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Report 5 of 5:
Safeguarding
Deposits - Madagascar
Introduction
Savings are a way of spreading income available in the good times over the times when things are not going so well. If a harvest is plentiful, the farmer may have some spare capital to keep for the time when drought or disease spoils his crop. A safe place to keep these spare funds is needed. For most people, any money which is not needed immediately would normally be deposited in a bank savings account both to provide security and to earn interest.
However, for the majority of people living in the more remote regions of Africa, a trip to a conventional bank can involve a long journey. For most of these people, too, the conventional banking system is unsuitable for their needs because, generally, the normal banks can only operate with relatively large sums of money. To the small farmer or trader, the minimum balance demanded is often far more than they have, so they are left without a secure place to keep their capital.
One traditional way of saving is to invest in more livestock, which can be sold when the money is needed. However, if the livestock should die for some reason, the capital invested in it is gone forever. If cash is kept in the home, even if it is carefully hidden, it is often at risk of being stolen. Even within the towns, the owners of small businesses do not always have access to secure banking because they, too, often suffer from the same requirement for large balances - the ownership of a business does not always mean wealth.
Conventional banking systems
The people who are excluded from the conventional savings system are also automatically excluded from the other side of the banking business - the provision of loan and credit facilities. This makes it difficult for a trader to expand the business or for a farmer to extend the range of his or her crops. Small amounts of spare capital may help to smooth out the difficulties of bad times but long-term savings would normally be needed to finance a significant improvement in an enterprise, whereas a loan can bring forward such business development.
Conventional banking works on the basis of taking deposits from savers and then lending them to other people - who repay the amount of the loan plus an additional sum in the form interest. Some of the interest is paid to the original saver. While the amount of money available to an individual saver may be small, the total amount of possible savings can represent a very large sum. By excluding the many small savers from this system, a country's economy is deprived of the use of their savings. A large proportion of the world’s population lives in rural areas and savings mobilised by efficient and well-managed local financial institutions could finance an increased level of development investment in rural areas.
Savings and access to credit for rural areas
The Food and Agriculture Organization of the United Nations (FAO) is particularly interested in the problems of savings and credit-access in rural areas as both have an effect on the farmers and the operators of other rural enterprises and, therefore, on the effectiveness and efficiency of food production. As a result of extensive studies, FAO has identified a number of problems in the whole area of rural finance. It has responded by developing a wide-ranging programme of activities to support the development of safe and fair savings systems and the provision of credit and loan facilities which include those people who can not gain access to the conventional banking systems. FAO believes that rural financial systems have to be developed if larger numbers of the rural population are to be provided with cost-effective facilities for savings deposits and credit.
In developing its rural finance programmes, FAO follows three basic principles:
- Adoption of realistic rates of interest – usually market rates
- Mobilisation of local savings – an integral part of financial mediation
- Promotion of a variety of less institutional types of financial intermediaries
Micro Banker
In order to promote the efficient management of savers’ deposits in the smaller banks, especially in rural areas, FAO has developed a computer programme called "Micro Banker". This software is a comprehensive banking system designed for all the different financial functions, such as loan, savings and current accounts, time deposits and share accounts. It is currently in use in over 1000 locations in some 30 countries.
Micro Banker is used by the Tanzania Postal Bank, whose clients are mainly people with low income, such as market traders and farmers. Some people, such as the Maasai, keep their savings in the form of cattle, but most keep their money at home. The Tanzania Postal Bank makes use of about 140 rural post offices and has embarked on a programme of advertising though a weekly radio programme which tells listeners about the availability of banking services close at hand. When a client has had an account open for a year, he or she may qualify for a loan, the size of which is decided by the manager when s/he has looked carefully at the security and guarantees available – just as in the large-scale banking world.
The bank provides a vital service to those who simply do not have the 100,000 shillings demanded by the larger banks as a minimum deposit. The Bank’s use of the MicroBanker software encourages clients’ confidence in the banking system because it can be seen in operation and speeds up transactions considerably. The long queues associated with the old, manual system are now a thing of the past and the clients have the added security of knowing that the country’s central bank, Bank of Tanzania, supervises the Postal Bank’s activities.
The bank is also exploring the provision of small loans through local savings societies which will be able to manage small loans effectively. The idea is that the Bank will provide a relatively large loan to the society which will then break it down into small sums for onward lending because it is not efficient for the Bank to manage loans of 10,000 shillings itself.
