Are Deposits a Stable Source of Funding for Microfinance Institutions?
Poor people save. The conventional view is that low-income depositors transact more frequently than holders of larger accounts and are more prone to income disruptions from natural disasters, health issues, crime, and other factors. This perception makes ﬁnancial institutions stepping into the under-served low-incomespace worry about whether they can use small deposits to fund their lending operations. But new research ﬁnds that under normal circumstances, aggregate balances for low-income accounts move gradually, and they are not prone to abrupt month-by month swings. This should make liquidity management easier because it gives the institutions enough time to adjust to changes in deposit supply overseveral months.
Of course, financial institutions cannot take for granted that any of their deposits are stable, long-term sources of funds until they have carefully analyzed typical savings patterns in their portfolio of deposit products. This analysis informs their liquidity management and their funding strategy. Deposit-taking MFIs should use the same type of analysis on their deposit products,and refine their liquidity planning and funding operations accordingly.
Five financial institutions were studied: Allied Bank (Pakistan), VTB (Georgia), BPR Kebomas (Indonesia), Equity Bank (Kenya), and Banco Sol (Bolivia). They were chosen because they represented large markets of under-served poor people, and all but one (BPR Indonesia) maintained large deposit volumes fromlowincome savers. “Small balance” deposits were defined by analyzing account sizes by product and customer demographics, matched against the poverty line and per capita income in the country. Each institution’s deposit base was analyzed in terms of long-term trend, seasonal patterns, annualized daily volatility, and average life of demand deposits, as well as peculiar patterns, trend interruptions, andoutlier values. Banks usually track these and other indicators for the purpose of asset and liability management and reporting.
CGAP commissioned the Frankfurt School of Finance and Management to study the stability of small deposits as a source of funds in five institutions.1 The study examined the actual behavior of deposits raised from poor individuals, and asked thefollowing: 1. Are there recurring seasonal savings patterns? 2. How volatile or predictable are the aggregate balances of demand and term deposits? 3. How do external events (e.g., natural disasters, political turmoil, war) affect deposits?
1 The full report, The Stability of Small Balance Deposits, is available at www.cgap.org. In addition to data from a diverse group of five lowincome depositoperations, the paper provides analytical tools that will help even small MFIs to start modeling deposit supply.
Small Balance Demand Deposits Provide Relatively Stable Aggregate Balances
Table 1 summarizes the main findings, along with reference data from a bank in Germany. The estimated volatility figures from the large German bank are in line with what conventional wisdom wouldpredict for deposit behavior in a country with fully developed financial markets. Current accounts are the most volatile: they are primarily used for transaction reasons, so transactions are frequent. Savings deposits are the bedrock of funding, with very low volatility and low interest cost. Term deposits are more volatile than savings accounts because of their higher concentration, or“lumpiness,” as they come and go in relatively large amounts. Equity Bank and Allied Bank conformed to this expected pattern, but in VTB, BPR Kebomas, and BancoSol, ordinary savings accounts turned out to be more volatile than term deposits. This may have something to do with the fact that in the latter three institutions, aggregate term deposits are several times larger than the total balance supplied by...