Show Me the Money: Cost and Revenues of Youth Savings and Financial Education Services Offered by Credit Unions in Mali and Ecuador” for Those Sections Excerpted.

Show Me the Money Cost and Revenues of Youth Savings and Financial Education Services Offered by Credit Unions in Mali and Ecuador Show Me the Money Cost and Revenues of Youth Savings and Financial Education Services Offered by Credit Unions in Mali and Ecuador

FREEDOM FROM HUNGER REPORT JUNE 2014

by Christian Loupeda, Director Financial Inclusion, Freedom from Hunger

Sections of this publication may be copied or adapted to meet local needs without permission from Freedom from Hunger, provided that the parts copied are distributed for free or at cost—not for profit. Please credit Freedom from Hunger and “Show Me the Money: Cost and Revenues of Youth Savings and Financial Education Services Offered by Credit Unions in Mali and Ecuador” for those sections excerpted.

For any commercial reproduction, please obtain permission from: Freedom from Hunger 1644 DaVinci Court Davis, California 95618 Tel.: 1-530-758-6200 [email protected] Table of Contents

Acronyms………………………………………………………………………………………………………… i

Aknowledgements……………………………………………………………………………………………… ii

Executive Summary…………………………………………………………………………………………… iv Integrated services…………………………………………………………………………………………… iv Market-level levers…………………………………………………………………………………………… iv Cost, revenue and profitability main findings………………………………………………………………… v Introduction…………………………………………………………………………………………………… 1

Methodology…………………………………………………………………………………………………… 2

Overview of the AIM Youth Initiative……………………………………………………………………… 4

Market-Level Levers in Ecuador and Mali and Organization Contexts…………………………… 6 Ecuador ……………………………………………………………………………………………………… 6 Mali ……………………………………………………………………………………………………… 7

Organization Description and Social Mission…………………………………………………………… 8 Organization description……………………………………………………………………………………… 8 A strong social case………………………………………………………………………………………… 12 Costs and Revenues Analysis for Youth Financial Services………………………………………… 14 Cost analysis……………………………………………………………………………………………… 14 Summary of cost analysis…………………………………………………………………………………… 25

Revenue Analysis…………………………………………………………………………………………… 26 Revenue structure………………………………………………………………………………………… 27 Summary of revenues analysis……………………………………………………………………………… 35

Overall Profitability Analysis……………………………………………………………………………… 34 Enhancing the profitability of youth integrated services…………………………………………………… 36 Revenue-maximization strategies………………………………………………………………………… 39 Summary on profitability…………………………………………………………………………………… 42

Conclusion…………………………………………………………………………………………………… 43

Annexes……………………………………………………………………………………………………… 44

Endnotes……………………………………………………………………………………………………… 51

Show Me the Money i Acronyms

FSP Financial Services Provider

GSA Group Savings Account

MFI Microfinance Institution

MNO Mobile-Network Operators

OSS Operational Self-Sufficiency

PAR Portfolio at Risk

PEACE Poverty Eradication and Community Empowerment

ROA Return on Asset

UCU Union des Coopecs Umutanguha

UFT Uganda Finance Trust

VAS Value-Added Service

YSA Youth Savings Account

Show Me the Money ii Acknowledgements

We would like to acknowledge Freedom from Hunger’s partners Nyèsigiso in Mali and Cooprogreso and San José in Ecuador for their valuable collaboration and full commitment to the success of the study.

A special acknowledgement to The MasterCard Foundation and particularly to Ruth Dueck-Mbeba, Program Manager, Financial Inclusion (The MasterCard Foundation) for her support and to Rossana Ramirez, Director AIM Youth (Freedom from Hunger) for her valuable insights.

Our gratitude also goes to

Our peer reviewers: Tanaya Kilara (CGAP) , Melody Chen (Consultant) and Our colleagues Amelia Kuklewicz and Rocio Chavez from the Freedom from Hunger country office in Ecuador.

Show Me the Money iii Executive Summary

With more young people alive today than ever before, most of them in poor countries, the need to include youth in financial outreach has never been greater.The international development community, with its global agenda of financial inclusion, now fully recognizes the need to provide young people with financial services and education. But providing financial services to the youth market is more challenging than targeting adult market segments. Moreover, the financial sector lacks experience targeting and serving this changing and multifaceted population.

The purpose of this paper is to shed light on some of the challenges and opportunities faced by financial service providers (FSPs) in providing savings integrated with financial education to youth.

The analysis is based on the experience of three FSPs: Cooprogreso and San José, credit unions in Ecuador, and Nyèsigiso, a credit union federation in Mali. The three organizations offer a savings account, combined with a series of financial education sessions (collectively referred to as integrated services) as part ofAdvancing Integrated Microfinance for Youth (AIM Youth), an initiative launched by Freedom from Hunger in partnership with The MasterCard Foundation.

The study analyzes quantitative and qualitative data collected from each organization and develops five-year financial projections. An examination of the projections reveals questions and challenges in the path toward profitability. By examining the impact on costs and revenues of key market-level levers, business structures and strategies, and competitive and regulatory environments, the paper aims to contribute to the development of a business case for providing combined savings with education to youth. It also offers FSPs considerations for optimizing costs, maximizing revenues and simplifying operations.

Integrated Services The three organizations decided to provide integrated services to the youth market in their respective countries in the belief that a) beginning to accumulate assets before facing the demands of adulthood would help young people start to build a sound financial foundation and b) financial education has a positive impact on the financial behavior of participants.We believe, as do the participating FSPs, that integrated services have the potential for fostering better clients for financial products in the long run. However, delivering education is a pure cost to the FSP, and its potential financial benefit to the institution is unknown, so each institution took a leap of faith, comforted by the recognition that each was advancing a social agenda to which it was already committed.

