Is Mandatory Savings a Price to Microcredit?

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Mandatory savings are generally used as a collateral substitute by many MFI's for securing guarantee against a loan. There has been an argument to include or exclude mandatory savings from loan price calculation. Microcredit managers face a host of scenarios to evaluate and take a decision; presenting loan price calculation not merely an accounting issue.

If mandatory savings are included in loan price, the price of the loan to the borrower increases; inversely the cost to MFI may decrease. This can just be superficial disguising self reliance and increasing financial capacity of the borrower and guarding the MFI against loan loss risk to some extent. In such scenario the principal lent to the borrower may not decrease. It is rather the MFI's cash out flow and net cash flow that decreases. On book entries the principal lent to borrowers will remain the same, with increases in savings deposits.

Transparency is an issue of good governance, if savings are included in loan price, savings will not be identifiable as a separate cost and this will not be an element of good governance. So exclusion of mandatory savings from loan price can not be taken as a practice which is not transparent. It is however true that mandatory savings are not available until the loan is repaid and they have opportunity costs. The opportunity costs accumulate with each period, adding only a fraction of the total opportunity cost during a single payment period. However, if the MFI is paying interest on mandatory savings, it is most likely that the opportunity cost becomes negligible. For accumulation of opportunity cost, existence of an alternate economic activity can not be ignored.

Many borrowers use the savings for the last installment payment as using savings for any purpose is at borrower's own discretion. The MFI can guide borrowers in an alternate best available economic opportunity or investment of the savings deposit, if the borrower seeks an advice. Besides being a collateral substitute, savings deposits are also a tool to increase borrowers earning capacity and a hedge against market risks. Such concerns which are obviously outside the ambit of MFI's responsibility, should not affect MFI operational policies.

 Mandatory savings help build wealth of the poor by collecting very small amounts during a single period and making same available in time of an economic opportunity. Additionally, savings deposits add to the MFI's Liabilities account on the balance sheet and show increase in total value of the MFI assets, thus contribute somehow to MFI's sustainability. While reaching a certain level of accumulation, MFIs can also mobilize savings deposits and can be in a position to offer subsidized services to a deserving borrowers segment. Put simply, if MFIs raise capital from market and through shareholders it will have to charge a higher interest rate to the borrowers; and if the same capital is raised from deposits, low interest rates could be offered for loan products.

People prefer mandatory savings to voluntary savings in such cases where they do not have enough to save. A mandatory saving serves as a motivating and enforcing tool for the borrowers to get maximum benefit of the economic opportunities as to enable them to maintain their credit profile. It is generally the personal situation and environment that force an individual to shape his/her preferences. People would find it difficult to save if there was no up-front commitment or regular savings together with installments of the loan. MFI services are for poor people who usually do not have regular savings; and in a case where they have an economic opportunity and the required finances, they have a well facilitated chance to save and fulfill their commitments.

 Mandatory savings are a different product, and therefore should not be included in the price of the loan keeping in mind that these come as part of the loan package. Psychologically and financially a loan is a liability on the borrower, on other hand savings are a liability on the MFI. These do come packaged but serve different purposes. On other hand, the MFI cannot intermediate mandatory savings till the savings deposits reach a certain level. After that regulatory cap is achieved, mandatory savings can be mobilized and used for MFI operations and expansion purposes.

Calculation of a price serves a specific purpose, whether calculations are made for the borrower or for the MFI. In both cases it is the cost of services to the borrower. By definition a price is paid once/several times but can not be recovered. Taking mandatory savings as a price will be wrong by definition because ultimately the borrower will have access to the savings. On other hand mandatory savings are forced savings and can not be labeled as true savings. Any type of saving can not be considered as part of the loan, rather savings are part of guarantees against a loan.

When mandatory savings reflect a cost burden to the borrower, these can kill the wealth generation purpose of the saving deposits. It is an MFI's responsibility to serve its clients with such marketing techniques which present all true figures but highlight the associated poverty reduction measures. It is by all principles not advisable to include mandatory savings in the price of the loan.

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