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Remittances And Savings Reflections From Kyrgyzstan Finca Finance Essay

Remittances – the portion of money migrants send back home to their relatives and families – change lives оf millions of people in developing country, providing essential financial support. For many years, migrant workers worked in the shadows of globalization while their remittances went uncounted by governments and aid agencies. Over the past ten - fifteen years the true size of their contribution – over US$300 billion a year – has been revealed. Moreover some remittances researchers and experts conjecture that unofficial flows of remittances could be even larger than the formal transfers.

Remittances service is related to delivering money from one location to another through a specific channel, which is extensively used by labor migrants remitting funds to their families in home countries. Remarkably, migrants tend to remit more during periods of economic downturn in their home countries, so the remittance products are both relatively stable and countercyclical in nature.

Money transfers have the potential to become a vehicle for local development, as well as they are linked to poverty reduction for people who receive them. International Fund for Agricultural Development (IFAD 2009) states that “from 30 to 40 per cent of remittances are sent to rural areas, where financial services are often lacking”. Due to the close proximity of microfinance institutions (MFIs) to these families, client groups, who likely to receive remittances, as well as the experience working with low-income people, microentrepreneurs, there is a potential and opportunity for MFIs to enter the growing market and provide remittance services for potentially lower cost, thus complementing MFIs' focus on the lower income populations.

Remittances are able to generate wealth, increase savings as well as investment potential for the clients. Leveraging remittances, linking remittances with other financial services, like credits and savings, contributes to clients’ welfare (Jaramilo 2008); at the same time designing new improved financial services (remittance linked products) may attract new clients and meet expected needs of remittance receivers and foreign workers (Hastings 2006).

When remittance savings are invested in financial sector, a bank or microfinance institution (MFI), instead of saving money “under the mattress”, remittances in this case can become a source for development of the community, country, thus contribute for poverty alleviation and become the money that can be mobilized to help other clients, entrepreneurs.

Recently microfinance institutions are seeking ways of linking remittances with other financial products they provide in order to increase financial inclusion of population, however up to date the scale remains limited for such movements, programs (Ratha 2010).

Kyrgyzstan is one of the poorest countries in Central Asia with the level of poverty of more than 40 percent. Among other neighbor countries Kyrgyz economy is highly dependent on remittance flows, which represent up to 30 percent of country’s GDP (World Bank 2009). External labour migration is expected to grow in the following year [1] , thus making dependency on the remittances even more obvious.

Kyrgyz microfinance sector is very competitive, involving numerous microfinance institutions operating in it. Money transfer activities are not widely represented by microfinance institutions, as long as savings products, while the demand is expected to be significant, while money transfer operators are well-established and recognized (ADB 2009).

The objective of this paper is then to answer to the main research question whether there is a demand from the clients of microfinance institution for remittance services and linked savings in remittance-dependent country. The aims of this study is to better understand whether remittances can be combined with savings models by examining the attitude of MFI’s clients with respect to remittances and savings behavior; to assess the new products opportunities for a microfinance institution that operates in a country that at some level is dependent on remittances; to better understand which remittance products would be best suited in country context using one specific MFI.

For this purpose quantitative extensive survey was conducted in Kyrgyzstan with the clients of one MFI in order to contribute to the knowledge regarding remittance, migration patterns and savings, explore the financial needs, investment opportunities and behavior of clients and identify the market potential and perception of these clients for remittances and savings products.

The first section of the paper will provide an overview of the literature on the topic of remittances, savings and country context. The second part will explain methodology used for the purpose of this study, data collection and analysis methods, followed by the survey findings, data description and results analysis. The last part will conclude the whole paper and shed a light on whether objectives of the study were reached.

Literature Review

Remittances and Microfinance. Every year hundreds billion of US dollars are sent by migrants back to their home countries. According the Word Bank information in 2009 more than US $ 315 billion was sent by 200 million foreign workers to their countries of origin. In most cases volume of remittances are far bigger than the foreign direct investments and the official foreign aid flow from OECD member states. Some countries, like Tajikistan, Tonga, Moldova and Kyrgyz Republic, are strongly depended on remittances inflows. This indicates the share of remittances in GDP of the country, sometimes this number can reach up to 49% (World Bank 2009).

Literature on remittances and microfinance is more focused on the guidance on developing and implementing remittances, rather than on overview of all important factors to consider for MFIs before implementing new services, like challenges, opportunities and barriers for MFIs and perception of the clients. IFAD (2006) states that “the early experience of newcomers to remittance services highlights the importance of conducting careful feasibility assessments to inform the design, pricing and introduction of products”.

