Microfinanciers plan formal saving system for the poor

The Bill and Melinda Gates Foundation has announced $38 million (Sh2.8 billion) in new grants designed to help some of the world’s leading microfinance institutions provide the poor with secure, affordable places to save their money.

One of the beneficiaries, the Kenya Women Finance Trust, is a microfinance institution specifically focusing on women’s access to capital for business.

The KWFT, together with two other institutions, will share Sh637 million ($8.5 million) that is part of the grant channelled through the Women’s World Banking.

The grants announced at the weekend  in Seattle, Washington, will help 18 microfinance institutions, which currently focus on micro-credit, expand their portfolios and make savings accounts available to an initial 11 million poor people across 12 countries in Africa, Asia, and Latin America over five years.

The grants will create new ways for the poor to make deposits and withdrawals, expand the availability of existing savings products, and fund savings-focused marketing campaigns.

The financial package will help KWFT, which until last year was a credit-only institution, conduct market research and product development to create services and products tailored to the poor.

“This signature package of grants represents our first bold effort with the micro-finance community to provide poor people safe places to save their money,” said Bob Christen, director of Financial Services for the Poor at the Bill & Melinda Gates Foundation.

“We see it as a major step to drive change and help broaden the microfinance business model to include savings.”

Microfinance has improved the lives of millions of poor people by offering small loans. Few of these institutions have offered savings accounts and more than 90 per cent the world’s poor still lack access to financial services and resort to risky, expensive, and inefficient ways to save.

In Kenya only 22 per cent of those eligible have access to banking services. Rural folks lack access to financial services, save for the mobile phone money transfer services that has lately connected the areas to money transfer firms.

Finance minister Uhuru Kenyatta, in an effort to deepen the penetration of financial services, said the Banking Act would be amended to allow commercial banks to give financial services through agents.
That arrangement would allow non-banking institutions to offer financial services to the unbanked — especially in rural areas where it remains commercially unviable for banks to run branches.

It would also allow banks to tap into the large networks of Saccos and micro-finance institutions to reach the millions of Kenyans without a bank account.

Early last year, KWFT became the first microfinance institution to be allowed by Central Bank to start accepting customer deposits under the Microfinance Act 2006.

Before the Act came into force in May, 2008, microfinance institutions operating in Kenya other than commercial banks had been prohibited by law from taking deposits from the general public.

These institutions have been funding their loan books largely from donor funds and loans from commercial institutions.

The Act now provides them with an opportunity to take deposits, to be regulated and to provide a wider range of financial products including savings and deposits, lending and money transfer.

With the latest grant, KWFT, which has 144 field offices countrywide, is likely to deepen its countryside presence with more branches.

Providing access to safe, affordable savings accounts has been a challenge because of the high costs for both banks and customers.

For banks, the costs of physical buildings, with dedicated bank tellers, are expensive, especially in remote areas or where there is a limited number of clients with small deposits. Poor clients often live far from banks so the cost to reach a branch may exceed the amount of their deposits.

“Despite conventional wisdom, poor people actually do save, even if it’s just pennies each day, but there have been very few accessible and safe options available to them until recently, when breakthroughs pioneered by the Grameen Bank have shown what is possible,” said Alex Counts, president of Grameen Foundation.

“Microfinance institutions, because of their established relationships in these communities and ability to bring the transaction to the client, are well-placed to provide safe access to formal savings accounts,” he added.

The grants announcement follows the foundation’s one-year review of proposals from leading microfinance networks worldwide. Applicants were evaluated on a range of criteria, including institutional ability to work in multiple countries, previous success in providing microcredit, and willingness to make savings a priority. Lessons from each project will be documented and shared with grantees and the microfinance community.

“The poor have surprisingly sophisticated financial lives and present a rapidly emerging business opportunity for banking in the developing world,” said Jonathan Morduch, professor at New York University and co-author of Portfolios of the Poor.

“Savings initiatives like these help strengthen and expand financial institutions, enabling them to overcome significant barriers and provide affordable savings accounts to the poor in a sustainable manner.”

To date, the foundation’s Financial Services for the Poor initiative, which is part of the Global Development Program, has committed $470 million to make financial services widely accessible to the poor and help break the cycle of poverty.

The initiative works with a wide range of public and private partners to harness technology and innovation to bring quality, affordable savings accounts and other financial services to the doorsteps of the poor in the developing world. The foundation believes that setting aside small sums in a safe place allows people to guard against risks, build assets, and provide opportunities for the next generation.