NOTE 3: (CONTINUED)

NOTE 3: ON SAVINGS MOBILIZATION (Continued)

In the previous note we observed that in the poorer countries more savings were made and that the lower and medium income classes are the ones that save most. Now we are going to analyze the savings issue related to the Microfinance Institutions (MFIs). In this sense the source of information was the MFIs registered in MIXMARKET at worldwide level, these totalled 2.446. However, reporting their information to this organization is voluntary, so each MFI decides what information is going to report or if it is going to report any numbers besides their profile. To analyze the savings it was required the loan and savings portfolios as well as the number of debtors and savers for 2012, this reduced the MFIs numbers to 1.971; but, in any case, it is a representative sample. The different regions were included to compare the patterns of the MFIs in each of those. The regional grouping of the countries was that of MIXMARKET.

In the first table the comparison criteria used between ranks was the savings as a percentage of the loans, in such a way that if the MFIs did not have any savings the value was zero, if all the loan portfolios was finance with the savings the value was 100%, the ranks were divided in three categories: From 1% to 29%, the second rank from 30% to 49% and the third goes from 50% to 100%. The savings that exceeded the loan’s portfolio and its percentage being more than 100% were analyzed in the second table.

As it can be observed, in the highest savings participation in the loan portfolio (50% to 100%), the average savings represent 62,1% in all the category, being more important the Latin American and the Caribbean region with 69,7%. As it can be seeing, as a whole, the savings portfolio is funding something over more than half of the Microloans, considering that the MFIs in this category can receive legally deposits from the public, this percentage is still low, so it can be assumed that the effort to bring in savings is limited. It is important to mention that this rank represented only 20% of the countries registered in MIXMARKET.

In the second rank from 30% to 49%, savings funding the loans represented about half of the average percentage of the first rank (37,0%) and the region with more weight (40,0%) was Africa. This is the rank with more countries (32,9%), so it can be assumed that this is also the highest worldwide tendency observed.

In the third and lowest rank 1% to 29%, the savings only funded a fifth part of the loans of the observed in the first rank (14,0%) and still prevails the East Asia and the Pacific region (22,7%). However, due to the fact that the average falls due to one of the regions; if we recalculate the average without this region, the average steps up to 16,4%, reducing the comparison with the first rank to one quarter part. In this ranks there is a fall in the presence of countries (27,1%), staying yet the first rank as the lowest of all the country’s rank.

In the last rank with the MFIs that do not mobilize savings the 20% was surprisingly low, which confirms the lack of interest of the MFIs to mobilize savings, as 80% of these can receive deposits.

My perception over the limited participation of MFIs in savings as a source of funding can be due to several reasons: (1) The historical roots of the MFIs were ONGs which their sources of funding were limited to equity, donations and soft loans from third parties, as these evolved towards Microfinance from the 90s on; in part due to legal changes, in part because of the cooperative equity that at that time was not regulated by the banking supervisor and in part because many ONGs became converted to banks, the possibility to mobilize savings was opened to these institutions, but their culture continue basically to fund with loans; (2) The lack of experience in the savings mobilization and promotion; (3) The easiness of access to the traditional sources of funds of the MFIs trough equity donations and soft loans kept being the central focus of their managers and directors, in what they knew well, but the 2008 crisis closed many of these sources and afterwards step up the cost of the money; (4) Being the Microloans products of demand; that is, that the potential clients ask for them without the need to offer them, the MFIs had no experience in marketing and selling to attend the requirements needed to promote savings and (5) In the trajectory of the MFIs, the aspect and the physical presence was not important, so the Image of the premises was poor to attract clients that only wanted to deposit their money in a safe place and also the branches were located near their local Microlending market and far away from the market of those who only want to deposit their money in a solid and trustworthy place. The evidence of this perception can be observed when many successful Microloan clients keep their savings in commercial banks when they reach the minimum required amount demanded by these institutions.

