Microsavings compared to [i.e. with] other sources of funds

To take full advantage of savings as a source of funds, however, microfinance institutions (MFIs) must be aware of the costs and risks involved with the deposit business. The paper discusses the various aspects of savings as a source of funds compared with other sources such as equity, commercial loans, and grants. After examining the liabilities structure of traditional banks and non-bank financial institutions, the specific risks involved in funds management are reviewed. Finally, the differences between the funding strategy of MFIs and traditional financial institutions are examined to provide insights into existing obstacles for commercializing and "popularizing" the sources of funds in MFIs. The overall conclusion is that, while deposit facilities are an essential service for microclients, only technically and financially sound MFIs should embark on this business. Larger programs should be run by commercial banks. While few such banks are currently engaged in the microfinance business, empirical evidence clearly shows that competitive pressures at the corporate, upper-end of many financial markets push commercial banks into new lower-end, high-margin markets that are traditionally covered by NGOs. It can be expected, then, that more and more commercial banks will become part of the microfinance industry over the next years. For their part, savings and credit cooperatives and village banks have a limited clientele and outreach and often exhibit a mixed record in terms of financial performance and institutional sustainability. There are strong indications, however, that village banks successfully develop networks that allow for economies of scale and scope. Also, new regulations in countries such as Bolivia attempt to consolidate the savings and credit cooperative sector through mergers and the introduction of demanding performance standards. In consequence, these institutions will become more important as depositories for the economically disadvantaged. Contains recommendations for donors, along with references.