Member-owned banks
In Madagascar, another approach has been taken up for the provision of savings services. The initial deposit is a shared deposit put together by the members of the bank. The shared deposit forms the core capital. Credit and savings facilities are based on the members’savings. Only co-owners have access to the bank’s facilities.
In the market place of Toamasina, a local bank has been set up amongst the traders’ stalls. One of the traders, Madame Berthe Rasroanadreny, acts as a savings-collector, passing among the other traders who are too busy to go to the bank themselves. The system works because Madame Berthe is well known and trusted and the system is open and secure. Now, the traders save as they make their profits and are not tempted to spend their money unnecessarily.
Micro-enterprise credit system
Yet another rural savings system is operated in from Arusha, Tanzania through the development agency Pride Tanzania. Over a period of time, it has set up a combined savings and credit system which now operates in 22 branches and has 24,000 members. The members are required to form into groups of five people, with each of the members having to contribute with mandatory savings and each prepared to provide financial guarantees for the other members of the group. If one member needs a loan, then the others also take on some responsibility to ensure that it is repaid, otherwise they themselves will have to repay it. Once the member repays the loan, s/he can get a bigger loan.
The pool groups have to attend rigorous training sessions on a regular basis. Such a system requires a very high level of trust and confidence, not only in the system but also among group members. However, it has proved itself to be an extremely effective system as the loan repayment rate is 100%.
Some tips for setting up local financial services
Initially, specialist help is recommended which may come from experienced national or international NGO’s or development agencies. Organizations such as FAO can provide guidelines for the analysis of the potential market for financial services within a targeted population.
What next?
- Go to the central bank and check local regulations about accepting deposits
- Decide whether you come under
- banking legislation
- NGO legislation
- Co-operative legislation
- credit union legislation
Most countries have banking and co-operative legislation.
- You have to understand the needs of your intended clients:
- savings
- credit
- and/or money transfer
- Decide for which institutional structure you go:
- bank
- savings/credit union
- informal saving like village banks
- Design financial procedures that suit your client.
For example, the bank in some local markets has to provide loans in the morning which are paid back in the afternoon.
- Train your staff and put in place procedures that ensure that internal control of your management is adequate.
Overall you need procedures that guarantee security, safe deposit facilities and meet the real needs of the clientele.
For further information, please contact:
ITDG would like to acknowledge the Food and Agriculture Organization of the United Nations (FAO), in particular Anne De Lannoy and Anthony Slangen, for providing the original material on safeguarding savings and micro-credit.
This document is an output from a project funded by the UK Department for International Development (DFID) for the benefit of developing countries. The views expressed are not necessarily those of the DFID.
Further reading available from ITDG Development Bookshop
Rural Credit: Lessons for Rural Bankers and Policy Makers
K.P. Padmanabhan
What is – and what should be - the role of rural credit in developing countries? There are two main views. The ‘banking school’ emphasises the importance of financial viability of lending institutions, the removal of subsides (including cross-subsidies) and the mobilisation of savings. The ‘development school’ empasises the need to steer rural credit into productive projects, and into the hands of the rural poor. The author is well equipped to steer the reader through this debate, and towards sound practical solutions and he uses comparisons from many countries including the Indian sub-continent, the Philippines, Brazil, Cameroon, Malawi and South Korea.
£9.95 1996 PB ITP ISBN 1853390208
Microfinance and Poverty Alleviation: Case Studies from Asia and the Pacific
Joe Remenyi & Benjamin Quinones
This important new book collects the experience of microfinance practitioners in eleven countries in the Asia-Pacific region: Bangladesh, India, Nepal, Sri Lanka, Indonesia, Malaysia,the Philippines, Papua New Guinea, Fiji, the Soloman Islands and Tonga. It is designed to provide an overview of the subject: why is microfinance so essential to poverty reduction, what is the current ‘best-practice’ and what kind of policy framework and regulatory environment is required?
£15.99 2000 HB Pinter ISBN 1855676427
Looking Beyond Credit: Business development services and the promotion of innovation among small producers
Jonathan Dawson & Andy Jeans
Credit has become the predominant form of support to small producers, while the role of other forms of business development services has diminished. Studies of the developmental impact of credit schemes find that they are generally beneficial, but there are important reservations: the benefits are in many cases not sustainable over time, and the poorest producers can even be disadvantaged by such schemes. This is the first of the ITDG working papers series, designed to make available to a wider readership the information that ITDG is generating about technology and development. The papers are selected as worthy of distribution to the wider development community, with the hope of provoking further research or uncovering similar work in progress.
£12.95 1997 PB ITP ISBN 1853394238
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