DEMAND AND CHALLENGES OF ACCESSING SAVING PRODUCTS IN TAJIKISTAN MICROFINANCE INSTITUTIONS BY JACQUELINE STENGA SUPERVISOR: DR MAREK HUDON A Master Thesis Submitted in Partial Fulfillment of the Requirements For the European Master in Microfinance - European Microfinance Program Solvay Brussels School of Economics and Management Universite Libre de Bruxelles- Belgium September, 2010 ABSTRACT The main objective of the case study was to describe how savings products are offered by MFIs in Tajikistan The study specifically addresses the following issues; first, types of savings products offered by MFIs in Tajikistan Second, what factors which supports or constraints poor households (or micro and small entrepreneurs) to access/ enjoy savings services from MFIs in Tajikistan Third, the study tried to identify challenges facing MFIs when offering savings products This study involved the use of three research instruments during collection of data, that is, questionnaires, interviews, and focus group discussions Respondents were drawn from the clientele base of various MFIs in Tajikistan and representative of five MFIs Questionnaires were employed to collect data from eighty (80) respondents, and Focus Group Discussions involved sixty four (64) respondents, whilst interviews was conducted only to five representative of MFIs in Tajikistan Questionnaires and FGDs supplemented each other by providing data from demand side (customers) while interviews to representatives of MFIs provide data from supply side (service providers) Findings reveal that common types of savings products in Tajikistan are term deposits, classic deposits, and special deposits (children deposits) These products are offered in local currency as well as in foreign currency Study observed that there is tendency of keeping their deposits in foreign currency in Tajikistan Findings also affirmed that demand for voluntary savings among the poor households is there in Tajikistan, compulsory savings is not considered as savings product because it is part of the requirements to access loans to MFIs This study also find that household income, proximity to financial institution, transaction costs, returns, security, level of education, nature of employment, household social intervention, and flexible product features are key factors from the perspective of MFIs’ client From the service provider perspective, this study noted that competition from experienced banks in savings products, nature of microfinance transactions (small but voluminous), and management of such transactions as key challenges i ACKNOWLEDGEMENT I feel indebted to all people who have extended help and assistance to me in the preparation of this thesis I acknowledge that without their help this thesis would not have been completed Although I cannot mention all of them by name the following people need special attributes First and foremost, I am very pleased to acknowledge the patience, encouragement, moral and material support which I received from my husband, Mr Phillip Kirenga and my sons Colin and Ibrahim, indeed they have sacrificed to me a very meaningful time that has enabled me to come this far Equally I feel obliged to extend my sincerely gratitude to my parents, Evelinus and Hellen Stenga Second my special thanks should go to my supervisor Dr Marek Hudon, of the Free University of Brussels (Universite libre de Bruxells-ULB) for his timely feedback and comments that were most valuable in the completion of this work Despite his busy schedule he found time to go through and correct my work Third I would like to express my sincere thanks to Ms Justyna Pytkowska a researcher at MFC Poland and Ms Magdalena Wronska researcher assistant who tirelessly helped me to organize and eventually collect data in Tajikistan both by questionnaires and FGD Special thanks to Magdalena for the role she played in the accomplishment of this study, specifically in translating my questionnaire from English to Russia and even my final data back to English I also feel highly indebted to management of MFC Poland and all the staff for their immeasurable support I can say confidently that without their help this thesis would never have been completed Lastly but not least I owe thanks to all the people who could not be mentioned here but have contributed in one way or the other into the completion of this thesis To all of you I say thank you and may our Almighty God bless you Finally while acknowledging the assistance of institutions and individuals mentioned above I remain personally responsible for all errors and shortcomings that might be found in this thesis ii TABLE OF CONTENTS ABSTRACT i ACKNOWLEDGEMENT ii TABLE OF CONTENTS iii LIST OF TABLE v LIST OF ABBREVIATIONS i CHAPTER ONE .1 BACKGROUND INFORMATION 1.1 Background .1 1.2 Study area description 1.3 Deposits market trend in Tajikistan 1.4 Problem statement 1.5 General Objective 1.6 Research Questions 1.7 Limitation of the study .5 CHAPTER TWO LITERATURE REVIEW 2.1 Microfinance services and poor communities 2.2 Motives for low income people to save 2.3 Types of savings products needed by poor households 2.3.1 Compulsory savings 2.3.2 Flexible (voluntary) saving product 10 2.4 Challenges facing low income people to save with financial institutions 11 2.4.1 Supply side .11 2.4.2 Demand side 12 2.5 Empirical Evidence 13 