However, Sander (2003) asserts that it is crucial to assess the capacity of MFI and its business environment in order to understand whether the MFI can capture a market share in the existing remittance market by providing services that should be of lower cost and improved.

Relevant literature reports some benefits for microfinance institutions (MFIs) when they are offering remittances services along with already existing credit and other products; among these benefits are improving existing customer satisfaction, attraction of new clients, thus increasing outreach, development of combined new loan products (CGAP 2008, FDC 2007, Hastings 2006, IFAD 2008, Isern et al. 2005, Jaramilo 2008, Orozco and Hamilton 2005, Sander 2003, Sukadi 2006, 2009).

Among the benefits MFIs possess some competitive advantages and opportunities in entering remittance market. When it comes to geographical presence in the country of operations, due to the branch network MFIs have significant advantage over commercial bank and money transfer operators (MTOs), especially if MFI is more present in rural areas (Sukadi 2009, Sander 2008, Orozco and Hamilton 2005, Evans and Klaehn 2004). Evans (2004) also indicates that proximity to the borrowers lead to lower transaction costs for the latter.

MTOs and banks usually are not extensively present in rural areas, thus the outreach of the MFI (breadth and depth) is another opportunity (Hastings 2006). Thus, the introducing of new services by MFI is likely to attract new customers (Jaramilo et al. 2008, Sander 2003).

Sukadi (2009), IFAD (2009), Jaramilo (2008) and Sander (2008) show in their papers that implemented remittance services may provide opportunity for cross-selling other financial products that MFI provides. Sukadi (2009) in her recent study emphasize that remittances can be a supplementary product to existing clients just after the traditional MFI’s services are well accepted and established, loans and savings.

According to Hastings (2006), Jaramilo (2004, 2008), IFAD (2008) remittances are able to generate wealth, increase savings as well as investment potential for the clients. They also emphasize that leveraging remittances, linking with other financial services, like credits and savings, contributes in clients’ welfare; at the same time designing new improved financial services (remittance linked products) may attract new clients and meet expected needs of remittance receivers and foreign workers (Jaramilo 2004, Hastings 2006).

IFAD (2009) claims that remittances can become a source for development of the community, country, if remittance savings are invested in financial sector, a bank or MFI, in lieu of saving money “under the mattress”. Therefore remittances can also become the money that can be mobilized to help other clients, entrepreneurs (IFAD 2009).

Along with benefits and opportunities there are some challenges and obstacles for MFIs entering remittance market. Regulatory framework, legal status of the MFI may impede in entering the remittance market. In many countries making money transfer services requires special license for these services or requires changing legal status of the MFI, becoming a licensed bank (IFAD 2006).

Another crucial factor is developing appropriate information management system within the company in order to execute new services (Orozco, Hamilton 2005). Evans and Klaenh (2004) observed that many MFIs made significant investments in developing or acquisition of new MIS systems.

Hastings (2006), Evans and Klaehn (2004) emphasize other challenges for MFIs: changing corporate culture and staff incentives, improvement of cash management capabilities, secure, strengthening of the anti-money laundering framework and improving internal control. Besides, CGAP (2008) and Sander (2008) reports that due to changeable cash demand from the clients after implementing remittance services, it is crucial to investigate clients’ remittances behavior and pay attention on liquidity management of the institution.

The knowledge of clients, clients’ perceptions, behavior and preferences is essential for marketing purposes and developing new product (Evans 2004, Hastings 2006).

The relationship between MFI and its borrowers is the issue that is less frequent mentioned in the papers, literature. Though if to take it into consideration, clients’ loyalty might be increased by offering a wider range of financial products, among them remittances services, and thus to reduce the chance for customers’ turnover. Since only after several loan cycles clients do feel the impact of the loans, are profitable, client retention is the factor that should not be underestimated, especially when MFI is operating in competitive environment (Hastings 2006).

Before introducing any new product it is important to make product analysis, among its dimensions the critical position refers to analysis of client’s needs and preferences. According to Sander (2005, 2008), Pieke (2005), Isern (2005), CGAP (2008), Sukadi (2009) client’s criteria for remittance products are the following: ease of use – less documents to fill out, safety – the trust to the money transfer operator, accessibility, speed, confidentiality and cost.