During the second phase of the project, Cooprogreso and San José incorporated some technology features into their product, including a text-messaging system offering financial education reinforcement messages to youth and the ability for field agents to collect savings remotely (in the field) using Smartphones instead of having the youth go to the credit union branches for their services.1

Market-level Levers In both Mali and Ecuador, young people comprise a high portion of the population—in Mali, more than 47 percent of the population is younger than 15 years old2—and yet, few youth have access to the formal financial sector. In Mali, only 5 percent of young adults had a bank account in 2011 while in Ecuador this figure was 23 percent.

Show Me the Money iv Cooprogreso has 87,000 members, 24 branches (11 of which are rural) and represents 0.9 percent of the total microfinance assets in Ecuador.

San José has 53,000 members, 10 branches, 5 of which are rural, and represents 0.2 percent of microfinance assets in the country.

Nyèsigiso is a federation of 15 quasi-independent credit unions and is the second largest MFI in Mali. Its network has 75 branches (25 of which are rural). The microfinance market in Mali has been suffering from a trust crisis over the last five years because of weak supervision of the sector. This crisis was exacerbated by the 2012 political crisis, which greatly undermined the economy at large.

In both Mali and Ecuador, regulations restrict the offering of formal financial services to people ages 18 or older. In Ecuador, however, people under 18 are permitted to maintain a savings account (but not a loan) in conjunction with a “tutor” who is 18 years of age or older.

Ecuador is a more mature and competitive market, so Ecuadorian credit unions must adopt a business model based on increasing outreach and diversifying their products. An FSP in Mali faces more limited competition, which led Nyèsigiso to adopt a business model that balances the needs and limitations of young people with those of the FSP.

Cost, Revenue and Profitability Main Findings The differences in projected costs and revenues among the participating FSPs can be explained by differences in product features, product delivery, allocation of staff and geography. Cost analysis This paper uses the measure of marginal direct cost. This is the best way to isolate the financial effect of integrated services on each institution. It represents how much additional expense will be incurred upon adoption and, correspondingly, how much will be saved if these services are ended.

The largest cost components are salaries, marketing, transportation, education and interest expense.

Salary costs Salaries are the most important costs for Nyèsigiso, comprising 70 percent of the cost of the integrated services in 2012. This reflects the institution’s decision to require dedicated field staff for the new product.The rationale was that the clients were remote from the branches, and the agent needed to create groups of savers. Nonetheless, this was a more expensive business model than that adopted by the Ecuadorian credit unions, which assigned the work to existing field agents who continued to have other responsibilities.

Marketing costs Marketing costs, representing more than 40 percent of the cost of savings with education for both Ecuadorian credit unions, were the largest cost component. This is explained by the more competitive environment in which they operate. Marketing costs are less than 10 percent at Nyèsigiso, where the service delivery through the formation of savings groups leverages the youth-group dynamic to spread the word in a more cost-effective manner.

Looking ahead to cross-selling opportunities, the bundling of services may be an effective way to control marketing costs. For example, loans associated with savings (for youth older than 18 years old) may be promoted and managed through the same field agent who promotes the integrated service.

Show Me the Money v Transportation costs Transportation costs are much higher for Nyèsigiso than for its Ecuadorian counterparts. This is because it chose to provide its field agents with motorcycles. Their rationale for limited public transportation to rural areas may be sound, but the result was higher costs. Cooprogreso and San José both used public transportation, but whereas Cooprogreso’s agents were able to rely mostly on buses, San José’s largely rural clients required greater use of a more expensive taxi service.

Interest expense on savings accounts This is a function of the savings balances and the interest rate paid. In the 2014–2018 projections, the Ecuadorian credit unions accumulate much greater savings balances than Nyèsigiso, and so their interest expense is greater, notwithstanding their lower interest rates. Although it is difficult to forecast savings balances with great accuracy, it is important for each institution to pay close attention to its interest expense in the context of the costs of alternative funding sources and the expected return on the use of the funds. Revenue analysis The major revenues that our participants anticipate derive not directly from the savings product, but rather from lending. Nyèsigiso expects to cross-sell loans and other financial services to the new youth clientele and to their relatives and networks. San José and Cooprogreso, whose savings balances are projected to be much greater than Nyèsigiso’s, see them as a source of funds to be lent profitably to other customers, as well as lent via cross-selling to young depositors and their relatives.

Revenues from account fees Only Nyèsigiso chose to assess fees for opening or maintaining a savings account. This is a questionable decision, because of its potentially discouraging effect on prospective savers. Nyèsigiso’s projections show these fees to be a decreasing contributor to profitability, as its management looks to cross-selling to generate the bulk of future revenue.

Revenues from cross-selling Cross-selling revenues derive from selling other financial products, such as loans, to youth and to youth relatives and networks. All three organizations expect cross-selling to generate a fast-growing revenue stream between 2014 and 2018. By 2018, this revenue source is expected to reach 32 percent of total revenues from youth products at Cooprogreso, 49 percent at San José and 94 percent at Nyèsigiso. For all three organizations, revenue from cross-selling services to youth is the driver of fast growth of the total revenue.

Bundled services may also increase youth loyalty and may help ensure a good-quality clientele in the future. Training field staff to treat youth as customers, based on a comprehensive understanding of their financial needs, instead of just selling them a product, is important to increase the likelihood of cross-selling other products to them.