CHAPTER THREE 15 RESEARCH METHODOLOGY .15 3.1 Methods 15 3.1.1 Research Instruments 15 3.1.2 Sampling Design 15 3.1.3 Sample Selection .16 3.1.4 Data Collection .16 3.2 Data Analysis 16 CHAPTER FOUR 17 FINDINGS AND DISCUSSION 17 4.1 Introduction .17 4.2 Description of the Respondents 17 4.3 Microfinance Organization in Tajikistan 18 4.4 Savings Products: The Perspectives of Service Providers 19 4.5 Types of deposit products, Organizations, and Tariff Guide .21 iii 4.6 Factors that influence the usage of savings services from financial institutions 24 4.6.1 Household income 24 4.6.2 Proximity to financial institution 24 4.6.3 Transaction costs .25 4.6.4 Returns 25 4.6.5 Security 26 4.6.6 Level of education 26 4.6.7 Nature of employment 27 4.6.8 Household social intervention 27 4.7 Focus Group Discussion- summaries 27 4.7.1 Forms of Savings .27 4.7.2 Source of Income .28 4.7.3 Household Expenditure 28 4.7.4 Factors that affect people’s savings behavior 28 4.7.5 Poor households’ trustfulness on financial institutions .29 4.7.6 The trust to formal financial institutions like MFIs compared to Banks .29 4.8 Conclusion 29 CHAPTER FIVE 30 CONCLUSIONS AND IMPLICATIONS 30 5.1 Conclusions 30 5.2 Implications .31 5.3 Suggested area for future research .31 REFERENCES 32 APPENDICES .36 iv LIST OF TABLE Table 1: Gender Profile of the Respondents 18 Table 2: Financial Institutions in Tajikistan 19 Table 3: Deposit Products in Local Currency .22 Table 4: Term Deposit in Local and Foreign Currency 23 Table 5: Attributes that influence Financial Inclusion (Demand Perspectives) .26 Table 6: Microcredit and Micro-Deposit Services in Tajikistan as of January 2009 36 v LIST OF ABBREVIATIONS AMFORT Association of Microfinance Organizations of Tajikistan ASCA Accumulating Savings and Credit Association CGAP Consultative Group to Assist the Poor GDP Gross Domestic Product MDO Micro-Deposit Organization MFI Microfinance Institution MLF Micro loan Fund MLO Micro loan Organization PPP Purchasing Power Parity ROSCA Rotating Savings and Credit Association WSBI World Savings Banks Institute i Table 5: Attributes that influence Financial Inclusion (Demand Perspectives) Number of Total Number Percentage Respondents of Respondents Household income 80 80 100% Proximity to financial institution 54 80 67% Transaction costs 54 80 67% Returns 27 80 34% Security 33 80 41% Level of education 69 80 86% Nature of employment 74 80 92% Household social intervention 65 80 81% Flexible product features 20 80 25% Source: Field data 2010 4.6.5 Security Low-income households perceive that they are vulnerable to physical risks such as theft hence looking for solution Thirty three (33) respondents mentioned the issue of security as attributing factor for them to have savings account They constitute forty one (41) percent of all respondents This becomes an issue if the persons or households are well to enough beyond consumption, and left with something to save This is a rare case to majority of self-employed persons in Tajikistan The question of security extends further from safety of money one possesses to include safety of chattels one possesses 4.6.6 Level of education Sixty nine (69) respondents out of eighty (80) respondents mentioned that level of education has a role to play in motivating the person to have enjoyed the savings services from financial institutions They are eighty six percent (86) of all respondents Taking the pyramid structure of level of education, majority with primary education are found at bottom, followed by secondary education, and later at the top 26 tertiary education The people at the bottom, end up doing self-employed activities, less are employed in the formal institutions, the situation that render the volatility of income Climbing the ladder of that structure, household income kept stabilizing due to fact that people with tertiary education are likely to be employed in private or public institutions, or self employed in stable business ventures 4.6.7 Nature of employment About seventy four (74) respondents out of all eighty (80) which constitute ninety two percent (92%) of the total representation see employment as important factor in enabling person to seek savings services from financial institutions Microentrepreneurs are self-employed individuals, owner-operators of their enterprises Distinction between business income and household income is hard to be established among Micro-entrepreneurs, rendering what is obtained to be used for household consumption as well as cushioning the working capital of enterprises In the formal employment especially in the public sector, people were obliged to have savings account for official use say imbursement of salary to employees, thus people who are employed are likely to have savings accounts than the self-employed Microentrepreneurs 4.6.8 Household social intervention About sixty five (65) respondents out of all eighty (80) which constitute eighty one percent (81%) of the total representation place opinion that social interference is another attribute to have savings account Due to extended family factor, household disposable income becomes insufficient for the households to remain with something to keep as savings Households with family members abroad (Russia, Ukraine, and Kazakhstan) are likely to seek savings account for remittances purposes