Investing in savings is a double-edged sword; investor funds can crowd-in deposits, but can also displace them. This session was intended as a debate between two experienced investors, Maria Teresa ZAPPIA of BlueOrchard and Bart VAN EYK of Oikocredit, to tackle this question from each perspective. They had been asked to explore the main pathways through which investors can encourage/discourage deposits, the roles of debt, equity and other investment types, as well as differences between public and private investors.
As the two experts had been asked to take opposite stances, it meant that they are not necessarily representing their personal or their organisations’ point of view, BlueOrchard and Oikocredit.
Daniel ROZAS from e-MFP introduced the session and debaters, mentioning this type of debate session to be very popular. He also said that the topic of debate was about low-income household deposits rather than about the build-up of bigger deposits.
On the side of intervening, declared as a positive stance, Zappia was asked to give her opinion. She started by saying that savings is a topic much at the heart of impact investors; almost 1.7 billion people out there still don’t have an account, meaning that there are still many poor households that are not yet served with basic financial services. This means that if you want to be part of the solution, you need to promote saving deposits as a way to build the financial strength and overall performance of an MFI. The volume of savings can be a measure of the impact made by a financial institution. She explained how they have worked to promote savings, mainly through focusing on institutions with a strong base of savings from micro, small and medium-sized enterprises. This was important for the financial strength and credit rating of the supported MFIs, as the deposit base and their duration can demonstrate impact to cover needs of end-beneficiaries. Loans of international lenders are then additional (in terms of their investment horizon) and complementary to the deposit base which is often shorter and more volatile.
Van Eyk thanked Zappia for the opening statements, and confirmed that savings are a crucial part of financial inclusion. There is often too much focus on microcredits and insurance. On the side of interference it was argued that, while savings and micro-insurance form a crucial part of financial inclusion, organisations tend to be very cautious about depending too much on savings; good intentions of investors may well hamper or even hurt and damage the financial performance of financial institutions. Financial and organisational capacities are needed to start offering savings and deposits. He believes that many institutions are not ready for that journey, and it may well lead to a situation where MFIs only take larger, wealthier clients to stay safe and attract investments. As an investor you have to be careful not to drive your own agenda of financial inclusion with savings, and properly assess the realities on the ground if they are ready for it.
Zappia countered that financial institutions must indeed be ready, but we have a role to demonstrate the potential of deposit taking for strengthening institutions. Van Eyk agreed and stated that Oikocredit is already lending to deposit-taking institutions, but a nuance is needed to the debate, that is of proper assessment and a strategic road map. In that way we can give credibility to that institution. According to Zappia, of course training and capacity building is required to help MFIs to be aware and ready to deal with smaller, low-income clients (a large number of small potential depositors). Larger depositors may be easier to attract but also leave faster in times of crisis; they tend to be more opportunistic and hence are not really contributing to the longer-term stability of the financial institution. Smaller depositors on the other hand tend to stick around longer and can therefore form a more stable basis for an MFI. Smaller depositors will rarely move like a “herd” and provide more stability at time of crisis. It is important to identify and understand the needs of MSMEs, including savings and deposit features required; these often can provide a good business rationale and a great add-on to other financial products.
Even if there is a business rationale, Van Eyk wondered how many MFIs will act on it with organisational investment. Support and capacity building is of course an attractive bonus, but is the deposit base actually going to make the MFI stronger or healthier? The business case needs to be clearly defined.
A question from the audience related to possible investment of an MFI interested in rural and agricultural lending and technical assistance to coops for draught-resistant crops, whereas the deposit base of that coop is stronger than the loans they need. Would the lending undermine deposit taking? Zappia responded that BlueOrchard has looked into resilience of smallholder farmers, also in relation to crop insurance. They have been successful with some MFIs to enhance the capacity of savings, and therewith strengthening business and being complementary.
According to Van Eyk you have to be careful not to interfere with possible other activities of coops and their deposit taking; can the organisation handle it, they often have a loyal member base but are not always ready for this type of interference. Expansion in product portfolio may lead to higher risks and hurt the MFI’s operations. Oikocredit in itself is a cooperative with an active member base, and active in agricultural financing. Important to first start with capacity building and governance of coops, and be very selective with additional activities based on organisational readiness.
Birgit Galemann, independent consultant, raised the question if size of the MFI mattered in decision-making. According to Zappia, this would depend on type of investees and mandate as to decide how to help small lenders. Van Eyk answered that Oikocredit might still deal with smaller loan sizes of € 50,000 but this is considered rare; mostly sizes are now with a threshold of € 500,000, and in general larger institutions are more ‘ready’ to meet regulatory requirements and offer a savings product .
Patricia Richter from ILO asked how investors are measuring success with respect to ‘encouraging deposits’. Both speakers agreed that it is important to set clear objectives for deposits, and monitor their performance, impacts and progressiveness, including catalytic effects and gender orientation. It is also a process of trust-building to leave deposits stored for a longer period. In particular for lower-income households you have to be very selective and careful to adhere to responsible financing. Readiness is crucial in order to avoid causing damage.
In the end, the audience voted 60 percent in favour of intervening, and 40 percent for interference. Zappia concluded that she hopes that in a few years there will be many more examples that low income households are being served.