THE ROLE OF SAVINGS IN MICROFINANCE INSTITUTIONS; Does it

foster institution’s financial performance and outreach?; (A Case of Kenya Women Finance Trust – Deposit Taking Microfinance)

By Paul Kurgat

Challenges of reaching the un-banked in Kenya

Outline of the Presentation

Introduction

The Literature review

The Methodology

Kenya women Finance Trust

Findings and Analysis

Concluding Remarks

A client of KWFT in North Rift, region

Introduction (1)

MFIs over the past have only focused on the primary activity of micro-

lending and ignored savings, because MFIs were heavily subsidized

by donor funds (Zeller et al, 1997).

Savings mobilization is costly and risky relative to other sources of

financing (Miller (2003),

Therefore, many have preferred to recapitalize their loan portfolios with

donor funds and other concessionary loans.

Provision of financial services involves high transaction cost and

risks associated with information asymmetries (Stiglitz and Weiss

1981).

Savings mobilization may be an incentive to MFIs to improve financial

performance and outreach,

Therefore, introduction of savings may lead to improved efficiency

and profitability for sustainability and expansion (Fiebig et al, 1999).

With the recent global financial crisis, it has pushed most MFIs to

mobilizing savings due to dwindling donor funds.

Introduction (2) Impact of savings mobilization can’t be ignored in funding structure as it

contributes to its financial growth and increased outreach (Campion and

White, 2001)

The MFIs are faced with twofold challenges of providing financial

services to the poor (outreach) and at the same time ensuring

sustainability (financial performance).

Hence, the question that arise is whether provision of savings fosters

financial performance of an institution and at the same time increase

outreach.

In the recent past, most MFIs have been pushing to transform into

regulated with the key motivation to mobilize savings.

Therefore, it is important to understand the role of savings in a regulated

institution

In reference to the MFI of focus, this study intended to;

Identify the role of savings in outreach and financial performance;

Establish the relationship between outreach and financial performance;

Identify the extent of outreach and preferred financial services/products

Introduction (3)

Definition of terms

The term financial performance is mostly used interchangeably with

other concepts like profitability, financial self-sustainability, financial

efficiency, self-sufficiency, financial viability, financial performance

(Ledgerwood, 1999; Hulme and Mosley, 1996; Christen, 2001). This

study used the term financial performance to mean the ability of MFIs to

exist indefinitely by generating returns (“ceteris paribus”) while

providing financial services

The concept of outreach has been mostly used in religion, community

activities and in microfinance. Number of active borrowers as a

measure of outreach is the most commonly available “proxy” to measure

the outreach. However, this study used active savings clients as a

measure of outreach

Savings is broadly defined as a means to secure future consumption at

any time either in cash or in kind (Robinson, 2004). This study referred

“cash deposited” by clients in order to consume or invest it in a later

date as “savings”.

Literature Review (1)

Savings plays a role in both financial performance and outreach of

MFIs through four major ways (Campion and White 200; Schreiner,

1999; Robinson, 2004; Islam et al., 2006; Hulme and Mosley, 1996).

Savings is a source of relatively cheap funds because it normally

attracts low interest rates compared to commercial loans.

Savings affects outreach as a financial service as MFIs not

providing savings services may achieve lower outreach than MFIs

providing savings.

Savings mobilization provide relatively less costly information

during loan appraisal process

savings may improve corporate governance of the MFI and increased outreach

Literature Review (2) Some empirical evidence of outreach and financial performance

Authors Sample and Data Main results

Cull, et al.

(2007)

Data collected

from 124 leading

MFIs in 49

countries

Mixed results, evidence of trade-off and

some evidence that outreach and

profitability to the poor can also be

achieved.

Fluckiger and

Vassiliev

(2006)

Data from 45 MFIs

in Peru

The findings were mixed; some MFIs

performed well financially, while some

reached the very poor clients and very few

managed to achieve both good financial

performance and outreach

Kereta (2007) Data from 26

Ethiopian MFIs

There was no trade-off between outreach

and financial

Olivares-

Polanco

(2003)

Data from 28 Latin

American MFIs

There exited trade-off between outreach

and sustainability

Methodology

The data collected was both primary and secondary

Primary data was randomly collected from 185 women clients in rural

and urban areas.

While secondary data was obtained from the institution for the period

2005 – 2010

OLS regression model was used on secondary data and descriptive

analysis on primary data

The study used return on assets (ROA) and number of savings clients

(ASC) as “proxies” of financial performance and outreach respectively

The study used the following two models to answer the research

question

ROAi = β0+β1SBi+β2ASCi+S..+Ei -------------------Model 1

ASCi = β0+β1SBi+β2ROAi+S..+Ei -------------------Model 2

Where SB is the savings balances for period i

ROA is the measure of financial performance in period i

ASC is the number of active number of savings clients in period i

E is the error term of the test equation

Kenya Women Finance Trust -DTM

KWFT Branch Network KWFT-DTM is wholly owned by

Kenya women Holdings

It traces its roots to 1981 when

KWFT was established as an

NGO

One of the most successful

MFI in Kenya with the largest

network (205) in rural and

urban areas

It enjoys a unique status in

financial services as the only

financial institution to focus

solely on women clients.

With PAR (30+) of less than 3%

Findings and Analysis (1) Characteristics of the clients

• Women engaging in small businesses and peasant farming.

• With the proportion of 60% rural and 40% urban

• On average, a client travels 28km to KWFT-DTM Branch/unit costing US$ 1.5

(Kshs.123) round trip

• 70% of the clients were less than 4 years in the institution

• The clients preferred credit, savings, insurance and money transfer services in

that order of importance

• 27% of the clients were previously excluded from financial services

Clients’ perspective on savings

52% of the clients belonged to more than one informal group “merry-go-round”

The reasons why they saved were to expand their businesses (62%),

education of their children (40%) and for emergencies (26%)

71% of the clients viewed compulsory savings as opportunity to save

The clients preferred savings services that are secure (71%), with return

(18%), liquid (7%) and accessible (4%) respectively in that order of importance

Findings and Analysis (2) Savings and Financial Performance

Variation of savings balances (SB) have no significant influence on financial

performance (ROA)

However, savings balances (SB) and financial performance (ROA) indicated

strong positive relationship (p=94.3% at 5% level of significance)

Savings and Outreach

Savings balances play significant role in outreach measured by active

savings clients (ASC).

The results indicated strong relationship between savings balances (SB) and

active savings clients (ASC) at 1% level of significance (p=99.2%)

Outreach and Financial Performance

It indicated a strong correlation between outreach (ASC) and financial

performance (ROA) at 1% level of significance (p=96.8%)

Therefore, no evidence of trade-off between the two MFI objectives; outreach

and financial performance noted.

Conclusion

KWFT demonstrates good outreach especially in the rural areas with

improved financial performance

KWFT managed to reach close to a third of its clients who were

previously excluded from financial access.

Although the clients increased significantly, savings per client

consistently averaged US$155

Savings mobilization is important for improved financial performance

and outreach especially in the rural areas where access to financial

services is challenging.

MFI to design a range of savings products that are safe and with better

returns

Both outreach and financial performance are important for an MFI to

operate as a going-concern (foreseeable future).

These findings are specific to KWFT and may not be sufficient for

general inference