63624 BRIEF Is There a Business Case for Small Savers? For most of its history, microfinance has focused on credit. Savings, which are very important in helping poor people start a business, mitigate risks, and maintain at least a minimum level of consumption, has traditionally played a secondary role. In recent years, microfinance institutions (MFIs) have increasingly recognized the importance of savings and introduced savings products. Now, faced with growing competition, many MFIs are rethinking whether they can continue to provide the level of cross-subsidies they believe is required to serve the low end of the savings market, namely, the small savers. With experience and data increasingly confirming generate large profits—just over 400 percent of the that offering small savings accounts brings large small-saver deposit balances in Centenary and just numbers of savers to MFI branches, costs a great over 1,000 percent in ADOPEM. Expressing this deal, and provides very little funding to the MFI, it same result in a different way, without small savers, is crucial to examine the true cost and profitability these two very profitable MFIs would lose about 30 of small savers. In Westley and Martin (2010), we percent of their total profits. We conclude, therefore, analyze quantitatively whether or not small savers— that based on this profitability analysis, there is a defined as the half of all savings clients of an MFI compelling business case for serving small savers in with the smallest deposit balances—contribute to or both Centenary and ADOPEM. Although we have undermine the sustainability of the MFI. calculated small-saver profits in only two MFIs, these MFIs have been carefully selected and suggest a In case studies of two MFIs, ADOPEM in the number of important channels through which small Dominican Republic and Centenary Bank in Uganda, savers may be a profitable, or even highly profitable, we confirm that the savings accounts of small savers client segment. are a very high-cost product for MFIs to offer, with annual operating costs on a marginal cost basis of To generalize from these two MFIs to others, it is 59–241 percent of the deposit balances of the small useful to examine what makes small savers profitable savers in the study year of 2008. We obtain these high in the two case studies. To this end, we have identified cost levels despite counting only marginal costs— five sources of small-saver profits in ADOPEM and that is, the costs that would actually be saved by Centenary: eliminating small savers—as is appropriate (but often • Loans. Loans are an important source of small-saver not recognized as such). This means, for instance, profits in both MFIs, generating 91 percent of total that no fixed costs are counted because they must small-saver profits in ADOPEM and 51 percent in be paid whether or not small savers are present. Centenary. These large profits are the result, in Fixed costs generally include, for example, much or both MFIs, of the facts that (i) lending in general all of the board of directors, management, and staff (to all borrowers, not just small savers) is profitable of central service departments (such as accounting, and (ii) small savers are not small borrowers, as administration, audit, finance, legal, marketing, and personnel), as well as nonpersonnel costs associated indicated by the fact that the average loan balance with these personnel (e.g., rent for the space they of small savers who borrowed was 61 percent occupy and the costs of the equipment, electricity, and 74 percent of the average loan balance of all fuel, paper, and other things they use). borrowers in Centenary and ADOPEM, respectively. • Other cross-sold products (besides loans and Although small savings accounts are found to have savings accounts). In ADOPEM, the remaining 9 high operating costs, these costs are more than percent of total small-saver profits is generated overcome by the profits generated through cross- from the sales of three life insurance products. In sales of loans and other products to small savers Centenary, 16 percent of total small-saver profits and by the fee income derived from the savings are derived from the sales of four essentially money January 2011 accounts themselves. On balance, then, small savers transfer products. January 2011 All CGAP publications • Technology. Automated teller machines (ATMs) To these five pathways to small-saver profitability are available on the CGAP Web site at help MFIs attract and retain clients and increase observed in ADOPEM and Centenary, we can www.cgap.org. small saver savings, borrowing, and purchases of add a sixth: the evolution of small savers to future other products. Centenary makes substantial use profitability. Even if small-saver loans and savings CGAP of ATMs; for example, in 2008, 51 percent of small accounts are too small today to make small savers 1818 H Street, NW MSN P3-300 saver deposit and withdrawal transactions were profitable, both may increase in size over time by Washington, DC made with ATMs. As a result of all these points, enough to make small savers profitable in future 20433 USA ATMs boosted Centenary’s overall small-saver years. As a result, small savers may be worth serving profits by 37 percent. today even on a strictly business basis so that the Tel: 202-473-9594 MFI can reap the rewards of serving them in future Fax: 202-522-3744 • Higher loan rates for smaller and otherwise years. Employing data from ADOPEM, we find that costlier-to-make types of loans. If the loans taken Email: the average size of small-saver savings accounts and cgap@worldbank.org out by small savers are smaller than average or loans has been growing very rapidly in recent years, costlier per dollar lent for other reasons, the MFI a total of 105 percent and 83 percent, respectively, © CGAP, 2011 may be able to cover all its loan costs and even over the two-year period from the end of 2006 to make this lending and small savers profitable by the end of 2008. charging higher interest rates and/or fees for these loans. Because of both factors (smaller Given all of these possible pathways to profitability— and otherwise costlier-to-make loans), Centenary and taking into account the fact that the revenue charged small savers 5.8 percentage points more derived from loans, other cross-sold products, and for loans than it charged borrowers overall (34.2 savings accounts need cover only marginal costs percent versus 28.4 percent). Without these 5.8 for these products to be considered profitable— percentage points, almost exactly 100 percent our educated guess is that many MFIs are already of the profits from lending to small savers would profitably serving small savers and many more could have been lost. do so. • Savings account fees. If the cost of serving small savers is excessive even when the preceding four Reference sources of profit are taken into account, the MFI always has the option to charge for the service Westley, Glenn D., and Xavier Martín Palomas. provided. This is analogous to MFIs that want to 2010. “Is There a Business Case for Small Savers?” be sustainable raising their lending rates, overall Occasional Paper 18. Washington, D.C.: CGAP. or for particularly costly subsets of borrowers. Centenary’s savings account fees generate 33 percent of its total small-saver profits. AUTHORS: Glenn D. Westley and Xavier Martín Palomas