Small balance demand deposits from poor clients are viewed as a particularly volatile class of funding. Low-income individuals are thought to transact more frequently than account holders with larger balances, and they are believed to be more prone to income disruptions from recession, natural disasters, health issues, crime, and other factors. For these reasons, microfinance institutions (MFIs) that are stepping into this underserved space are concerned about using deposits to fund their lending operations. In addition, regulators often mandate very strict statutory liquidity and reserve requirements that limit or effectively prohibit the intermediation of “micro” customer deposits into lending activities.
The objective of this research is to put the conventional core deposit theory to the test by examining the actual behavior of deposits raised from poor individuals. This study focuses on five institutions in developing and emerging markets that, all but one, have large deposit volumes from low-income savers.