Does Offering Microsavings Make Sense for Microfinance Institutions?

Abstract

Within the past decade, two trends have emerged in the global microfinance industry. First, there has been a recent emphasis on financial sustainability. At the same time, microfinance institutions (MFIs) have begun to offer microsavings deposit services to their clients. Could there be a link between these two trends? As MFIs offer savings deposits, do they achieve greater financial sustainability? David Hulme (2008) asserts that Grameen Bank became more financially sustainable after it changed its business model to include microsavings. However, Hulme observes that Grameen Bank also moved away from its poorest clients when it made the shift to savings. This paper explores, as MFIs have switched to offering savings, whether or not MFIs have achieved greater financial sustainability and whether or not they have moved away from their poorest clients. The data examined were collected from the financial statements of Opportunity International MFIs. The results indicate that Opportunity International MFIs that offer microsavings are more financially sustainable than those that do not. Moreover, there is no significant evidence that, by offering microsavings, Opportunity International MFIs have abandoned their poorest clients. Opportunity International MFIs could provide a model of how microfinance institutions can improve their financial sustainability without compromising their core mission to serve the poor.

Revenue diversification and financial sustainability of microfinance institutions

“…Doan et al (2018) considered 83 countries' data over2003-2012, assessed the relationship between income diversification and bank efficiency and found that increased income diversification improved bank efficiency. Similar findings were reported byAlhassan (2015), based on a sample of 26 Ghanaian banks and data for the period2003-2011, and Nguyen and Pham (2020.They looked at Vietnamese commercial banks over the period 2005-2017. Empirical studies have also shown a positive association between RD and bank performance.…”

“…Again, RD has been linked to cross-subsidization and crossselling, which improves the lending business and eventually improves profitability (Cosci et al, 2009;Abedifar et al, 2018). In the context of MFI, Bergsma (2011) found that MFIs that offer microsavings are more financially sustainable than those that do not. Additionally, the author found no significant evidence suggesting that MFIs abandoned their most impoverished clients by providing microsavings.…”

Microfinance and financial inclusion: Challenges and opportunities

“…There will always be a few smart operators on both the supply side and the demand side, but in general, microcredit works well. It works especially well for the institution if it can be accumulated with other financial services such as microsavings, microinsurance, and micropayments (Bergsma, 2011; Chikalipah, 2018; Davis, 2012; Delgado, Parmeter, Hartarska, & Mersland, 2015; Tavanti, 2013). It works well for the client if, in addition to microfinance services, he can also be provided with human capital and social capital in the form of livelihood training and access to markets, respectively (Bradley, Mcmullen, Artz, & Simiyu, 2012; Lam, Zhang, Ang, & Jacob, 2020; Rajasekhar, Manjula, & Suchitra, 2017).…”

Can microsavings work without microcredit? A case study of India Post Payments Bank

“…A study in Sub Saharan Africa found that there is a significantly negative relation between the profitability of MFIs and its offering savings products (Chikalipah, 2018). On the other hand, a study of Opportunity International's MFIs showed that those offering savings products are more financially sustainable than those that do not since credit risk is partially mitigated (Bergsma, 2011). Perhaps, both are right because it is found that the median MFI has economies of scope (by providing both microcredit and microsavings) but at least a quarter of MFIs have diseconomies of scope, often those in less densely populated areas, indicating that not all MFIs should offer both credit and savings (Delgado, Parmeter, Hartarska, & Mersland, 2015).…”