Are Deposits a Stable Source of Funding for Microfinance Institutions?

Poor people save. The conventional view is that low-income depositors transact more frequently than holders of larger accounts and are more prone to income disruptions from natural disasters, health issues, crime, and other factors. This perception makes financial institutions stepping into the under-served low-income space worry about whether they can use small deposits to fund their lending operations. But new research finds that under normal circumstances, aggregate balances for low-income accounts move gradually, and they are not prone to abrupt month-by-month swings. This should make liquidity management easier because it gives the institutions enough time to adjust to changes in deposit supply over several months.

Of course, financial institutions cannot take for granted that any of their deposits are stable, long-term sources of funds until they have carefully analyzed typical savings patterns in their portfolio of deposit products. This analysis informs their liquidity management and their funding strategy. Deposit-taking MFIs should use the same type of analysis on their deposit products, and refine their liquidity planning and funding operations accordingly.