2.0 Deposit Collection and Credit Extension: Microfinance in Africa - Experience and Lessons from Selected African Countries

(IMF Working Paper, Prepared by Anupam Basu, Rodolphe Blavy, and Murat Yulek1, September 2004)

The importance of deposit collection in the development of microfinance services has arisen from the fact that the poor value both deposit and lending services. Surveys have shown that small entrepreneurs seeking micro financing for their projects constitute a relatively smaller subset of the poor population than the segment interested in accessing deposit services.2 The poor value the availability of liquid and secure financial vehicles for savings for a variety of reasons. First, such savings help poor farmers to smooth their consumption expenditures between lean and peak harvesting seasons, and provide a cushion against income fluctuations caused by exogenous shocks. Second, savings could be used to pay for inputs needed at the start of production processes, and self-finance future investments or leverage supplementary financing for them. Third, saving deposits also provide a convenient vehicle for setting aside money for such costly future events as weddings, children’s education, and funerals.

While poor households may save in the absence of deposit services, for example in cash hoards, by acquiring assets such as gold, or by stockpiling relatively non-perishable commodities between harvests,3 saving services offered by MFIs have the advantage of security and liquidity that makes them popular among the poor, especially in rural areas.

Hence, deposit collection has played a central role in the development of the microfinance sector in many African countries. Hirschland (2003) identifies the four major criteria valued by households concerned with savings mobilization as access, security, liquidity, and returns.

As described in Box 1, the expansion of MFI services and outreach has been supported by a parallel expansion in deposit collection. To achieve such performance, MFIs have provided the means for overcoming three main barriers to the use of the deposit facilities commonly offered by banks (as identified by the World Bank, 1997): (i) high opening and minimum account balances, (ii) high travel time and transport costs involved in making deposits and withdrawals at the bank branch, and (iii) lack of familiarity with bank branch operations and procedures. To learn more about this author, visit International Monetary Fund's Website.

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