Five Lessons for Building Savings in Latin American Microfinance

> Posted by Ana Ruth Medina, Lead Specialist, Accion

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It is not a secret that, in Latin America, we are behind in terms of savings culture. Too few microfinance institutions offer savings. Among the savings accounts that do exist, dormancy is widespread. Compared to other regions, the average deposit in Latin America is quite large¹, illustrating that the institutions that do offer savings aren’t necessarily serving the underserved client segment. For the last four years, Accion partnered with financial institutions in Latin America, in a project funded by the Bill & Melinda Gates Foundation, in order to mobilize savings at the base of the pyramid (BoP). The objective of this project, beyond impacting the lives of thousands of clients, of course, was to strengthen the institutional capacity within Accion’s partner organizations to expand beyond their focus on lending. How successful were we?

Some overarching results of the project included: four new savings products (one received the 2013 Accenture Prize for Innovation); implementation of institution-wide communication, education and brand models; and creation of distribution channels for deposits (including ATM’s, non-banking correspondents, and branches specialized in savings). Best of all: enrollment of more than 700,000 new and active savings clients.

Recently Accion hosted the closing event of the project in Cartagena, Colombia to share main challenges and lessons learned, and to open a discussion with practitioners on how to build savings capacity within the industry. These are the top five lessons.

1. Microfinance institutions perceive savings as a long-term objective which comes after they have reached financial stability and a significant client base. Savings is often postponed in favor of giving priority to short-term financial objectives that provide faster return and greater stability. Microfinance institutions consider offering savings services primarily as an “add-on” means to improve their funding structure rather than as a service for clients. To encourage MFI managers to embrace savings, the following strategies were helpful: reinforcing awareness within the institution regarding the benefits of savings for clients and for the institution; having clear institutional objectives for savings services aligned with market needs and business opportunities; and employing improved commercial strategies (product development, branding, promotion, client education, etc.) for savings initiatives, which differ from those used to sell credit products.

2. Institutions have a widespread belief that offering savings alone is not profitable. Many institutions need clarity on all the variables involved in microfinance’s profitability model – for example, cross-selling, client loyalty, a decrease in funding cost, and the effect of alternative transaction channels, among others. The business case for savings should be approached cohesively, understanding that is an investment that helps maintain clients and diminish risks.

3. Institutions must make organization-wide adjustments if they are to mobilize savings successfully. In our work, we have found that MFIs’ staff and customer incentives schemes often take into account credit but not savings; training within the organization for offering savings is scarce; monitoring and measurement processes often overlook savings; and structurally there are usually organizational areas exclusive for credit but not for savings. On the service side, institutions tend to have limited efforts in terms of promotion, savings branding, learning about the client, client education, and product development.

4. Technology is indeed helpful, but its use needs to be framed by the institution’s unique business reality. It isn’t enough to simply implement technology that might be trending. IT projects shouldn’t set the path of the business, but the other way around. Client needs should be studied before, during, and after IT implementations, and IT investments should have this knowledge in mind. Among other considerations, technology should address client proximity and trust and be tailored to the institution’s channels and market, and inactivity and adoption should be an ongoing effort.

5. In the region, basic savings accounts through branchless banking (and the underpinning regulation) have paved the way to improved savings offerings for the BoP. During the last three years the countries in Latin America have been flooded with e-wallet solutions that leverage IT solutions and legal environments. However, problems facing these services persist, such as high numbers of inactive users, limited service portfolios, and insufficient funding sources. The main challenges we encounter with mobile money are effective roll-out, scalability, and interoperability.

We hope the accomplishments over the past few years will persist among our partner organizations, and that others too will benefit from our learning and expand their capacity to offer savings. Perhaps the biggest takeaway from the project is that there are big opportunities to help change the lives of customers through savings and generate strong business options for financial institutions.

Have you read?

New Research on Barriers to Basic Savings Accounts Is a Cautionary Tale for India’s Financial Inclusion Push

Refocusing On the Use of Formal Savings Services

BRAC Microfinance Director Shameran Abed on Client Protection, Balancing Credit and Savings, and the Evolving Financial Inclusion Landscape

[1] MIX Market: Latin America 1100 USD, Southern Asia 50 USD, Middle East & North Africa 370 USD, Europe & Central Asia 800 USD, East Asia & Pacific 180 USD, Sub-Saharan Africa 200 USD.