Many researchers indicate that another important issue ought to be consider in developing remittance products is the socio-economic situation in the country, both home country and host country of the migrant, migration, the political situation in the countries (Adams 2009, FDC 2007, Gupta 2005, Hagen-Zanker and Siegel 2007, Jaramilo 2008, Lueth and Ruiz-Arranz 2006, Pieke 2005). For example, Gupta (2005) explains the rapid growth of remittances inflows to India by the increase in emigration from India. Recent financial crisis proves that economic situation in the countries plays significant role on money transfer activities, as remittances reported a decline for more than six percent in 2008-2009 globally and affecting some region more than others (World Bank 2009).

Shaw and Eversole (2008) emphasize that natural disasters, political or financial crises in recipient countries usually increase remittances flows to these countries, as migrants are eager to help their families in the time of need. It was observed and reported by World Bank (2006), that there was a growth of remittance inflows in Indonesia and Philippines in response to the financial crisis in 1997. Identical evidence was in Samoa, where economic downturns and cyclones happened (IMF 2005). After tsunami 2004 in Sri Lanka money transfers increased drastically (Deshingkar et al 2006). There is no official information about remittance volume after military coups of 2000, 2006 in Fiji, whether it increased or not, nevertheless, these coups causes increased migration from the country (Shaw and Eversole 2008). According to Ratha (2010) the same tendency, increase of remittance inflows, is expected to happen in Hiaiti in 2010.

Savings and Remittances. As it was mentioned above, recently MFIs are seeking ways of linking remittances with other financial products they provides, in order to increase financial inclusion of population, but up to date the scale remains limited for such movements, programs (Ratha 2010). The most popular scheme is link remittances to savings accounts. On World Council of Credit Unions in 2005 it was presented that when people begin to use remittance services in a particular financial intermediary, i.e. credit union, they end up opening a saving account and save some portion of money, on both sides of remittance flows – sender and receiver (Ratha 2010).

Orozco (2004), Ponsot (2007) in their papers emphasize that a share of remittances that person receive from their relatives is saved and shows that remittance recipient is tend to save for longer terms compare to the population who does not receive remittances. Jaramilo (2004), Orozco and Fedewa (2005) affirm in their studies that participants of money transfers are willing to save their money in the MFI as long as it has adapted financial products among its services. Sukadi (2009) once again confirms that the portion of savings is higher among richer clients of the MFI. In literature there is no relevant information that will show whether remittance services increase saving investments into MFI due to the attraction of new clients or already existing borrowers save money thanks to the introduced remittance-linked products. Thus, investigating savings behavior of the clients is an essential issue for any financial institution.

In general, savings mobilization is a crucial issue in developing countries, as process of saving in the long-term can contribute significantly to the quality of life of the clients (Otero 2003). Savings mobilization enables to decrease the dependency of the MFI on external financial sources and increase additional resources for lending activities (Sukadi 2009). Moreover, savings products should not be underestimated in terms of client’s relationship, since well established and adapted saving services can create a close relationship between the MFI and clients, thus increase clients’ trust in the in the company (Otero 2003, Armendariz de Aghion and Morduch 2005).

Country Context. Kyrgyzstan is one of the major recipients of remittances in Central Asia region. Over the recent years, the stream of migrants’ remittances has significantly increased in this country, reaching more than 27% share of remittances in GDP of the country (World Bank 2009).

In recent years increased external migration of labour workers began significantly affect population and its state of life in Kyrgyzstan (Agadjanian et al. 2008). Due to increased remittance flows into the country some studies shows growth in daily consumption and reduction in the level of poverty in 2003-2008 (IOM 2009).

Historically, the Russian Federation is the main country of destination for labour migrants. According to some researches, more than 80% of all Kyrgyz migrants are currently working in Russia and their share in remittance flow counts up to 4/5 of all money transfers (Lukashova and Makenbaeva 2009). Officially, around 800,000 Kyrgyz people are working abroad (ADB 2008); but obviously this number does not include illegal migrants, which to some estimates may reach up to 2 million [2] during seasonal migration as the Kyrgyz Republic does not have sound labour migration policy and borders with Russia and Kazakhstan are opened (IOM 2009, Schmidt and Sagynbekova 2009). Therefore, share of remittances in the GDP of the country can be even more than official number of World Bank and National Bank of Kyrgyzstan, 30-35% when to take into consideration informal ways of remitting money back home. Thus, it is possible to name Kyrgyzstan as a remittance-dependent country.

Recent financial crisis showed no massive return of migrants, instead 60% of former migrants said they will return to migrant destination after the crisis’ end (Lukashova and Makenbaeva 2009).