 

The second table shows an aspect apparently contradictive as keeping much savings, even exceeding the loan portfolio, in an MFI is ideal to strengthen the institution. However, it is not the case, because interests must be paid (Usually higher than those paid by the banks to be competitive in this market) so if the excess money is not lent it will be causing a financial cost without the counterpart of income, that will affect the profits of the MFI, even causing it to fall in losses. Maybe many of you will argue that this is the reason why MFIs ask for loans according to the Microloan demand; however, there are four reasons not to fund mainly with loans: (1) the cost of the loans, even the soft ones, will always be higher than that of the savings; (2) The interests received by the excess savings when invested, will be much lower than if these funds were lent; (3) The maturity of the funding loans will be                           for the total and will occur at a fixed date,  while  the  atomized  nature  of  the savings makes improbable that all the savers withdraw the money at one time and (4) Attracting savings is controlled by raising or lowering the interests rates and using marketing, at the same time all this actions help to have a better control on the cost of the money. As a general rule, the MFIs that are capable to mobilize savings should recur for loans as a complementary source for funding, so that the main source of funds may come from the low cost deposits from the public.

Although in the second table the presence of the MFIs whose savings overcome the loan portfolio is very small (3,9%), it is also true that those which show more than twice the loan portfolio in savings are nearly half of the group, being this incomprehensible, this minority show either an incapacity to lend or have a wrong financial sense of the importance of keeping a high liquidity.

I am convinced that the MFIs have an enormous potential to lower the interest rates by founding mainly with the cheaper money of the deposits from the public. When these can receive deposits and do not do it as much, they are increasing the costs of the Microloans for their clients. As an example there is the region of Middle East and North America were the loans are being funded with little savings (3,3%), being able to reach in their huge potential markets lower cost funds that can also strengthen the national family savings in their countries.

Jose Linares Fontela

jlinaresf@gmail.com

NOTE 2: (CONTINUED)

NOTE 2: ON SAVINGS MOBILIZATION (Continued)

At risk of being called tiresome due to the insistence in savings and Microsavings, because I am not talking about Microloans, which is what usually interest everyone; be patient, the moment will come. I am going to comment in this Note on savings at World’s level and in the next Note I will aboard savings at MFI sector, in order to cover the most necessary and immediate aspects on the issue, due to the actual difficulties to get funds, because of the global lack of liquidity.

I devoted myself to evaluate the rank of the World’s countries on their savings; the data came from the World Bank and used the Gross Savings (%) of the GDP, in order to learn the relative weight of savings in the GDP. To be surer, I used the income per capita based on the GDP-PPA and included the poverty line. With this data I ranked the 142 countries that were the available data for savings and from this total of countries, I selected to my  best criteria, 10 rich countries and 10 poor countries, to see what could happen.

This exercise does not pretend to be a rigours academic research; it is only done to see the issue from far. As you can appreciate, each group in the table has been ranked by the position on savings at world’s level (C2), leaving the other world ranks with its original values (In all the cases, the lowest number is the first place and the highest is the last). I will only work with columns C2, C4, and C6. I used the GDP-PPA (Gross Domestic Product – GDP – Purchasing Power Parity - PPP) per capita to balance better the rich and poor countries; I will identify in the text the world’s position of each country placing before the number of the position or place the letter “P”. Le us analyze the rich countries: We can see in C2 that only South Korea (P16), Germany (P43), Belgium (P45) and Finland (P65) show the highest amounts of savings, representing 30% of all the countries in their group, the rest of the countries in the group show less savings. Observing the GDP-PPP per capita in C4, the four first countries with more savings, rank in income P26, P28, P32 and P40 respectively, while the countries that rank the first four places in income: United States (P11), Canada (P20), Ireland (P23) and Germany (P26), show a ranking on savings of P119, P77, P108 and P43 respectively, with lesser savings although their citizens are enjoying of the highest income. Only Germany shows a better place in savings (P43), although it has the last place of income (P26) with the three other countries. ¿Does higher income tends to kill the savings discipline?, I do not know, but it places an interesting question. Related to poverty C6, we can see that the first four countries with the highest income of their habitants (C4): United States (P11), Canada (P20), Ireland (P23) and Germany (P26), show different places in poverty the P122, P139, P152 and P119, but all show little poverty. Let us now analyse the poor countries: The first thing that draws attention is the average income in C3, were the income in the poorer countries represent 9.8% of the income in the richer countries. But Surprise!, we can see in C2 that China (P1), Algiers (P3), Bangladesh (P8), India (P13), Bolivia (P35), Burkina Faso (P46), Haiti (P52) and Pakistan (60) show the highest amount of savings, representing 80,0% of the countries in the group and all are in savings over Finland (P65). The last two countries of the group in savings: Nicaragua (P79) and Cambodia (P114), rank P170 and P186 in income, over Haiti (P205) that exceeds them in savings (P52) being the poorest country in the group (1).

