The Forgotten Half of Microfinance Not Forgotten at XacBank

By Kevin Henderson, KF11, Mongolia

“What is microfinance?” I’ve been asked this question a lot during my time as a Kiva Fellow. I used to answer by saying “microfinance is extending credit to people who do not have access to the traditional financial system” then remembering Kiva Fellows training I would add, “but not just credit, it’s providing other financial services, too.”

I think because Kiva is a lending platform and the field partner I primarily work with in Mongolia, Credit Mongol, is exclusively a lending institution*, it’s easy to forget about the “other” part of the equation. So I was very interested to learn about a program at XacBank, Kiva’s other field partner here, that is using funds from Kiva to provide more than just credit. Since August 2009, XacBank has provided Kiva borrowers with savings accounts when their Kiva loans have been repaid. To start the borrowers-turned-savers off XacBank returns 9% of the interest a borrower pays over the course of his or her loan.

Offering the poor a safe, liquid option for savings can be as valuable as providing credit. Savings can protect against interruptions in income caused by, for example, the loss of a job or illness. Providing a secure location for deposits can also remove the temptation to spend frivolously (see a great article on this topic by Nicholas Kristof in the New York Times). Deposits are also beneficial for the sustainability of the lending institution because they are a source of capital.

Savings programs are actually commonly called the forgotten half of microfinance. Due to the high administrative costs of accepting small deposits most banks have been unable to offer this service. Unlike microcredit, which is often funded by donor aid and organizations such as Kiva, there haven’t been many organizations committed to funding savings programs.

XacBank began offering the savings account program for Kiva borrowers when they were looking for a way to share the benefit of Kiva’s 0% interest capital. Since Kiva loans are usually pre-funded from the bank’s source of capital and there isn’t a guarantee they will be funded on the Kiva website, XacBank can’t offer a lower interest rate to Kiva borrowers and instead decided that returning interest in the form of savings accounts would be the best way to contribute to Kiva and XacBank’s common goal of alleviating poverty.

The greatest challenge in implementing the savings program has been extending it to all Kiva borrowers. XacBank can only afford to offer the program to borrowers who repay their loans as scheduled. 55% of borrowers are ineligible because they repay early. However, of borrowers who do receive accounts, Xacbank has found that so far they have all kept their accounts open and some clients have even started making small deposits.

I’m getting better at explaining that microfinance is about more than just lending. For me the best reminders are these press releases from XacBank describing proud Kiva borrowers receiving their account passbooks. XacBank translated these press releases into English to share them with Kiva lenders.

XacBank branch in Arhangay province started opening savings accounts for its Kiva borrowers

January 29, 2010. Branch staff informed our clients of this happy news via phone. Microentrepreneurs all were very happy no matter if they received 1000MNT or 10,000 MNT in their savings account. Mongolians are very superstitious. The day we organized the event to hand them a savings book was a special day in the Buddhist calendar that wealth is increased a lot if someone has wealth on this day. One of XacBank’s repeat clients Ms. Davaadorj wore her best traditional dress because she respects this event and her understanding was that she was getting a benefit from an international organization. She was very proud of herself for becoming a Kiva borrower. All microentrepreneurs who received Kiva benefits through savings accounts expressed their gratitude to both Kiva Microfunds and its lenders and also to Munhmandah and her colleague Ms. Botagoz who are working on this project. In this picture: Kiva borrower and Micro Entrepreneur Davaadorj C., branch manager Galya Ch. along with branch staff.

Motto: Let’s take the Kiva loan. Let’s pay it back on time. Let’s get the benefit from it.

April 30, 2010. Invitation to the Kiva event in Uvurhangay province was distributed to XacBank’s micro entrepreneur clients. The event was held on the following day. Best performing micro borrowers were awarded a Kiva savings passbook with total amount of MNT 418,000. At the event XacBank promoted its microfinance services and products to participants. Furthermore, XacBank’s success stories and microclient successes were presented during the meeting. There was high satisfaction shown on our borrowers’ faces.

* I don’t want to imply that Credit Mongol has forgotten about the importance of savings in microfinance. As a non-bank financial institution they are prohibited from accepting deposits.

Kevin Henderson is serving in Ulaanbaatar, Mongolia as a member of Kiva Fellows 11th Class

You can lend to a borrower in Mongolia here!