ADB (2008), Schmidt and Sagynbekova (2008) shows that changing pattern in migration is noticed in Kyrgyzstan during the last year – more young people (till 30 years old) are more likely to migrate, the younger the person it is more possible that his migration will end up as permanent one (Adadjanian et al. 2008). In the country of destination most of the Kyrgyz migrants work as low-skilled professionals, in positions that are not in demand among local population (Ruget and Usmanalieva 2008).

Microfinance sector in Kyrgyz Republic is very competitive, but there are main players in the market that are well-known and respected. Among the MFIs that are listed on MixMarket and do not registered as a bank, there are no MFIs who provide remittances and collect savings. This is due to the microfinance legislation in the country, which does not allow establishing savings products unless the institution register as a bank and got bank license. However, it is allowed for nonbanking financial institutions work in partnership with MTOs after getting approval from National Bank of the Kyrgyz Republic. [3] 

Methodology

We conducted an extensive research in Kyrgyzstan in order to contribute to the knowledge regarding remittance, migration and savings, explore the financial needs, investment opportunities and behavior of clients of one specific MFI and identify the market potential and perception of these clients for remittances and savings products.

The purpose of this study and analysis of the results will be basis for further identification and assessment of strong and weak positions of the microfinance institution, i.e. become a necessary prerequisite to develop and introduce remittances service and deposit accounts service for clients of the MFI.

Additionally, this research will help to limit ambiguity level when making operational, marketing and other management decisions in the microfinance institution.

Nature of the Study – descriptive research, aimed to explain behavior in the market.

The main part of the research was based on Client Questionnaire. The survey covered the following topics: profile of the clients, profile of migrants, savings behavior, remittance sending and receiving behavior, current remittances and savings usage, perceptions and intentions, opportunities for remittance linked products.

Data collection.

Quantitative and qualitative methods were selected for the purpose of this research, qualitative overview and quantitative survey.

The quantitative method was based on closed type structured questions (questionnaire) that were filled out by the respondents. A unique feature of this survey is a clearly defined format of the data collected and also the source of the data, the collected data was processed through ranked procedures, being quantitative by their nature.

The research methodology for the study was based on questionnaires and for this purpose a random selections of FINCA/KG clients were interviewed to complete one questionnaire per client selected.

Concurrently, in order to get a better sense of the attitudes and awareness of remittances and remittances linked products and the impressions of the clients’ ability to engage in remittances and savings mobilization from an institutional context, interviews / discussions with open ended questions were conducted with FINCA/KG staff, among them three Regional Operating Officers, Chief Financial Officer, IT Manager, HR Manager and Audit Manager. Besides, qualitative overview of information about the current situation in the country and state of the company, readiness and capacity of the institution to implement new products, overview of the microfinance sector in the country and potential risks that may arise in the future were collected from secondary sources of information like books, journals, articles, National Bank of Kyrgyzstan, World Bank, MixMarket.

Method of analysis.

The method of analysis of the collected data was frequency of occurrence. The method to measure characteristics of the content is to count frequency of instances occurrence. One counts each occurrence of any feature of the given characteristic.

Method of data acquisition from the respondents.

For the main part of the research the method of independent filling out of the questionnaires was selected. This method is a variation of a survey based on independent completion of questionnaires. The questionnaires were distributed among loan experts and cashier at the branches of FINCA Kyrgyzstan (FINCA/KG). Completed questionnaires were handed over to the Head Office.

This method of data acquisition is known for high rate of feedback, minimal influence of interviewer on respondents, relatively cheap and provides good control over selection of respondents. All respondents were active clients of FINCA/KG.

Distribution Strategy.

To the distribution of the questionnaires stratified sampling approach was applied.

Questionnaires were distributed via loan officers in 17 branches in all 7 regions of Kyrgyzstan. Questionnaires were in Kyrgyz and Russian languages.

The survey was conducted in July 2010. The total number of interviews was planned to be 1,000 by the available. 937 questionnaires were returned usable, thus it makes 93% of response rate. 67 clients in Osh and Jalalabad regions were not interview because they suffered from June events, ethnic clashes, and could not be found on the place of their business or home.