A simple statistical approximation show lower figures of less than 0.5 in Pearson’s correlation and P values, in al the country ranked data; both in savings and in GDP-PPP per capita and poverty, that seems not to be a clear relation between these variables. I leave this issue in the hands of the academic community for study. What seems to be clear is that the poorer countries save one and half times more that the richer countries. This brings and unavoidable question: What are the reasons for this higher savings in the poorer countries?, there can be many causes; maybe the less access to consumer credit than in richer countries, or the low or nil social protection of the citizens by the State could be another one, in such a way that savings becomes the “B” plan of family protection. It seems that savings is, in the first place, a cultural fact and I think that the motivation to confront emergencies, which has been present in the results of the surveys I did for many years, could also be an important motivation.

But is not enough to see savings punctually in time, the evolution of these has to be also observed: Do people save less now than before?, would be an appropriate question. In general the savings in the World has drop from a 22.52% in 1998 to 20.46% in 2010, a reduction of 2.06% in 12 years, 0,17% yearly; it reminds me of the stability 

The savings have raised much in East Asia and dropped in North America, in Europe and Central Asia, in Latin America these have raised moderately. In relation to who save more according to their income, the highest level of income has fallen, prevailing more the medium and low incomes. This comes to dismiss the idea that the poor people cannot save, my practical experience of many years in the field, is that the lower levels of income and the medium class are the ones that demand more the savings services, because they are also the ones that most need family protection and to assure the future of their daughters and sons. My experience in many cases is that they look more for security and liquidity than profitability for their money. Is a matter of scale that compels to offer the savings at Microsavings level, because although this segments saves small amounts is huge representing a very important mass of money and their needs keep a proportionality with their income. This type of atomized savings account guarantees the average stability of the of the savings portfolio, that permits this money to be used to give medium term Microloans.

If the services, motivation and education on savings are not offered to the segments that have not raised their savings, the World will loose a very important asset. If the developed countries, that are the ones with less savings, had kept and motivated their citizens to save, I ask myself: Maybe the crisis would have been les traumatic for their citizens? and: Would the savings could have helped the financial institutions to reduce the negative impact?, maybe; otherwise, these would not be desperately trying to promote and mobilize savings, as they are doing today, due to the dry up of the traditional sources of funds. Could this happen to the MFIs?. What I observed in the richer countries is the damage of their social protection due to the crisis, that has force them to reduce the existing protection: Demanding extra payments for health services and an increase in the retirement age, getting nearer tot USA, with the Private Health Insurances and in Latin America, with the Private Pension Funds, which in both cases this are more limited that the public systems.

In my next note I will aboard the issue of the savings in the MFI sector, that will take them to play the Robin Hood, attracting money from those who only want to invest well their liquidity, at an attractive rate of interest and besides support the more needed, instead the MFIs are today mainly basing their funding in expensive financial sources.