Revenues from savings on-lending Credit unions, like any financial intermediaries, are in the business of attracting funds from various sources and lending them profitably to others. Our participants expect the revenue stream from on-lending of youth savings to be the fastest growing source during the projection period. Between 2012 and 2013, we estimate it grew by 39 percent at Nyèsigiso, doubled at Cooprogreso and multiplied six fold at San José. The trend is expected to continue in a relatively slower rate.

Show Me the Money vi Social case All three participating institutions have a deep and conscientious social mission. Like all credit unions, each is owned and controlled democratically by its members. Each has adopted an explicit statement of values aimed at serving the needs of their members and communities. Undoubtedly this stance influenced their separate decisions to offer savings services with financial education, and will influence their patience to stay the course even if the path toward profitability is relatively long and slow. Conclusions The financial projections suggest that integrated services can lead to profitability. The Ecuadorian credit unions are projected to reach a break-even point on a current basis by 2014 and on a cumulative basis by 2015. Nyèsigiso is projected to breakeven on a current basis by 2017 and on a cumulative basis after 2018, perhaps by 2020. Profitability of integrated services can take time to materialize and therefore requires commitment to a social mission and the willingness and financial capacity to take a long view.

Show Me the Money vii Introduction

As more than one-half of the world’s population today is under the age of 30, with the vast majority living in the developing world,3 addressing the economic needs of young people before they transition into adulthood is not an option but rather a necessity. In every region, responding to the needs and aspirations of young people is a crucial challenge for the future.4

One strategy that financial service providers (FSPs) are exploring to improve the economic well-being of young people living in poverty is to provide a savings product combined with financial education (“integrated services”).5 While savings and education alone will not lift young people out of poverty, the combination might strengthen the resilience of young people to financial shocks by helping them build assets and acquire financial understanding before they face greater financial responsibilities as adults.

Researchers are looking into both the impact of financial services on the lives of young people, and whether this is a viable business model for FSPs. Two potential benefits to the FSP are 1) cultivating future clients and 2) generating revenues by cross-selling services such as loans.6 The experience of Freedom from Hunger suggests that the integrated services for young people can produce positive financial returns, but only over the long term.

For financial institutions that consider offering such services, the important questions are: Does this strategy enhance our ability to further our mission? How much will the initial investment and ongoing operation cost? What incremental revenues can we expect and over what time frame? Is the long-term financial return sufficient? Can we accept a lower return to further our mission? What can we do to mitigate the financial risks and maximize financial returns?

The purpose of this study is to shed light on these questions through a financial analysis of the participation of three financial institutions in the implementation ofAdvancing Integrated Microfinance for Youth (AIM Youth), an initiative of Freedom from Hunger in partnership with The MasterCard Foundation. The institutions are listed below: Cooperativa de Ahorro y Credito Cooprogreso, Quito, Ecuador (referred to subsequently as “Cooprogreso”) Cooperativa de Ahorro y Credito San José, San José de Chimbo, Ecuador (“San José”) Nyèsigiso, a federation of credit unions headquartered in Bamako, Mali (“Nyèsigiso”)

The analysis draws conclusions about the following areas related to providing integrated services for people ages 13 to 24:

Show Me the Money 1 Key market levers or market factors that influence the development of the service. Key cost and revenue drivers for different business models. Options for reducing costs without undermining the quality of service, and increasing potential revenues.

The primary audience of this study is financial institutions looking into the possibility of delivering integrated services to the youth segment. The study projects financial results for 2014–2018, taking into account trends observed since the launch of the services and anticipated growth projected by the participating organizations.7 This analysis also considers the potential financial return from cross-selling other financial products to the youth market, to family members and others.

The three institutions are all credit unions,8 but they have adopted different operating models to provide savings with education. These different approaches will illustrate the importance of adopting a sound business model before providing the service.

Methodology

To address the research questions, Freedom from Hunger analyzed the experience of the partner organizations. This analysis involved collecting data, creating financial projections and applying an analytical framework developed by CGAP for use in building a business case for youth savings9.

1. Collecting data. Two types of data were collected with the help of the three organizations: a. We gathered financial data by interviewing key staff and examining management information system (MIS) reports and financial statements. We focused on cost and revenue data to measure the marginal direct costs specifically related to the implementation of savings with education.This included both a percentage of staff time and institutional costs subsidized by Freedom from Hunger. To the extent possible, we excluded indirect costs.10 We also included the investment costs incurred by each partner in developing the product, allocating costs based on staff time spent in this effort. Costs pertaining to the use of mobile electronic devices by Cooprogreso and San José were not included in this report.11

b. We gathered qualitative data through interviews and focus-group discussions with management, field agents and clients in both Mali and Ecuador. We asked management about their commitment to and future plans for serving youth clients. We asked field agents about how they allocated their time between promoting youth savings and promoting education and about the potential for cross-selling products to youth and their relatives. Finally, we asked young clients about their experience with savings with education. The qualitative data provided deeper insights into the implementation of the service, which significantly informed the development of the assumptions that underlie the financial projections.

