Are all deposit products in the microfinance world created equal?

Abstract

Building on the economies of scope framework, we estimate how the use of mandatory deposits alone in credit-only microfinance institutions (MFIs) or in combination with voluntary deposits in credit-plus-deposit MFIs is associated with the performance of MFIs in terms of financial sustainability, breadth, and depth of outreach. We account for MFIs’ double bottom line with the seemingly unrelated regressions method and use data from 544 MFIs worldwide for the period 2000–2015. We show that, for credit-only MFIs, mandatory deposits are associated with improved depth of outreach to the poor. For credit-plus-deposit MFIs, we find a trade-off: mandatory deposits are associated with a decrease in financial sustainability but an increase in breadth of outreach. We also analyze the moderating role of mandatory deposits. High-risk loans collateralized by mandatory deposits are more likely to reach poorer clients in credit-only MFIs and help to reach more borrowers in credit-plus-deposit MFIs, but at a higher cost.