No matter how efficient be the administration of an MFI, the only way to lower the interest rates of the Microloans is getting funds at a lower interest, which is not the case of the loans, but it is the case of the deposits, that include savings. Remember that the interest rates of the loans are higher because the investor stops being the owner of the money, passing to be of the debtor when it is given away, it does not happen the same thing with deposits, as these are always in the ownership of the investor, but in both cases there is the same risk of loosing the money if the MFI goes broke due to the lack of sustainability. Then, why not accessing lower cost money to lower the loans rates of interest, keeping the same margin of profit (ROA) (By the way, non profits must also produce profit, the difference is in the way this profit is used by the institution).

Jose Linares Fontela

jlinaresf@gmail.com

 

NOTE 1

NOTE 1: ON SAVINGS MOVILIZATION

After graduated in college as a psychologist in 1968, I started my professional work in a Savings and Loan Association in Venezuela selling savings passbooks door by door. The equity of these institutions was mutual and these were specialized in home mortgage loans at 20 years term. The curiosity was that we were financing the long term mortgage loans at first; only with on sight savings and later with term deposit certificates with maturity of less that 180 days, we never had any problems due to the term fitting between the liquid deposits and the long term loans. It could be said that this was the “daily little miracle”. Neither had we a credit crunch as the one that we all lived since 2008, that after triggered a World recession.

Many of you could argue me that the World was better at that time and that was the reason why we did not have the problems that we are living today. But do not fool yourselves: In Latin America: Brazil and Argentina showed from the 60s a growing 1.500% inflation rate that compelled Brazil to implement a monetary correction scheme in 1964 with monthly adjustments, that in the 80s, when inflation reached 2.000%, the adjustments pass to be made daily. Even in this terrible situation, the savings portfolio of the Savings and Loan Associations reached in 1989 to be 23,4% of the Internal Net Product, this made possible for the Brazilians to be able to continue financing to buy their homes.

In the 90s the culture of the Securitization of the mortgage portfolios surged and was the main issue in all the congresses and seminars at that time. The Securitization was born motivated on the apparent risk that posed the difference in the term fitting between the short term deposits and the long term loans, arguing that the sources of funds should also have similar terms as the loans, valid maybe in theory but it neglected the practical reality of the huge stabilization that the atomizing gives to the portfolios and the bigger risk of the simultaneous maturity in the securitized titles. On the other hand, the new created Pension Funds Administrators demanded long term certificates with mortgage guaranty in which to invest the worker’s pension contributions, which also stimulated the Securitization as it was something good for everyone. 
            Internal Net Product of Brazil
            Savings as percentage of the 

This figure started to spread to all type of loans and to every type of banking institution. First the mortgage loans were securitized and it was appropriate, but after it fell in the temptation of adding other type of riskier loans (Consumer, car financing, etc.) to better the ratings given by the Qualifying Agencies, because the mortgage loans valuated notably the package. In this way, during the last 20 years, the financial institutions got accustomed to this easy and massive access to funds, selling long term certificates in the Stock Exchange, bought by big investors and left to a second place the savings and deposit mobilization. My unicellular mind, never understood how the loan portfolios that already acted as a guaranty to the deposits, could also be a guaranty for the long term investment certificates, there was something that did not sound right to me.

As a constant wholesale demand of the long term investment certificates grew, these funds became a liquidity risk due to cover their high cost, which pushed the financial institutions to design methods for massive lending, in order to invest fast the funds. This new strategy virtually replaced the prudential selectivity, the “instinct”, the decentralize approval and the personal knowledge and contact with the loan applicants, done traditionally by the loan officers, being substituted by the statistical criteria and risk analysis and qualification that is prevailing today. The loan approval of the loan applicants was automated with the Credit Scoring and the qualifications in the Credit Bureaus, the rate of interests were adjusted according to the statistical risk, making them higher if there was more risk. In resume, all the process was automated creating Risk Departments to do the analysis and in many cases act as final deciders, based on the Credit Bureaus data and the probability statistics, but without ever meeting the loan applicants. As a huge amount of loans came in and also due to the filters imposed by the Risk Departments, bottlenecks were produced which increased the risk due to the pressure of time demanded to discharge the excess liquidity.

