Microsavings vs. Microlending: Understanding the Disparity

In Pakistan, financial inclusion has made significant strides with the help of microfinance. The access to microcredit has broadened financial services for underserved populations significantly. Currently, Microfinance Banks have contributed to doubling the ratio of account holders among the adult population compared to the recent past. Approximately 60% of Pakistan’s adult population, totaling 83 million individuals, now possess an account. While the sector serves 76% of all borrowers from the financial sector.

However, despite the success of microcredit, the adoption of microsavings – designed to encourage savings for emergencies and long-term MSME investments, has not mirrored the success of microlending. Several factors contribute to this discrepancy.

In Pakistan, financial inclusion has made significant strides with the help of microfinance. The access to microcredit has broadened financial services for underserved populations significantly.

A major barrier is regulatory challenges. In many countries, it’s easier to obtain legal permits for issuing loans than to manage savings securely. In Pakistan, for example, only microfinance banks are permitted to accept deposits, while microfinance institutions (MFIs), despite their prevalence, are prohibited from doing so. Regulatory frameworks often prioritize credit products as drivers of economic growth and financial inclusion, overshadowing efforts in savings mechanisms. Additionally, governments typically emphasize lending targets to sectors like agriculture and MSMEs, neglecting incentives for savings. Political success often hinges on visible lending progress rather than promoting savings. Consequently, central banks or other regulatory authorities are pressured to monitor lending rather than savings initiatives.

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Moreover, the financial sustainability of microsavings services is often a factor as well. The administrative costs of managing numerous small savings accounts often exceed the revenue generated from these accounts. This results in MFBs to struggle in attracting deposits from medium to high-end savers unless they offer competitive interest rates, further inflating costs.

Another major cause of the existing gap between microcredit and microsavings is the demand dynamics which are significantly influenced by the preference for credit products over savings among low-income populations. While credit products provide immediate utility by facilitating the acquisition of assets or small investments in local ventures: 1. addressing cash flow breaks, and 2. generating income for loan repayment; conversely, surplus savings, especially in rural communities, can expose individuals to familial pressures for financial assistance. Many still prefer traditional saving methods such as ROSCAs also known as committee systems, saving in livestock or gold, among other traditional practices.

Unfortunately, an underlying cause is also the widespread perception that microfinance institutions only focus on lending. This leads individuals to believe that keeping savings with MFIs might limit their access to loans or result in their savings being used to adjust their existing loans or other members’ loans within group lending arrangements. These misperceptions disincentivize significant savings accumulation and push individuals towards borrowing instead of saving.
Despite these challenges, some microfinance banks and branchless service providers have successfully implemented large-scale microsavings programs. Khushhali Bank, for instance, derives 92% of its deposits from individual small-ticket accounts. Almost all the MFBs in Pakistan have an ADR (asset-to-deposit ratio) of less than 100%.

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Although microcredit remains pivotal in microfinance, microsavings are equally crucial to tackle hurdles associated with regulatory complexities, financial sustainability concerns, and nuanced demand dynamics. The potential for microsavings to economically empower individuals highlights opportunities for further innovation and exploration in global financial inclusion strategies, advocating for expanded roles for MFIs meeting specific criteria to promote savings and deposits.

Aftab Alam
Chief Business Officer
Khushhali Microfinance Bank Limited

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