Lending for savings

At its core, the branchless banking model depends on designing innovative financial products and commercialising them through the customers’ mobile accounts. Towards that end, progressive policy & research centres like the “Consultative Group to Assist the Poor” (housed in the World Bank) are actively bringing fresh perspectives about financial mainstreaming of the poor.
CGAP’s latest report on the subject highlights early success of the “lend to save” model in the branchless banking sector. M-Pesa, the mobile wallet service of the cellular operator Safaricom, has been used in Kenya to replicate the success of a famous microfinance savings product, P9, over mobile phones. P9 was experimented in Bangladesh in 2007, and has since been significantly up-scaled, targeting the poor.
The P9 service works like this: customer takes out an interest-free loan after paying account-opening and loan disbursal fees. A third of the loan is set aside as savings, and a larger savings target is determined. Drawings from the savings pool leads to penalties. While loan collectors pay regular visits, client decides on the pace of repayments. Full repayment qualifies the client for a bigger loan, under same terms.
What happens after successive repayments is that eventually clients’ savings outgrow their financing needs, easing the personal and/or business cash flows.
According to the report, Kenyan startup firm “Mobile Venture Kenya Ltd” decided to give the P9-type model a shot, using M-Pesa. The idea was to “improve the P9 model by enabling the movement of small amounts of money instantly at a relatively low cost as well as enabling enhanced customization of product terms and features”, while avoiding the original model’s costly collection operations.
A service with the name of “Jipange KuSave” (which in Kenya means ‘to organise oneself to save’) was rolled out in 2010. The basic features of the JKS were the same as those in P9 in Bangladesh. However, loans were released directly into the customers’ M-Pesa wallets and the savings were also deposited there. Need for field collectors got eliminated because repayments were also done through M-Pesa.
CGAP study underscores encouraging signs from this venture. “Seven out of 10 clients reported that JKS helped them save. Almost everyone mentioned the benefit of keeping savings secure until they reached their targets. Clients liked how quickly their JKS loans were disbursed and that they qualified for the next loan as soon as they completed the previous loan cycle.”
Though the JKS client profile was found to be predominantly urban and already-banked, two-fifths of the clients were estimated to be living below the poverty line ($2.5 per day; 2005 PPP), which CGAP takes as an indication that many poor people were availing this service.
CGAP researchers maintain that the business model for JKS-type services is viable, and a reasonable ROI can be obtained within three years with a client base of 300,000. Yet, stand-alone entities may struggle to scale this service due to banking regulations on deposits and loans. “The easier route to market may be the adoption of the product concept by an existing bank or financial institution”, they suggested.
Initial success of this lending-savings model warrants its tailoring and testing by Pakistan’s BB sector, which has been called a “laboratory of innovation for BB services” by CGAP. More recently, accolades poured in for the SBP’s role from Financial Times. It sounds great that the local BB service providers channeled Rs339 billion in FY12 alone. But the real barometer is the rollout of savings, credit and insurance products (and other related services) and their large-scale adoption.