly by those who were previously unbanked. BFA gathered and analyzed new primary supply-side data, under confidentiality arrangements with all five banks, as well as new qualitative and quantitative demand-side data from in-depth customer interviews and detailed surveys. Comprehensive report was timely launched so that it could contribute to the debate around the future of the Financial Sector Charter and basic financial access initiatives in South Africa.

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The Problem:

Currently, we see imbalance and inefficiency in the marketplace for savings products for the poor in developing countries.

On the demand-side, there is a widespread desire among the poor for savings products; i.e., services that enable them to conveniently and safely store their money, until accessed (for whatever reason) in the future (whenever that might be). However, because services are largely unaffordable or unavailable, this widespread desire for savings has not translated into effective demand for savings in the financial services marketplace.

On the supply-side, to date, there are two primary “problems” confronting suppliers of savings products, when it comes to seeking to meet the high (as yet ineffective) demand for savings among the poor:

First, the cost of delivering convenient and safe savings mechanisms for the poor can be relatively high, and there is no clearly established business model for affordably sustaining such an offering at scale. While relatively high interest rates arguably help “solve” this high cost “problem” in the microcredit context (and, similarly, relatively high premiums do so in the microinsurance context), no comparable “solution” has yet emerged for savings.
Second, the regulatory environment is often quite restrictive when it comes to savings (i.e., who can accept and hold deposits; and what can be done with deposits once accepted). Other things being equal, the more stringent the regulation, the higher the cost of compliance; and – in turn – the higher the cost of access to (i.e., price of) such services. In other words, stringent regulation can translate into a de facto barrier for the poor to access formal savings products.

The Solution:

Given this status quo, BFA’s efforts in three areas tend to support development of this frontier issue:

Demand-side research and analysis of the financial management practices of the poor, such as analyzing the current and potential role for various forms of savings in the “portfolios of the poor”, gathered through collecting Financial Diaries.
Research, analysis and strategic advice around optimizing business models for supplying savings products to the poor, especially focused on leveraging, on the one hand, new technologies and innovations in service delivery channels (e.g., branchless banking and, on the other hand, so-called ‘gateway opportunities’.
Research, analysis and policy advice around optimizing financial legislation and regulation so that policies geared primarily to minimize systemic risk and institutional failure do not unnecessarily disable innovations that could otherwise substantially enhance financial inclusion.

We believe that savings is desirable on several levels:

From the perspective of the saver, saving one’s own money can be a relatively conservative and inexpensive (compared to credit or even insurance) means of smoothing consumption, building assets, addressing emergencies or having funds for opportunistic investing.
From the deposit-taking institution’s perspective, mobilizing savings (i.e., accepting deposits) can be a relatively stable and inexpensive source of funding; as well as a means to start a basic customer relationship that can later lead to additional cross-sell opportunities.
From a macro-economic perspective, domestic savings (to the extent they are ultimately intermediated into productive capital investments) are seen as an important fuel for economic growth.

To be sure, there are potential undesirable aspects of savings, namely:

Savings, by definition, means foregoing immediate consumption, which can be a serious concern among the poorest. However, we feel the poor are best positioned to judge the consumption tradeoff for themselves and we want to contribute to offering them the practical choice to access affordable, convenient, safe savings.
Where inflation outpaces any interest paid, the potential for negative real returns is present. Consumer education (such as targeted financial literacy) can help, as well as possible product design to perhaps counter inflation.

Accordingly, pressing sub-issues within this frontier issue include:

Effective marketing and product design, so that savings products are not merely initially adopted by the poor, but regularly and meaningfully used by them.
Business models for microsavings at scale (making low-value, high-volume sustainable)
Regulatory issues around who is allowed to legally accept savings (either as principal or agent)
Establishing a common taxonomy for “savings” so that discussion on the issue can be better understood, including defining exactly what is meant by or qualifies as “savings”.