Could I (as one of the minnows) interject on an earlier point made in this record-setting discussion?
For institutions (and not speaking of small groups here), it is absolutely the case that profits come from loans and not savings. But there's a related and important point here. We know banks focus on savings as a source of low-cost, reliable funding. The resulting extra gross margin is then sufficient to generate higher profits. The problem is that this argument breaks down for small accounts. There's just no way, regardless of technology deployed, to increase profits by operating small savings accounts with frequent transactions. To the extent there's a case for institutions to take on such small accounts, it's that the value comes through not from the savings account, but from the added customer relationship, which generates additional cross-selling revenue -- mainly through loans.
A CGAP paper some time ago essentially made this very point: Is There a Business Case for Small Savers? And I've used that approach to also demonstrate how youth savings accounts at Banco ADOPEM in Dominican Republic are likewise profitable -- but only after you factor in the cross-selling opportunities. On a broader scale, the point is evident across many MFIs that do small-scale lending, as I argued in a recent paper for FAI. In it, you can clearly see the pattern of some institutions targeting large-scale savings to raise low-cost, local-currency funds, while others focus on small-scale savings to strengthen relationships with their core clients. These are two separate models.
Ok, I admit, I'm using this as an opportunity to share some of my lesser-known work on savings (which you can find here), but I do want to make the broader point out that the institutional drivers behind small-scale savings are the lynchpin in understanding why MFIs and banks face this dilemma. The conclusion for me is that in order to promote small-scale savings at the institutional level, we need to provide incentives to the institutions that are something other than cross-selling more loans. Savings ought to be worth pursuing in their own right.
In earlier times, we've seen countries focus on saving as a source of national strength. Postal banks and the like didn't need to be profitable -- these were state institutions, and in their heyday (pre-WWII mostly), their outreach far exceeded that of commercial banks. Yet now we expect entirely private, commercial institutions to do the same, which I believe is unrealistic. Might there not be an argument for targeted subsidies -- perhaps via social impact bonds, for example -- to explicitly promote small savings? The recent findings that savings actually boost income suggest this is a worthy pursuit.
Daniel
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Posted by: danrozas@yahoo.com
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