Stratified sampling method was based on the clients’ distribution in the regions. The regional and branch distribution of interviews and number of clients were selected and interviewed is presented in the table below:

Table 1. Regional / branch distribution of respondents

Region / Branch

Number of Active Borrowers (June 2010)

% in Total

Number of Interviews Plan

Number of Interviews Actual

North Region

39,346

36%

364

364

Bishkek

11,221

10%

104

104

Dordoi

2,031

2%

19

19

Tokmok

5,868

5%

54

54

Karakol

6,669

6%

62

62

Balykchy

6,598

6%

61

61

Naryn

6,959

6%

64

64

Central Region

38,992

36%

360

340

Kara-Balta

10,188

9%

94

94

Kerben

6,213

6%

57

57

Jalal Abad

9,465

9%

87

67

Toktogul

3,550

3%

33

33

Talas

9,576

9%

89

89

South Region

29,845

28%

276

233

Osh

10,007

9%

93

50

Uzgen

5,020

5%

46

46

Batken

3,186

3%

29

29

Kadamjay

5,622

5%

52

52

Nookat

2,668

2%

25

25

Alai

3,342

3%

31

31

Total

108,183

100%

1,000

937

Even though the geographic scope of this research expands in all regions and main cities of Kyrgyzstan, it is important to mention that the results cannot be generalized to entire population.

Survey Findings

As the result of the survey that was conducted in July 2010, the following information was gathered.

Customer profile

The average survey respondent was aged 30 to 50 (70%). The survey respondents were quite evenly split between males (49%) and females (51%), though FINCA Kyrgyzstan’s customer base is predominantly female (67%). Respondents representing rural area of the country were counted up to 68%.

Most respondents had received a group loan (78% received group loans versus 22% received individual loan), if we look at the clientele at large, group loans are more predominant as 87% of active FINCA Kyrgyzstan clients receive group loans, and only 13% receive individual loans. About 80% of respondents received their first loan ever from FINCA demonstrating that FINCA is banking the unbanked. This parameter is important in product design: any new product should be simple enough for clients who are new to the formal financial sector to understand.

Most respondents had received three FINCA loans or fewer [4] (82%), and had been a FINCA client for less than three years (69%). Here, we note that there is a significant drop off in retention after 3 years, highlighting client fatigue, an issue that can be ameliorated by offering new products. Finally, most respondents had heard about FINCA through word of mouth (54%), illustrating both the power that clientele has in helping recruit new clients and the fact that good performance is excellent marketing as existing clients attract new clients by speaking highly of MFI’s services. At the same time, when analyzing the data it was noticed that respondents who receive loans from FINCA less than 2 years learned about FINCA from advertisement.

Migrant Profile

The survey showed that every second client has relatives who live abroad (53% of respondents said that they have 1 relative who live abroad). The survey also revealed that 21% of clients responded to have two family members [5] working abroad. It was mentioned by 63% of respondents that this is the result of financial crisis and the political and ethnic clashes that happened earlier in 2010. Before 2010 there were fewer migrants. Earlier Program for Culture and Conflict Studies (CCS 2009) stated that the return of up to 300,000 labor migrants was expected in 2009, but this information was not confirm by the survey. According to the survey we conducted, most of the relatives of the respondents, migrants, did not return to their home country in 2010 (83%) and now after the recent conflicts in Kyrgyz Republic respondents are positive that their relatives will not return either.

Diagram 1. Number of migrants in the family

According to the survey migrants’ average age is 25 years. Seventy-five percent of the relatives that live abroad are between 18 and 35 years old. Significantly those migrants of 18 to 25 years old account for 40%; this number differs from the survey conducted by Eurasia Research Institute in 2006 [6] , where it was 25%. That might be indicated by the reasons of migration: economic and political issues in the country. Young people do not see the reason to stay in the country where “there are no places to work and very low wages across the country”.

The survey showed that 85% of migrants go to work to Russian Federation and 10% - to Kazakhstan, and 5% - to other countries like the USA.

Interesting to mention that most of the clients indicated that most of their relatives migrated either after secondary school (more common for rural areas) or after finishing higher education in order “to find better life”.

Diagram 2. Geographic distribution of migrants

As one of the question on the questionnaires, clients were asked to answer whether he/she or someone among the family members have an intention to emigrate in the nearest future (following year): 69% - expect to emigrate in the following year, 21% - do not have confidence in the future plans, 10% - were sure that there is no intention to emigrate.

Diagram 3. Intention to migrate the following year

Among those who intend to migrate the following year, the main obstacle to do so earlier – is the shortage of money, savings, to have as initial capital when emigrating.

It is interesting to mention that among the fraud cases revealed at FINCA/KG, there were some clients who received loan amount and used this loan to migrate to Russia. This again shows the huge intention among people to emigrate.

