Microsavings Compared to Other Sources of Funds
This paper highlights that in order to take full advantage of savings as a source of funds, microfinance institutions (MFIs) have to be aware of the implications regarding costs and risks involved with the deposit business. The paper discusses various aspects of savings as a source of funds compared to other sources such as equity, commercial loans, grants and others.
It begins by examining the liabilities structure of traditional banks and non-bank financial institutions, looking at the different sources of funds generally acquired. The following section then highlights the costs and risks involved in the various funding strategies. Costs consist largely of indirect and direct financial costs as well administrative costs, and risk is made up of liquidity risk, interest rate risk, credit loss risk, foreign exchange risk and concentration. As well as discussing the key factors behind cost and risk, this section also considers ways of reducing and mitigating their impact.
The paper notes that three categories of MFIs can be identified according to their primary funding source:
- Full-fledged financial intermediaries such as commercial banks with emphasis on microclients;
- Savings-driven financial institutions such as savings and credit cooperatives and self-reliant village banks;
- Donor-driven non-government organizations with special micro-lending programmes;
The most important mechanisms for full-fledged financial intermediaries and savings-driven financial institutions are deposits. For the third group, however, funds largely arise from grants and soft loans provided by donors or governments, which the paper argues only develops weak links with commercial financial markets. It argues further that many donors and microcredit institutions have not embarked on a strategy that promotes loans and savings, insurance and payment services as financial services in their own rights.
The latter sections of the paper examine the differences between the funding strategies of MFIs and traditional financial institutions to provide insights into the existing obstacles for commercialising and “popularising” the sources of funds in MFIs.