Viewing posts in series: High Yield Loans

Part 2: High yield loans: the lynchpin of deposit-driven microfinance

Part 1 ("The Economics of Microsavings") of this brief exploration into the economics of savings-driven microfinance looked at the role of microsavings at microfinance institutions. In one large study, poor borrowers, despite accounting for 75% of active accounts, only contributed 3% of total deposits mobilized, mainly because they maintain low balances. However, poor savings clients carry out frequent transactions, for which they have well-demonstrated willingness to pay relatively large fees. These and other fees can be a major source of revenue on its own. However, many savings clients are also borrowers, and it is through the combination of fees, high yield microcredit loans, and other services (insurance, transfers, etc.) that microsavings clients can be truly profitable.

That raises a question: if small savers are indeed profitable without providing significant funding, then where does the funding of deposit-driven MFIs come from? 

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The Economics of Microsavings

I have a confession to make. When I began composing this blog, I approached it with a fairly simple hypothesis:  Microfinance institutions (MFIs) that engage in large-scale deposit taking must likewise grow their loan portfolios. After all, deposits are a source of funding with high operational cost that must be appropriately offset by growing revenue, and only microfinance portfolios provide yields high enough to achieve that. And because many poor families have a higher demand for savings services than for credit, the resulting over-liquidity could push MFIs into unsustainable portfolio growth, eventually leading to the very credit bubbles that microsavings advocates are trying to avoid.

It seems a reasonable enough hypothesis, and sufficiently controversial to be interesting. Trouble is, it’s not true. Reality turns out to be more complicated. In this two-part blog series, I will explore the underlying economics behind microsavings . . . 

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