Clues for achieving a strong savings culture

On an initiative of the Ministry of Finance and Planning, GTZ (German Technical Cooperation) commissioned an islandwide survey to determine the outreach of financial services in Sri Lanka with a special focus on the microfinance perspective. Following is a brief look on the study.

The Sri Lankan financial market is essentially a micro-finance market with over 80 per cent of households having total borrowings below Rs. 100,000. Disparities do exist across sectors, regions and income groups. In the urban sector, 67.9 per cent of households have total borrowings less than Rs. 100,000 compared to 100 per cent in the estate sector.

Microfinance institutions (RDBs, CRBs, Sanasa, Samurdhi Banks, NGOs and CBOs) play an important role in the country with over 60 per cent of households having accessed these institutions. Institutions such as the Samurdhi Banks are particularly important for the lower income groups.

Outreach is fairly extensive with 82.5 per cent of households having accessed financial institutions for their savings and credit needs. The estate sector has fairly low outreach compared to the rural and urban sectors.

There is a strong savings culture in Sri Lanka with nearly 75 per cent of households having saved in a financial institution. However, the estate sector lags behind, with a figure of 68.5 percent and provinces such as the Northern, Eastern and North Western have a savings rate of approximately 65 per cent.

82 per cent of savings accounts are found to be earning interest rates of less than 10.0 per cent per annum. With official inflation rates in double digits since 2005, savers are earning negative returns on their accounts.

Institutional preferences

State banks are generally more popular for savings with over 75 per cent of households saving in these banks (especially the People’s Bank and Bank of Ceylon). This is mainly due to the fact that these banks are seen as reliable and safe.

Accessibility is a prime factor influencing the choice of institution for borrowing. Here too, state banks are comparatively more popular than other financial institutions.

Domestic private banks (such as HNB, Seylan Bank and Commercial Bank of Sri Lanka) play a fairly significant role especially in the case of savings.

In the case of the lower income groups Samurdhi Banks seem to be the main source of finance with over 50 per cent accessing these institutions for their credit needs and approximately 38 per cent for their savings needs.

Informal credit

There is a fairly active market for informal credit in the country with nearly 20 per cent of households having accessed informal sources of finance.

The percentage of households using informal credit is highest in the estate sector.

Only about a fifth of the total value of informal loans is taken from money lenders. This is in contrast to the common perception that moneylenders play a very significant role in the informal sector.

Easy access, ability to obtain funds speedily and the absence of collateral requirements play a key role in motivating households to use informal sources.

Barriers to access and suggestions for service improvement

Three is still an unmet demand for financial services, particularly credit, with over 50 per cent of households claiming to be in need of a loan, indicating that there is scope for expansion in outreach.

Collateral requirements, excessive documentation, rigid terms and conditions and long processing periods are key barriers faced by households when accessing formal institutions for credit. For savings, the key barriers cited are long transactions times, low rates of interest, lack of knowledge of services on offer, excessive documentation and distance to institution.

Insurance services

Simple and quick loan procedures, reduced documentation, greater information dissemination and a customer friendly environment are the key suggestions for service improvement in financial institutions.

Over 31 per cent of households in the country have obtained some form of insurance. However, there is a large disparity between income groups. There are no households in the 1st quintile who have insurance compared to over 40 per cent in the top quintile.

Impact of financial services

A considerable proportion of households feel that their utilisation of financial services has a positive impact on factors such as household income, housing conditions, employment opportunities, overall standard of living and the ability to cope with vulnerability and risks. Low-income groups derive fewer benefits from utilising financial services compared to higher income groups.

A much larger proportion of households (over one fourth) in the poorest quintile utilise their loans for consumption and various emergency purposes (medical treatment, deaths, births etc.) compared to the richest quintile where a larger proportion of loans are used for productive purposes or for purposes where benefits can be derived over a period of time.

Conclusions and outlook

The survey provides evidence of a mismatch between supply and demand. Customers complain of high transaction costs and the fact those providers lack the flexibility they need. Despite financial institutions having a rather extensive coverage, there is still a large unmet demand for credit.

Another striking finding of this study is the clear preference of customers for Government financial institutions. The large outreach of state-owned financial institutions is an added justification for the introduction of market-oriented reforms that would boost the efficiency of these institutions and the financial sector as a whole.

Regulating and supervising microfinance providers would go a long way in improving public and investor confidence in these institutions.

The data indicates that microfinance providers are accessed by a fair number of households therefore, licensing large MFIs and authorising them to mobilise deposits would enable them to expand operations and increase outreach to lower income groups and free them from the limitations of dependence on donor funding.

Despite the fact that Sri Lanka’s financial market is mostly a microfinance market, the advances in terms of poverty alleviation seem to be rather modest. The development in terms of quantity and quality of credit plus services tailored especially to the needs of the poor could prove useful in enhancing the benefits they derive from access to financial services.

The study finds a relatively low utilisation of insurance services. Increasing outreach of insurance services is important, particularly to low income households which can be dragged into poverty by sudden sickness or death.

However, a greater acceptance of insurance services among the general population is required before microinsurance can be developed and expanded.

Approximately 15 per cent of households have multiple borrowers while 35 per cent have multiple savers. Moreover, nearly 8 per cent of households have 4 or more savers, reflecting Sri Lanka’s strong savings culture.

Disaggregating data by gender shows a higher percentage of males among borrowers and savers. This pattern is common for all three sectors, though in the estate sector as much as two-thirds of borrowers and savers are male - 12 per cent to 15 per cent higher than in the urban and rural sectors.