Banks in developing countries may seek to mine a potentially rich new market: the poor.
A program funded by the Bill and Melinda Gates Foundation aims to help impoverished people in Africa, Latin America and other traditionally underbanked parts of the globe open savings accounts and engage in other financial transactions. For banks, especially small ones, the approach is an opportunity to reach a large but historically underserved market.
The Seattle philanthropic group provides grants, loans and equity investments to organizations that set up nonprofit banks in poor countries or team with for-profit institutions operating there. The funds are used for things like equipping vehicles with automated teller machines so banks can offer services in far-flung villages, using cell phones to transfer money remotely into savings accounts and providing “smart” cards that require thumbprint identification.
“The customers benefit by having a safe place to save, and banks benefit by attracting more customers and deposits and lowering the transaction cost per customer,” said Robert Christen, director of the foundation’s initiative.
One of the grantees, Opportunity International in Oakbrook, Ill., has opened 17 nonprofit banks in several African and Eastern European countries, as well as in India and the Philippines.
It used the $2.2 million it received from the foundation in 2005 to expand the reach of its two banks in Mozambique and Malawi, including putting converted shipping containers in a number of rural villages to serve as branches and installing ATMs on buses and vans. Over three years that effort spurred a fivefold increase in the number of savings accounts at the two banks, to more than 41,000 at the end of last year.
Such an approach not only benefits poor people, but it also helps banks in developing countries stand on their own by widening their deposit base, said Dennis Ripley, Opportunity International’s senior vice president of international business development.
“It’s very hard for a bank making small loans in rural areas to actually have a model that’s sustainable,” Ripley said. “By lowering the cost of bringing in more deposits, we can fund more loans, be sustainable and put more money back into serving more people.”
Such programs are getting traction around the world, though microfinance experts and bankers acknowledge that there are obstacles; perhaps the biggest is overcoming the distrust many unbanked people have when it comes to financial institutions.
More broadly, it remains to be seen what impact a proliferation of savings accounts might have on poverty in countries with many significant problems other than a lack of access to financial services.
Though the Gates Foundation’s initiative also seeks to help the poor obtain microloans and insurance, for now it is focusing on savings products, because they are a first, critical step to helping people climb out of poverty.
“Savings accounts make people less vulnerable — when they have something to fall back on, they don’t have to sell an asset to eat,” Christen said.
In another project aimed at fostering banking in poor parts of the world, the Gates Foundation awarded $12.5 million this year to the GSM Association, an international mobile phone trade group, to test 20 programs in Asia, Africa and Latin America that let people use cell phones to transfer money into bank savings accounts.
The test is modeled after M-Pesa, a Kenyan program run by Safaricom Ltd. and Vodafone Group PLC in which customers give money to a cell phone clerk — often an employee at retail outlets or postal clerks who double as representatives for the mobile phone operators. The clerk credits the money to a cell phone account and then generates a code for the customer to send by text message to someone else. The recipient uses the code to collect the funds, minus a fee, with the aid of another cell phone clerk.
Amitabh Saxena, a director in the marketing and product development unit of Accion International, a microfinancing organization in Boston, said the phone programs supported by the Gates Foundation would help banks reach poor customers.
Accion partners with a number of for-profit banks in Africa that are weighing whether to implement such a system, he said. “Using retailers could decrease our transaction costs, because it’s not our staff, and we don’t have to build additional infrastructure to do this.”
Despite their promise, observers say such initiatives may have a downside — the savings may be too liquid.
“Whether these measures are going to improve the well-being of the poor is an open question,” said Dean Karlan, a microfinance expert and economics professor at Yale University. “They make it very easy to deposit money, but they make it equally easy to withdraw money.”
Saxena said Accion’s partner banks in developing countries offer illiquid savings products, such as those that require customers to deposit money on a fixed schedule in exchange for a higher interest rate. “In some cases, people like having fixed deposits, but many poor people need liquidity for their daily needs and emergencies,” he said.
Accion is also using a $5 million Gates Foundation grant to help the Indian nonprofit Swadhaar FinAccess get people to save money using smart cards equipped with thumbprint verification. Swadhaar, working with ICICI Bank, India’s largest private bank, provides the cards at kiosks in poor neighborhoods in Mumbai.
Christen said the cards are proving particularly valuable to widows in Africa, because when a husband dies, in-laws often claim his assets, leaving the widow and her children destitute. Using cards that only recognize the woman’s thumbprint has helped stymie that practice, he said.
“Women found that they could deposit small savings and earnings from their agriculture or other work, and that it was out of their husband’s family’s reach,” he said. “These smart cards have become so popular that women have started giving them to new brides as presents.”