Remittance Receiving and Sending Behavior

National Bank of the Kyrgyz Republic (NBKR) recently revealed the data on the share of remittances in GDP of the country. These numbers are similar to the World Bank’s data in Factbook 2009. The share of money transfer activities in the GDP of the country is increasing from year to year; in 2008 this number was 29% of GDP, which indicates that the economy of the country significantly depends on remittances. For 2009 this number is estimated to fall, nevertheless the prognosis for 2010-2011 by World Bank (2010) [7] is positive. According to the NBKR in the first half of 2010 remittances to Kyrgyzstan were 32,6% higher than during the same period of time in 2009.

Diagram 4. Remittances share in GDP, Kyrgyzstan

Source: National Bank of the Kyrgyz Republic

Receiving Remittances. The research suggested that seventy-eight percent of clients who have family members abroad do receive remittances from them. We suspect that this percentage might be even higher, as there may be some percentage of clients who were afraid to declare the fact of receiving remittances because of the fear of taxes or status issues among the community.

This research showed that the average amount received through money transfers was USD 100-200 [8] . This information is useful to have as it provides insight into how large a subsidy the respondents are receiving from abroad and will help in further financial calculation for the MFI. That said, once microfinance institution starts to offer remittance services, it will be able to track this data, and its transaction history will be a more reliable source of information than client memories and this can be applied for the clients’ interest in the future, as remittances income for some clients could become a primary source of income in obtaining loans from microfinance institution.

As it is shown in the diagram below, 83% of respondents receive remittances at least one time per two month, 30% of them receive money transfers once per month.

Eighty-one percent of clients who receive remittances indicated that these transfers were made through banks and MTOs; most of these funds are transferred through MTOs (92%), among these MTOs are Leader, Anelik, Contact, Unistream, Migom, Western Union. And only 12% of these clients said that transfers were made though friends and relatives.

It ought to be pointed out that most of the respondents stated that the percentage of remittances received through banks, even without opening bank account, is relatively small, especially after the political events in April 2010, due to mistrust to the banks.

Diagram 5. Frequency of receiving remittances

Changes in remittances in 2010

Kyrgyz clients were quite confident that the remittance volume they receive from abroad will increase in 2010: 58% of respondents expected the amount or frequency of received remittances to increase, 19% thought there will be no changes.

Diagram 6. Forecast of changes in remittances in 2010

Showing the chart, it is obvious that most of the clients do not expect negative effect of the political situation in the country to influence the remittance flows, instead it is expected there will be the increase in receiving transfers.

Use of Remittances. The survey showed that 49% of remittances are spent on regular consumption needs for the family; 35% of respondents saved remittances for less than six months and only 7% saved some amount for long-term, more than six months.

Saving Behavior

The vast majority (82%) of respondents did not have a deposit account in a bank; and of the 13% that claimed to have a savings account in a bank, only ¼ of them had “active” accounts. Thus, only about 3% of respondents had active deposit accounts with banks. If we combine the fact that only 3% of respondents are actively saving with a bank, but that 52% of them would like to open deposit accounts, our research suggests that there is significant unmet market demand for savings products. Moreover, it also suggests that banks currently do not offer savings products that appeal to microfinance’s client base—the working low income. Thus, when designing new savings products, microfinance institutions must be mindful to create products that respond to client needs and thus are demand-driven.

It ought to be mentioned that our research showed that there is no link between respondents who receive remittances and who have a bank account. Ninety-five percent of remittance receivers do not have a bank account and only one percent (1%) of the respondents who do not receive any remittance has a bank account.

Fifty-seven percent of respondents suggested they would like to open a savings account with FINCA and invest money. Since this percentage is higher than the percentage of clients who were interested in a savings account more generally (52%), our research confirms that clients trust FINCA, thus non-banking financial institution – MFI, more than banks in general because more clients would open a savings account with FINCA than with any financial institution in general. Thus, we can see that indeed the main obstacles for people to open savings account is the mistrust in the banks.

Research showed that because of the current unstable situation in the country, people do not trust banks even more and not eager to open bank accounts and save in the banks. Other reasons for not keeping savings in banks can be seen in the diagram below.

Diagram 7. Reasons for not saving money in the banks

Of all savings products, the most popular savings products included: 1) accruing deposit accounts, 2) fixed term savings accounts and 3) on-call deposit accounts. The three most popular reasons for which clients saved included: 1) to buy or renovate a house, 2) to pay for tuition, and 3) to buy a car. Thus, it is obviously needed for the MFIs to design products that can help clients save for these key expenditures.