2. Financial projections. To evaluate how the service might evolve for each partner, we built financial projections through 2018. We began by developing a set of assumptions in collaboration with each organization. We based the assumptions on the organizations’ actual performance to date, an assessment of management plans for and commitment to continuing the service, and each organization’s expectations of future growth and of how the service will evolve. Where estimates were sketchy, particularly in the area of cross-selling, we supplemented them with findings from quantitative research conducted by Freedom from Hunger in Mali and Ecuador12. Freedom from Hunger developed operational and financial projections for 2014–2018,

Show Me the Money 2 incorporating growth estimates provided by the organizations, and applying the assumptions noted above. See Annex 1 for a detailed description of the assumptions. For context, the report includes actual performance data for years prior to 2013 and estimated data for 2013.

3. Analysis. The analysis uses the framework developed by CGAP for building a business case for youth savings. The CGAP framework suggests four categories of levers or drivers influencing FSPs interested in providing a savings service aimed at the youth market: Market-level levers

¡¡ Macroeconomic factors, such as higher per capita GDP growth achieved by including more youth

¡¡ Demographics

¡¡ Financial market depth and access, such as the rate of adult savings, and the correlation of youth savings with use of ATMs

¡¡ Regulatory enabling environment, such as restrictions on account ownership by minors

Institutional levers

¡¡ Opportunity costs, such as the reduced focus on more profitable markets or services

¡¡ Institutional “muscle,” or depth of staffing and resources, which is linked to scalability

¡¡ Time horizon, because gains are likely only in the longer term

¡¡ Commitment to social responsibility, which is associated with the institution’s brand, and which may help offset some degree of financial limitation

Segment-specific levers

¡¡ Children

¡¡ Youth students

¡¡ Youth workers

Profitability drivers

¡¡ Marketing, considering the costs of recruiting young clients now compared with the potentially greater cost of luring them away from another FSP as adults, and factoring in the value of providing a social good

¡¡ Products, recognizing the cost of developing new products versus the relatively low cost of funds available from youth savings

¡¡ Operations, reflecting the added costs of outreach

¡¡ Delivery, such as using schools as a channel for delivering the service

¡¡ Risk, particularly if potential cross-selling will include lending to the youth market, whose credit risk may be greater than that of adults

The first section of this study focuses on market-level levers.The second provides an analysis of the cost and revenue elements. The third section addresses the overall profitability of the service at each institution. Key institutional dimensions and growth strategies are woven throughout the discussion of how to manage costs while maximizing revenues on the path to profitability.

As a credit union federation, Nyèsigiso approaches new product development differently from standalone institutions. This means that they pilot new products at the federation level before rolling them out through

Show Me the Money 3 the network of credit unions.13 During the pilot, the federation created a project implementation team of six field agents and a supervisor, all assigned to the Marketing Department. The federation incurred all investment and operating costs, and applied them against a grant from Freedom from Hunger, which was funded by The MasterCard Foundation. Since the federation does not provide services directly to members, the youth group-based savings accounts (GSAs) were offered through six selected credit unions located in the Bamako area. One field agent is attached to each of these six credit unions.14 The field agents cooperate with the respective credit union management to directly monitor these accounts. The analysis of actual (not projected) costs and revenues combines the costs incurred at the federation level with the revenues gained at the credit union level to obtain a consolidated view of the contribution of the service for Nyèsigiso as an entity.

The study examines the actual FSP experiences in order to help guide other FSPs who are entering the area of integrated services. This practice-based approach does not lead to recommendations about which actions to take, but rather offers lessons and potential pitfalls to keep in mind while defining and implementing such a service. In addition, while the marginal costs/revenues approach can be an accurate gauge of the additional cost of adding (or ending) the service, because it lacks indirect costs it does not accurately reflect the fully loaded profitability. Finally, although we did not set out to analyze the differences between rural and urban environments, we try to draw some conclusions from that perspective where relevant.

Overview of the AIM Youth Initiative

Freedom from Hunger and The MasterCard Foundation launched the AIM Youth initiative in December 2009. The goal of AIM Youth was to improve the capacity of youth living in poverty to access and utilize financial services as a way to enhance their future economic opportunities. To accomplish this goal, Freedom from Hunger set out to explore, test and document a variety of approaches for integrating financial services and education for young people ages 13 to 24 years old. Freedom from Hunger partnered with implementing institutions in Mali and Ecuador to design and test the different models of delivery.

Freedom from Hunger aimed to reach 37,000 young people with integrated services through its partners. The partners were selected based on their understanding of, and experience in, integrated services and on their institutional commitment to extend services to low-income youth.15

In Mali, there were two different approaches to delivering savings services. In both models, financial education was provided to youth who were brought together to save in groups. The first approach involved two Malian non-governmental organizations (NGOs) CAEB and Le Tonus. Young people joined youth savings groups (YSGs), a non-formal community-based savings and loan model, which held the funds locally and did not use an FSP.16 In the second approach, young people saved money in a GSA with one of two credit union federations, either Nyèsigiso or Kondo Jigima. The account holder was one of the group members who was 18 years or older and who met with the group on a regular basis. The goal was for each group member to save a set amount at each meeting. The money saved remained in the savings account until the group jointly decided to withdraw the money. If one member left the GSA, the credit union field staff provided guidance to help the group manage the departure without closing the account.

In Ecuador, four cooperatives (Cooperativa San José, Cooperativa Cooprogreso, San Miguel de los Bancos and Cooperativa Santa Ana) provided financial education through middle and high schools and the students were encouraged to open individual savings accounts. Table 1 summarizes their services and outreach as of December 31, 2013.