Everything went well until the credit crunch exploded as a consequence of the accumulation of toxic assets in the financial institutions that gave loans to unknown people, that could not pay them back, mixing mortgage loans with other type of loans and inviting the customers to ask for loan when they “qualified” according to the calculated theoretical risk filters; reaching a point in which the toxicity was unbearable and impossible to ignore, and when the big investors found out that they were buying thrash, they decided not to buy anymore. The financial institutions run out of liquidity and to this the maturity of the 20 years certificates added up and as no one was buying the new emissions, they could not compensate paying the matured ones, plunging down; causing the bankruptcies of banks, mortgages generators, mortgage insurance funds (Such as Fannie Mae) and everything else that we already know.

At first the Microfinance Institutions got their funds from the international cooperation and investors that saw in the Microlending a very attractive profitability. But from the 90s on they became aware that the best source of funds was the retail money in the market; that is: The savings and term certificates, but these had to regulate themselves with the Banking Authorities to have access to the funds of the public. Many did it based in new legislations that ease the process, others became banks and the whole sector became interested to learn how to mobilize and attract savings, I helped with these issues in many projects.

Today, all financial institutions are desperately trying to mobilize again savings deposits with an indifferent public, which leads to close the circle and return to the roots, but with the added difficulty that the institutions have lost their ability to attract savings or term certificates of people who, for the most part, have forgotten how to save and also distrust the banks themselves.

The Savings and Loan Cooperatives could only receive money from their members and these did so with the voluntary contributions, which were another way to save and did not need to be supervised by the Banking Authority. When the possibility of these institutors opened up to receive savings from the general public these were regulated and supervised by the Banking Authority, creating the Credit Cooperatives also known as Credit Unions. In USA in the 30s the savings in the Credit Unions were guarantied by the federal government.

Even today, it prevail both; the NGOs that still work as the old ways with funds from investors and Savings and Loan Cooperatives that only receive contributions from their members. When the banks passed to a second place the savings and term certificates mobilization and promotion, because it was consider being too expensive to manage, left this market to smaller and more innovative financial institutions, many of which took advantage learning how to do it. 

I think that it is vital to retake the promotion and mobilization of savings and term deposits, because it gives access to a massive financial retail market that due to its atomized nature produces stable and low cost funds, as was the case in the 80s, but this implies a great effort of marketing, financial education, persistence, confidence and a creativity forgotten by the traditional financial institutions. With the technological tools available today in communications and information processing, the cost to manage many small accounts has been demolished, so now is not valid the excuse of the high costs of small savings accounts and term certificates. I have build savings mobilization systems that have shown the favorable impact in the costs reduction, thanks to the ICT and with the appropriate and scientific marketing the rest is assured.

To end, I will leave you with the following concern that I will analyze in another note: In the 70s, while selling savings passbooks door to door, many us who worked with these issue learned and became aware that the savings account is the primary and fundamental tool for financial inclusion, because it helps to create assets for the families and motivates the voluntary and without compromises financial discipline, that after will be a clue issue for a healthy loan.

Suggested reading: “The Myth of the Rational Market” - Justin Fox - Harper Collins 2009 – It is also in e-book, look it up in Internet. This very interesting book, written by a columnist, it focuses on the super-mathematical models approach to economy and finances and its consequences. It is an historical review since 1905 till recent times that ended in 2008 with Alan Greenspan’s phrase “irrational exuberance” and describes the principal actors an its contribution to the process. It is a very light and illustrating book, that makes clear the origin and real effectiveness of the financial paradigm to measure risk, as it is used today. As a paragon we could also talk about the “irrational exuberance” of the lending of the previous years until 2008.

Jose Linares Fontela
jlinaresf@gmail.com