Intention to save. Sixty-three percent of respondents claimed they could make monthly deposits, 60% of respondents suggested that they could deposit up to 500 Soms ($100) immediately. As per month, 40% of the clients claimed they could deposit up to $25, one-third of respondents (33%) can deposit monthly up to $100. Only 40% of respondents suggested they could make deposits for a period of over six months.

It is interesting to mention that the survey did not show the correlation between the clients who receive remittances within their family and their ability to save more than clients who do not receive remittances. Thus it suggests us that remittances are not the primary source of income for respondents, but we believe that this is due to the nature of this study.

The vast majority of the remittance receivers among the clients (63%) suggested that they would probably consider investing money, deposit part of the remittances into savings account. This observation should be taken into account when developing new products and schemes to attract savings of people who receive remittances into the financial system.

Results Analysis

This section is dedicated to the analysis of the results derived from the extensive research on remittances and savings among the MFI’s clients.

Every second client has relatives who live abroad and seventy-eight percent of these clients do regularly receive remittances from them. We suspect that this percentage might be even higher, as there may be some percentage of clients who were afraid to declare the fact of receiving remittances because of the fear of taxes or status issues among the community.

We identified that migrant’s average age is 25 years. The vast majority of client’s relatives who live abroad are between 18 and 35 years old. Significantly that those migrants of 18 to 25 years old account for 40%; this figure is higher than in the survey conducted by Eurasia Research Institute in 2006 [9] . This is also confirmed by the finding that most of client’s relatives migrated either after secondary school (more common for rural areas) or after finishing higher education in order “to find better life”. That might be indicated by the reasons of migration: economic and political issues in the country. Young people do not see the reason to stay in the country where “there are no places to work and very low wages across the country” (Schmidt and Sagynbekova 2008). Therefore the main recipients of remittances in the home country are parents of these migrants, and that should be taken into consideration by MFI before implementing new products.

According to the Program for Culture and Conflict Studies (CCS 2009) it was expected in 2009 the return of up to 300,000 labor migrants due to financial crisis and economy downturn in Russia (the main destination for Kyrgyz migrants). However our survey did not confirm this information, most of the relatives of the respondents, migrants, did not return to their home country in 2009 (83%) and now after the recent conflicts in Kyrgyz Republic respondents are positive that their relatives will not return either.

Expectation and intention of the following year’s (2010-2011) migration among clients, their family members were quite high (69%). Among those who intend to migrate the following year, the main obstacle to do so – is the shortage of money, savings, to have as initial capital when emigrating. Internal and external migration is one of the consequences of the incidents happened in the South of Kyrgyzstan. People try to leave the conflict zone and MFI’s clients maybe among those people. This observation should be seriously evaluated by the MFI as the migration risks may lead to the risk of non repayment, in case when people may take loans in order to finance own departure and evacuation of family members inside or outside of Kyrgyzstan. In the past fraud cases of this kind were already revealed at FINCA/KG.

At the same time we can do a reasoning that in the long-term increased migration in Kyrgyzstan will lead to increase of remittance flows coming to home country (Agadjanian et al. 2008, FDC 2007). Therefore any MFI should consider this as an opportunity to develop new products for remaining part of the population, among these products remittance service.

The last resume is also confirmed by clients - they were quite confident that the remittance volume they receive from abroad will increase in 2010. Most of the clients do not expect negative effect of the political situation in the country to influence the remittance flows, instead it is expected there will be the increase in receiving transfers. This is similar to the conclusion of country studies by Shaw and Eversole (2008).

It is interesting to note that the majority of clients (81%) who receive remittances indicated that these transfers were made and received mainly through MTOs. It ought to be pointed out that most of the respondents stated that the percentage of remittances received through banks, even without opening bank account, is relatively small, especially after the political events in April 2010, due to huge mistrust to the banks. This observation makes it clear that MFIs rather than banks have competitive advantages in capturing the remittance market, working as an agent or sub-agent with MTOs, - reputation and trust among the clients, the branch network, and accessibility for clients among others (Hastings 2006).

That said, once microfinance institution starts to offer remittance services, it will be able to track data about remittance flows, and its transaction history will be a more reliable source of information than client memories and this can be applied for the clients’ interest in the future, as remittances income for some clients could become a primary source of income in obtaining loans from microfinance institution.

On average, forty-nine percent of remittances are spent on regular consumption needs for the family and around forty percent – save, mostly for short-terms and ‘under the mattress’. Survey did not reveal the correlation between the frequency of receiving remittances and inclination to save.