of money from abroad Above findings were supplemented by other observation collected through Focus Group Discussions as indicated below 4.7 Focus Group Discussion- summaries 4.7.1 Forms of Savings Participants of FGD mentioned the common forms of savings in Tajikistan; majority preferred to keep cash or being liquid by maintaining less cash, but preferred to keep 27 large proportion of their lifetime earnings in the form of kind such as jewelry, cattle, and houses/flats Devaluation of local currency is one among the reason why people not prefer to keep cash They also mentioned that in some parts, people are still using Black cash box as savings instrument 4.7.2 Source of Income Majority of participants in the FGDs conducted mentioned that main source of income is wage or salary from being employed in non official sector in Tajikistan or remittance sent home by those who migrated abroad The income can be described as regular salary or irregular salary depending to the persons involved Borrowing from family members/relatives is also among source of income and last resort might come from selling of households’ equipments/furniture if other possibilities fail 4.7.3 Household Expenditure Consumption and obligatory payments constitute the largest percentage of household expenditure among majority Tajikistanis Participants further said that during spring and autumn season’s households incur larger expenses due to the fact that at this period they were suppose to buy tickets for family members who will go abroad to work as migrants and to prepare the farms/field for the coming seasons Also save money for festivals for instance weddings, child birth and religion festivals 4.7.4 Factors that affect people’s savings behavior Participants of the FGD revealed that the level of people’s income affects their saving behavior/pattern; Views of people who are working with states for example education sector, health sector, pinpointed that what they receive as salary is not enough for consumption and at the same time to make savings This forced them to have multiple/additional jobs as other source of income as what they earn is all used for consumption /daily spending but not for savings Additionally it was also noted that the size of regular income depends on seasons of the year for instance during spring, summer and autumn, the main jobs were mainly agriculture, plantations work, constructions activities and industries jobs Majority of the people migrate during spring to autumn and were moving to Russia, Kazakhstan and Ukraine The findings revealed during winter it was difficult to find a job Young 28 people moves around the country to search for job though is less popular than migrating to abroad Lastly it was noted that increase in obligatory payments for instance utilities like bills for water, electricity have a negative effect on saving abilities of the poor households 4.7.5 Poor households’ trustfulness on financial institutions Findings from this study reveal poor households didn’t want to use banking services or microfinance institutions due to; –lack of experience in using banking services and also lack of information about banking services/MFIs, according to the respondent opinions this is due to the fact that bank/financial institutions have no leaflets with the information about services/products which they offer- this could be the reasons that saving services are not popular among low income earners in Tajikistan 4.7.6 The trust to formal financial institutions like MFIs compared to Banks Findings from this study indicate a number of reasons among them being shorter period of processing credit applications, MFIs clients don’t need too many documents to receive credits and the staff does not request bribes –this is according to respondents opinions, though some of them have no experience in banking services/sector 4.8 Conclusion The findings of this study concurs with what was observed in survey conducted by Kiiza and Pederson (2002) in Uganda, Ashraf et al (2006) in Philippine and Bertrand et al (2010) in South Africa In their survey, low income peoples mentioned that interest rate (return), distance to the bank, education level, level of permanent income and transaction costs were the main reasons for them not to have saving accounts in formal financial institutions 29 CHAPTER FIVE CONCLUSIONS AND IMPLICATIONS 5.1 Conclusions Based on the findings depicted in the previous chapter, this study reserves its conclusions as follows: First, MFIs/MDOs in Tajikistan offer savings products mainly as savings accounts and term deposits The product features seem not to be rigid in terms of duration, interest rate, minimum balance, opening balance, fees (withdrawal and monthly), and currency (local or foreign) In addition, there are number of factors on the side of service providers that determine the Micro-enterprises to access or enjoy savings services from MFIs/MDOs in Tajikistan Branch location, distance from homestead to bank, and all transactions to be incurred by clients are among the noted factors on the side of service providers Furthermore, there are also numbers of factors on the side of buyers (potential customers) that limit Micro-enterprises to access savings services from the institutions Amount and stability of disposable income were among the noted factors that