Show Me the Money 4 Table 1: Outreach Indicators by Integrated Model (as of December 31, 2013)

Ecuador Mali Mali Financial Formal GSAs+ Education+ YSGs+Financial TOTAL Financial Formal Individual Education Education Savings Accounts Youth with Savings 5,701 2,606 24,070 32,377 Youth with Financial Education 12,763 2,372 19,391 34,526

This study of profitability excludes the programs sponsored by the Malian NGOs because the NGOs do not have a revenue stream.

Of the Ecuadorian credit unions, San José was a logical choice because it was one of the first to implement the integrated services. In addition, since San José participated in the impact research activities, we have more data from which to develop our hypotheses. Cooprogreso was also a very strong choice because it is the largest of the partners in Ecuador and has participated in a number of research activities. For Mali, our only option was Nyèsigiso, since the partnership with Kondo Jigima concluded prematurely in 2012.

All AIM Youth partners integrated financial services, primarily in the form of savings paired with a series of financial education sessions.The rationale for AIM Youth partners to provide education sessions is that offering youth financial services requires a comprehensive approach to overcome limited financial literacy and lack of experience with formal financial services. By accepting guidance in understanding, for instance, the importance of saving and how to assess and access the savings product proposed to them, young people will become better consumers of financial products. The education sessions delivered by each organization, adapted to their respective contexts and targeted to specific needs, covered the following areas: Establishing savings goals and a plan to reach goals Making informed savings and borrowing decisions Identifying safe places in which to save Making good money-management decisions Planning for difficult times

For each organization, the sessions are delivered by the same field staff that provides the financial service, which is referred to as the unified model of education integration. Nyèsigiso Federation field agents provide education to youth participating in the GSA during the weekly meetings, typically at the house of one of the members or at a public place. At Cooprogreso and San José, the education sessions are delivered in the schools by the field staff.

Show Me the Money 5 Market-Level Levers in Ecuador and Mali and Organization Contexts

Ecuador With a population of 15.49 million and a GDP of US$84.4 billion, the economy of Ecuador has great challenges ahead, despite its impressive growth rate since 2010 (3, 7.8 and 5.1 percent in 2010, 2011 and 2012, respectively)17. According to the World Bank (Global Findex database), more than one-half of the population continues to live in poverty18 or in a vulnerable situation; and the country’s economy continues to depend heavily on oil. The inflation rate was 5.1 percent in 2012.

Ecuador Microfinance Sector 954 credit unions 4 specialized microfinance banks 10 NGOs operating as MFIs Some downscaling banks such as Banco de Guayaquil or Banco Pichincha

Although lagging slightly behind the regional benchmarks, the microfinance sector in Ecuador is well developed and offers a diversity of products, including loans, savings, insurance and cash-transfer services. The sector is highly competitive with a large number of service providers (see box), and total assets in 2012 of $23.4 billion, with 959,907 active borrowers and 1.45 million active depositors. This high level of competition has led to market saturation and the consequent deterioration of credit standards has contributed to as many as 41 percent of Ecuadorian families suffering over-indebtedness, a level that increased greatly between 2006 and 2011.19 The government reacted by adopting new legislation in May, 2011 aimed at providing a single legal framework for Ecuador’s financial system, encouraging more deliberate social inclusion by FSPs, reducing overindebtedness through financial education and bringing many previously unregulated microfinance institutions (MFIs) under the supervision of the Authority for the Solidarity and Popular Economy.20

With only 37 percent21 of the Ecuadorian population older than 15 years owning a bank account in a formal financial institution in 2011 and only 15 percent having used these accounts to save during the year, there is a long way to go for the country to achieve full financial inclusion.This is especially the case for young adults,22 as only 23 percent of them had a bank account in 2011.

However, some positive trends are evident, such as the reduction of the income gap between the poorest citizens and the average of the population (8.8% in 2000 vs. 5.8% in 2011).23 Additionally, the Global Competitiveness Report 2013–2014, published annually by the World Economic Forum, ranks the Ecuador financial market to be in Stage 2 of development, which is described as an“efficiency-driven economy.24” All these factors contributed to rapid economic growth and provided a favorable context for the two Ecuadorian credit unions to expand their financial services to youth.

Cooprogreso and San José account for only 0.9 and 0.2 percent, respectively of the total microfinance assets in Ecuador in 2012, and 6.5 and 1.8 percent of the total gross loan portfolio of MFIs. The table below shows that both organizations perform substantially worse than the national average for return on assets (ROAs) and slightly worse for operational self-sufficiency (OSS). With its portfolio at risk (PAR,30 days) of 3.46 percent, Cooprogreso nearly matches the national average while San José’s 2.39 percent is significantly better.

Show Me the Money 6 Table 2. Cooprogreso and San José on the Ecuador Microfinance Market*

Ecuador Key Performance on 12/31/2012 Cooprogreso San José Microfinance Market Number of Active Borrowers 37,430 11,585 959,907 Number of Active Depositors 86,963 53,415 1.45 million Gross Loan Portfolio 182.8 million 50.5 million 2,782 million Portfolio at Risk (30 days) 3.46% 2.39% 3.47% Assets 231.8 million 62.6 million 23.46 Billion Return on Assets (ROA) 1.17% 1.24% 1.63% Operational Self-Sufficiency 110.01% 113.64% 114.81% *MIX Market

Mali Mali’s economy has always been fragile because the climate is so dry. Global climate change further jeopardizes the country’s agricultural performance. With rapid population growth and frequent droughts, most recently in 2011, the population faces chronic food insecurity and widespread poverty.