Only about 3% of respondents had active deposit accounts with banks, however more than half of the clients would like to open savings account. If we combine the fact that only 3% of respondents are actively saving with a bank, but that 52% of them would like to open deposit accounts, our research suggests that there is significant unmet market demand for savings products. Research showed that because of the current unstable situation in the country, people do not trust banks even more and not eager to open bank accounts and save in the banks. Moreover, it also suggests that banks currently do not offer savings products that appeal to microfinance’s client base—the working low income (Hastings 2006, Otero 2003). Thus, when designing new savings products, microfinance institutions must be mindful to create products that respond to client needs and thus are demand-driven (Jaramilo 2004, Orozco and Fedewa 2005).

Fifty-seven percent of respondents suggested they would like to open a savings account with FINCA/KG and deposit money, this percentage is slightly higher than the general willingness in opening savings accounts, which leads us to reasoning that clients trust FINCA, thus non-banking financial institution – MFI, more than banks in general, as more clients would open a savings account with FINCA than with any financial institution in general. Thus, we can see that indeed the main obstacles for people to open savings account is the mistrust in the banks (Hastings 2006).

Of all savings products, the most popular savings products included: 1) accruing deposit accounts, 2) fixed term savings accounts and 3) on-call deposit accounts. However, we observed that when it comes to defining what kind of savings account the client wants to open, they do not understand the general terms, which shows that there is a lack of financial education and financial literacy among the low-income population.

Sixty-three percent of respondents claimed they could make monthly deposits, but the amount is relatively small ($ 25), which is another reason why clients do not open bank accounts.

The three most popular reasons for which clients saved included: 1) to buy or renovate a house, 2) to pay for tuition, and 3) to buy a car. Thus, it is obviously needed for the MFIs to design products that can help clients save for these key expenditures.

The survey did not show the correlation between the clients who receive remittances within their family and their ability to save more than clients who do not receive remittances (Sukadi 2009). Thus it suggests us that remittances are not the primary source of income for respondents, but we believe that this is due to the nature of this study.

The vast majority of the remittance receivers among the clients (63%) suggested that they would probably consider investing money, deposit part of the remittances into savings account.

The client’s survey revealed that FINCA is banking the unbanked, as about 80% of respondents received their first loan ever from FINCA, and heard about it through word of mouth. This parameter is important in product design: any new product should be simple enough for clients who are new to the formal financial sector to understand. At the same time, we note that there is a significant drop off in retention after 3 years, highlighting client fatigue. This is an issue that can be ameliorated by offering wider range of products, among them remittance services and savings (Hastings 2006).

Taking into consideration all findings from the survey, we can conclude that there is indeed demand from clients for remittance services and remittance linked savings products, but it should not be forgotten that the unmet market demand for saving products is huge, whereas remittance services are already well-established in Kyrgyzstan through MTOs. Nevertheless, MFIs have competitive advantages entering the remittances market, thus implementation of these types of products should not be deferred. Especially in case of Kyrgyzstan, where due to unstable political situation and macroeconomic instability forced migration will lead to increased remittance flows in the nearest future.

Given the information described above, any new financial schemes, products developed should take into account the following:

Products should be aimed at both men and women aged between 30 and 50. This means we can assume the typical client has school aged children to support.

Remittance linked products should be for individual clients. Savings products could also have a group component to them given that 87% of FINCA/KG clients receive group loans.

Any product designed must be simple because the audience is largely financially unsophisticated. Eighty percent of FINCA’s clients were unbanked prior to joining FINCA.

Given that there is a large incidence of dropouts after three years, it would be interesting to test products with two different durations: one that had a term exceeding three years (car or housing, for instance) and one that had a term of under three years but that was renewable (school tuition, for example) and assess which has a bigger impact on long-term retention rates.

If possible, savings products should focus on the three most salient needs identified by respondents: paying school tuition, buying a car and a house (if feasible). MFI should either encourage or program deposits to be either monthly or more frequently, if the client group meets more frequently. Deposits should be scheduled for a maximum of about 400 Soms (US $ 80), and MFI should leverage remittance transfers by encouraging clients to invest a portion of their transfers into a savings account.

For MFIs it is feasible to make promotions and marketing should focus largely on increasing word of mouth, as that is the main avenue through which existing clients learned of FINCA. In terms of content, these campaigns should emphasize that microfinance sector is a trustworthy; MFI is reputable and established financial institution, while also differentiating it from banks, which are not well regarded in the country.

Conclusion

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