Question

saving services are not often available to microfinance clients especially the microfinance institutions that are not regulated . Discuss any four reasons why saving services are not available to those microfinance institutions potential clients(10mks)

Answer 1

Microfinance is a category of financial services targeted at individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems. Microfinance services are designed to be more affordable to poor and socially marginalized customers and to help them become self-sufficient

They may claim that they are only prevented from taking client savings by their lack of a banking license, but there has at least until very recently been little movement away from debt and towards client savings as the major source of funds. The availability of relatively low cost wholesale funding from ‘social’ lenders makes savings mobilization even less attractive.

Much of the world is in trouble today because of debt, too much borrowing, presumably not enough saving, by individuals, companies, countries and groups of countries. Microfinance is still mainly microcredit, . Microfinance institutions have successfully, and with some recent exceptions quite profitably, extended the same facilities for indebtedness to millions of poorer people.

Saving is surely not an optional extra which we may or not add to credit. It is where we should have started, not because it was more convenient or more profitable, or a cheaper way to raise funds, but because it was and still is the most important financial service, particularly for poorer people.

Northern Rock, one of Britain’s major mortgage providers, discovered a few years ago that it was more profitable to focus on lending, on indebting its clients, than to bother with taking their savings as well. The transaction costs of borrowing large sums on the international money markets were far lower. Northern Rock’s dramatic collapse in 2007 demonstrated that this was not a viable long-term business model, but microfinance institutions which focus only on credit are surely making the same mistake.

They may claim that they are only prevented from taking client savings by their lack of a banking license, but there has at least until very recently been little movement away from debt and towards client savings as the major source of funds. The availability of relatively low cost wholesale funding from ‘social’ lenders makes savings mobilization even less attractive.