The 2012 political crisis had a huge negative impact on the economy, which experienced negative GDP growth that year.25 The Malian microfinance sector comprises 125 FSPs, including 70 cooperatives (credit unions) and 55 MFIs. Nyèsigiso, along with two other organizations (Kafo Jiginew and CAECE) dominates the Malian market, accounting for 51 percent of the deposits and 49 percent of the gross loan portfolio.26 The sector is regulated by a new law that went into effect in May 2010, aimed at better monitoring FSP performance, tightening the supervision of the Central Bank, and developing mechanisms to protect depositors.

As in Ecuador, the financial-sector regulation authorizes only youth ages 18 years or older to become clients of a formal financial institution.The country’s microfinance sector faced tremendous difficulties over the last few years, which saw four organizations ceasing activities.27 This situation was further exacerbated by the 2012 political crisis, which caused some FSPs to suffer financial losses—particularly those operating in the three northern regions—and a sharp reduction of funding opportunities.28

The country’s economic and financial shortcomings are confirmed by the Global Competitiveness Report 2013–2014, which ranks the development of Mali’s financial market as Stage 1“factor-driven economy. 29” In Mali, 49.62 percent of the population is female. Challenges for full financial inclusion in Mali are much greater than in Ecuador. In 2011, only 8 percent of the population older than 15 years old had an account in a formal financial institution and 4 percent of the population actually used it for savings. Only 5 percent of young adults in Mali had a formal account in 2011,30 which is a significant challenge in a country where 47.14 percent31 of the population is younger than 15 years old.

Show Me the Money 7 Organization Description and Social Mission

Organization Description Cooperativa de Ahorro y Credito Cooprogreso (Cooprogreso) has operated as a credit union in Ecuador since 1967 and has offered integrated financial and educational services to its credit union members since 2003.

Cooprogreso currently operates in several cities in the Ecuadorian provinces of Pichincha, Santo Domingo de los Tsachilas and Manabi through 24 branches, 11 of which are rural. The credit union offers microcredit (business, auto and home loans), credit cards, savings accounts and investment options and had 87,000 depositors in 2012,32 40 percent of whom are in rural areas. It is estimated that this percentage applies to their youth outreach as well.

Cooprogreso’s Youth Saving Product “Yo Soy” Youth ages 13–24 years old Initial deposit of $5, subsequent deposits as small as $.01 No maintenance fees or account closing fees Interest rate of 2% annually earned ATM available for youth 18 and older ($.50 ATM fee when used) SMS (text message) technology for users to receive savings messages that correlate with the financial education they are receiving

Working with Freedom from Hunger’s AIM Youth program, Cooprogreso has developed an individual youth savings product called Yo Soy (“I am”) and promoted it through all their branches and through community- wide marketing events. Yo Soy is also promoted through the financial education developed by Freedom from Hunger and provided to young people in schools by Cooprogreso field agents. Anyone interested in opening an account must go to a branch to do so.

The majority of the youth participating in the financial education are in school and primarily between the ages of 13 and 17 years old. The profile of young people with savings accounts is somewhat different, with most between the ages of 18 and 24 years old (as shown in Table 3).

Table 3. Cooprogreso: AIM Youth Outreach Breakdown as of September 2013*

Profile of Youth Who Have Participated in Financial Education 5,650 Number of youth clients who are women 2566 (percentage of total number of youth) (45%) Total number of youth clients ages 13–17 years old 5454 (percentage of total number of youth) (97%) Total number of youth clients ages 18–24 years old 86 (percentage of total number of youth) (2%) Total number of youth clients who are in school 5540 (percentage of total number of youth) (98%( Total number of youth clients who are married 0 (percentage of total number of youth) (0%)

Show Me the Money 8 Number of Youth Savings Account Holders 1,828 Number of youth account holders who are women 908 (percentage of total number of youth) (49.7%) Total number of youth account holders ages 13–17 years old 155 (percentage of total number of youth) (8%)

Total number of youth account holders ages 18–24 years old 1,673 (percentage of total number of youth) 92%

Total amount in savings (USD) 338,797 Average amount of savings per client or member during this period (USD) 185.34

*Cooperativa Cooprogreso 2013

Cooperativa de Ahorro y Credito San José was established in 1964 as a financial institution. The credit union has 10 branches serving 53,500 depositors in 2012.33 In 2009, it began offering integrated services to its clients in rural areas, specifically in the provinces of Bolivar, Los Rios and Pichincha. San José offers a range of financial products, including business and home loans, microcredit, a variety of savings accounts and remittance and salary-processing services. Approximately 70 percent of San José members are from rural areas.

San José has developed an individual youth savings product called Ahorrando Ando (“I am saving”) in partnership with Freedom from Hunger under the AIM Youth program (see description in the box). San José promotes Ahorrando Ando in much the same way that Cooprogreso promotes Yo Soy. The majority of the youth participating in San José’s financial education are younger than 18, whether in school or working. Actual account holders are mostly 18 years or older (as shown in Table 4).