hinder the potential Micro-enterprises to access savings products from MFIs/MDOs Moreover, financial inclusion in the sense of savings products traditionally used to be carried out by commercial banks; these banks are more experienced and have capital base advantage than MFIs/MDOs thus posing stiff competition to MFIs To sum up, this study also noted that microfinance sector doesn’t enjoy people confidence since majority of people trust big commercial banks and if they would like to save they prefer/ trust commercial banks rather than MFIs/MDOs 30 5.2 Implications MFIs/MDOs are important institutions to reach the unsaved Micro-enterprises left by commercial banks due to stringent conditions required by banks The flexibility of these institutions to start offering savings products that reflect the characteristics of the low-income segment imply that financial inclusion has moved one step ahead in Tajikistan However these efforts not elude the inherent constraints both from supply side as well as demand side These institutions can control the constraints in supply side but have no control to maneuver the constraints in demand side 5.3 Suggested area for future research This study noted that majority of Tajikistanis seems to acknowledge the importance of remittances from abroad This show that the tendency for some people to seek job in neighboring countries with economy which is better than Tajikistan is quite common among the local population, especially the youth and male population Therefore this study suggests further research to be: “The Impact of Remittances to welfare of Tajikistan poor Households” Also since the current quantitative study was based on small sample size taken from the MFIs/MDOs that operates in the capital of Tajikistan, the results cannot be generalized to other areas of country 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Why? 4) In which months the highest expenditures occur and for what? 5) Why and when people don’t save although they earn income – they spend all their money on consumption, or they invest some of their money? 6) What are the factors that affect people’s saving behavior? 7) Why poor households not trust financial institutions? 8) Why people trust MFIs rather than banks? 37 APPENDIX : Questionnaire for MFI Clients • Before interview, the clients should be informed on the purpose of the study and what kind of information is needed • Questions should be well elaborated for the client to understand SECTION A; Respondent’s profileRRAnne2 Gender of Respondents (a).Female ( ) (b).Male ( ) (a) Primary School ( ) (b) Secondary School ( ) (c) Tertiary Education (College or University) ( ) Level of Education Employment Status (a) Employed by Government ( ) (b) Employed by Private company ( ) (B) Self Employed ( ) If you are self-employed, what kind of economic activities you are engaging with? ………………………………………………………………………………………… SECTION B; MICROFINANCE SERVICES As the customer of MDO/MFI what kind of services are you getting involved with those services providers? …………………………………………………………………………………………… What are common types of savings products that are offered by MDO/MFIs in Tajikistan? 38 (a)……………………………………………………………………… (b)……………………………………………………………………… (c) …………………………………………………………………… (d) …………………………………………………………………… Among the mentioned savings products which one is most preferred in your scale of preference? ……………………………………………………………………………………… ……………………………………………………………………………………… ……………………………………………………………………………………… What are the reasons that attributed to that preference? ……………………………………………………………………………………… ……………………………………………………………………………………… ……………………………………………………………………………………… What currency you prefer to keep your savings in MDO/MFIs in Tajikistan (a) Local currency ( ) (b) Foreign currency ( ) 10 Please mention factors or attributes that influence the usage of savings services offered by financial institutions in Tajikistan? …………………………………………………………………………………………… …………………………………………………………………………………………… …………………………………………………………………………………………… 11 Among the factors you have mentioned, can you rank them (a)……………………………………………………………………………… (b) …………………………………………………………………………… 39 (c) …………………………………………………………………………… (d) ……………………………………………………………………………… 12 Have you ever received remittances from relatives or friends who works abroad ? (a) Yes ( ) (b) No ( ) 13 How often you receive remittances from abroad? ………………………………………………………………………………………………… ………………………………………………………………………………………………… APPENDIX 3: CHECKLIST OF MDO/MFIs questions What are the factors that push institution to offer savings services? What are types of savings product offered in Tajikistan? What product has high demand in Tajikistan, and What are challenges encountered by financial institutions that offer savings products 40 ... in Tajikistan, what saving product with high demand in Tajikistan and what are challenges encountered by financial institutions that offer savings products were the main focal points of the interviews... the study focusing on the demand and challenges of accessing saving products to poor households in Tajikistan microfinance institutions 1.5 General Objective The general objective of this study... push institution to offer savings services? What are types of savings product offered in Tajikistan? What product has high demand in Tajikistan, and What are challenges encountered by financial institutions