San José Youth Savings Product Initial deposit of $11 for youth over the age of 18 and $2 for those between the ages of 13 and 17 (future deposits can be as low as $.01) Possibility of making deposits at credit union branches or making “Virtual Deposits” via PDA devices during financial education meetings while at school No maintenance fees Annual interest rate of 4% on savings Additional benefit of life insurance provided by San José to all youth with a savings account Account converts to a normal adult savings account once youth reach the age of 25

Show Me the Money 9 Table 4. San José: AIM Youth Outreach Breakdown as of September 2013*

Profile of Youth Who Have Participated in Financial Education 2,584 Number of youth clients who are women 1,575 (percentage of total number of youth) (61%) Total number of youth clients ages 13–17 years old 1,770 (percentage of total number of youth) (68%) Total number of youth clients w ages 18–24 years old 814 (percentage of total number of youth) (32%) Total number of youth clients who are in school 2,584 (percentage of total number of youth) (100%) Total number of youth clients who are married 22 (percentage of total number of youth) (1%) Number of Youth Savings Account Holders 2,788 Number of youth account holders who are women 1,576 (percentage of total number of youth) (57%) Total number of youth account holders ages 13–17 years old 282 (percentage of total number of youth) (10%) Total number of youth account holders ages 18–24 years old 2,506 (percentage of total number of youth) (90%) Total amount in savings (USD) 348,656 Average amount of savings per client or member during this period (USD) 125.06 *Cooperativa San José 2013

San José’s management is committed to continuing the delivery of financial education in schools and in the communities as part of the cooperative’s corporate social responsibility efforts. It also intends to pursue youth savings as part of a strategic decision to drive up savings balances as a source of funds.

Nyèsigiso was formed in 1990 as a cooperative in the city of Bla, Mali. It was converted into a network institution in 1997, and in 2003 it began to reconfigure its network to achieve financial and institutional sustainability. Today, it is the second largest MFI in Mali34 with 181,000 members.

In 1996, Nyèsigiso began working with Freedom from Hunger to offer Credit with Education to women in rural areas. It currently operates in Bamako, Kayes, Koulikoro, Ségou and Tombouctou. Nyèsigiso offers a variety of savings, credit and other financial products, including retirement pensions, money transfers and disability and life insurance. The network comprises 15 credit unions with a total of 75 branches, 25 of which serve rural populations.

Nyèsigiso is a major player in the microfinance market in Mali. It is represented in five35 of the eight regions of the country and serves 13 percent of the county’s microfinance clients, holds 16 percent of loan portfolio and 17 percent of total deposits. Despite the political crisis in 2012, savings balances nationally increased by 3 percent during the year. Nyèsigiso’s loan portfolio decreased by 6.73 percent from 2011 to 2012 and the portfolio quality deteriorated sharply from a PAR 30 days value of 1.19 percent in 2011 to 9.9 percent in 2012, a larger decline than the national average.36 The political situation reduced loan repayments across the country, especially in the northern regions, which led to the closing of four northern credit union branches (Tombouctou, Diré, Goundam and Doïkiré) and the temporary closing of the Markala credit union and four branches of Niono’s credit union.

Show Me the Money 10 Nyèsigiso’s Youth Saving Product: Mara ni wassa Deposit of CFAF 9,000 ($18) by group to open group account covering enrollment, youth membership cards, minimum deposit requirement, and a contribution to the association Minimum account requirement of CFAF 2,000 ($4) 6 percent interest on savings every three month Weekly deposits to the group account Involvement of a “tutor” if over half the youth in a group are under the age of 18 (helps the group manage its savings account) 3 delegates who can sign for the account (or 2 delegates plus the tutor) for groups whose members are predominantly under the age of 18

Table 5. Nyèsigiso in the Mali Microfinance Market 2012*

Mali Microfinance Key Performance Nyèsigiso Sector Total Client Number (savers and borrowers) 233,349 1,724,490 Gross Loan Portfolio $21,347,128.57 $135,556,820.00 Total Deposit Amount $20,487,216.00 $121,237,120.00 Portfolio at Risk (30 days) 9.9% 3.16% Return on Assets (ROA) (%) –0.72% –1.43% Operational Self-Sufficiency 97% 94.15% * Nyèsigiso, BCEAO and The MIX.

With Freedom from Hunger’s assistance under the AIM Youth program, Nyèsigiso began offering integrated services to youth in 2012.

In Nyèsigiso’s model, youth between the ages of 13 and 24 form savings groups of 5–15 members where they receive financial education in addition to the opportunity to save (see product’s description in the box).To receive education through Nyèsigiso, youth must be part of a savings group, so all youth who receive education are also saving through a GSA. Youth are assisted by Nyèsigiso’s field agents, who are attached at the federation level and assigned to a geographic area. When the youth groups are ready to open an account, field agents direct them to one of the six credit unions37 participating in the pilot project. Seventy-two percent of youth at Nyèsigiso are over the age of 18 and 45 percent are in school (see Table 6).

Show Me the Money 11 Table 6. Nyèsigiso: AIM Youth Outreach Breakdown as of September 2013*

Profile of Youth with a GSA 2,262 Number of youth clients who are women 421 (percentage of total number of youth) (19%)

Total number of youth clients ages 13–17 years old 599 (percentage of total number of youth) (26%)

Total number of youth clients ages18–24 years old 1,663 (percentage of total number of youth) (74%)

Total number of youth clients who are in school 1,016 (percentage of total number of youth) (45%)

Total number of youth clients who are married 303 (percentage of total number of youth) (13%)

* Nyèsigiso 2013

Nyèsigiso’s model provides youth access to formal savings accounts as a member of a group, overcoming the regulatory barrier that limits formal financial services to people 18 years and older. Despite the challenging economic and financial circumstances, with a significant proportion of the population under 15 years old, Nyèsigiso has the opportunity to address the growing financial needs of this young population. With its extended service-delivery infrastructure of 15 credit unions and 75 branches as points of sale, the organization has the potential to scale up its youth savings services.

Table 7 below shows AIM Youth partners’ performance in their respective countries.

Table 7. Performance of AIM Youth Partners as of December 2013

Number of Number Average youth with Total Average of youth Number savings a savings balances savings participating of group amount account in savings amount per in financial accounts per group (group or accounts ($) youth education account individual) Cooprogreso 6,321 1,210 $216,155 $178.64 San José 2,680 3,124 $444,867 $142.40 Nyèsigiso 2,262 2,262 $7,238 $3.20 219 $33

A Strong Social Case Credit unions The three institutions analyzed in this study include two credit unions (Cooprogreso and San José in Ecuador) and a credit union federation (Nyèsigiso in Mali). Credit unions are membership organizations. They are owned and governed democratically by their members and typically deeply involved in their communities. Credit unions typically aim at responding to their members’ social goals by providing financial services and encouraging a very strong culture of savings. They promote responsible lending strategies to their members.38

Nyèsigiso in Mali is a network of independent credit unions, each with its own governance structure, including a board of directors of members selected from the community.39 Ecuadorian credit unions are structured in branches totally under the control of the credit union management. Providing social values to their members

Show Me the Money 12 and the communities they serve is central to the mission of the three organizations. This certainly played a role in their decision to provide financial services and education to the young people40 of their communities.

Social Missions of the Organizations Cooprogreso To serve client members in a competitive, equitable and socially responsible manner. To facilitate the delivery of financial products and services. To give value to member contributions, which ensure improved quality of life, community and country advancement. To use available technology, backed by the commitment of its human resources to build confidence, strength and sustainable growth of the institution. San-José Contribute to the progress and welfare of the Ecuadorian family with financial products and quality services, based on principles of solidarity and sustainable equity.

Nyèsigiso Make available in a mutual fashion, local financial services tailored to the needs of urban and rural populations to improve their living conditions.

Targeting the excluded segments The target clientele of the three organizations shows a concerted focus on reaching excluded segments of their respective communities: youth, women, rural populations (Nyèsigiso and San José), the poor and low- income populations (Cooprogreso). Offering pro-poor and high-impact services The services promoted by these organizations also show their commitment to ensuring social impacts for their members. In addition to offering traditional products, such as savings and loan services, the three organizations have been offering Credit with Education with support from Freedom from Hunger.41 Both Cooprogreso and San José also offer insurance products, while San José offers linkages to health services and water sanitation. Social-performance management and client protection The three organizations’ commitment to social outcomes is also evident through their work in social- performance management. Applying a social lens to their service-delivery approach, they have fully embedded client-protection principles into their operations.42 Cooprogreso has trained its board members on social- performance management principles, San José is using a poverty measurement tool to systematically assess its social performance and Nyèsigiso is currently finalizing a report on its social-performance assessment.

The three organizations studied in this paper appreciate the importance of social goals. However, the organizations’ different competitive environments and business structures result in different approaches. Cooprogreso and San José are operating in a more competitive environment and thus have adopted a more business-orientated posture; Nyèsigiso’s organizational structure as a network of decentralized credit unions allows it to focus more resources on credit union members and the community.

Show Me the Money 13 Costs and Revenues Analysis for Youth Financial Services

Beyond the social-performance considerations, the decision of a financial institution to invest in the provision of a new financial service depends on its projected profitability and its potential for additional business opportunities. “The program has enabled While financial institutions may be well-equipped to conduct such analyses of their traditional clientele, applying the cooperative to such analysis to a youth population can be very challenging diversify its products, to because of limited data about this segment. Moreover, even allow for a new product if financial institutions perceive youth services as a useful strategy for cultivating their future client base, they might specifically for children not be able to assess with a high level of confidence the and another one for young profitability of the services offered because of a lack of experience in serving this market. people”. (Cooprogreso)

To address this gap, we offer an in-depth analysis of the costs incurred, and potential revenues generated, by providing savings with education by the three AIM Youth partners selected for this study.

Cost Analysis In this analysis, we examine the key costs and cost drivers incurred by the credit unions to develop, launch and integrate services. As noted above, the analysis uses marginal direct costs, which is the cost that would actually be incurred by adding the service or saved by eliminating the service.43 This approach excludes indirect costs, such as executive and management time, administration (information management, human resources) and occupancy costs, since those costs would change minimally whether the service was offered or not. Consequently, the analysis focuses primarily on costs directly linked to field agent activities on the ground and to immediate supervisor costs (in the case of Nyèsigiso). However, we did include administrative costs of office equipment and supplies purchased specifically for savings with education. Cost-structure analysis The analysis of the cost structure of the three organizations reveals strong similarities, despite the differences in their business models and geographies served. The cost elements assessed across the three organizations include the following: Product development (investment costs incurred once, at the beginning) Operations

¡¡ Salaries

¡¡ Transportation

¡¡ Marketing and administration Interest expense on savings

The product development costs were incurred during the first year of implementation and consist mostly of management time. These costs were largely financed by Freedom from Hunger.We examine the implications of dropping this external funding by Freedom from Hunger in the Profitability Analysis Section. The drivers associated with the cost items described above are shown in the table below; these drivers informed the assumption for projections described in Annex 1 of the report.

Show Me the Money 14 Table 8. List of Cost Drivers

Costs Cost Drivers Product development costs Personnel time (including consultants) Salaries and benefits of field agents Number of field agents Monthly salary of field agents Annual salary growth rate Transportation costs Number of motorcycles Price of fuel Field agent caseload (number of youth groups) Rural outreach of the organization (deeper rural outreach involves higher transportation costs) Administrative and marketing costs Number of accounts opened Interest paid on youth savings accounts Interest rate Balance of savings accounts

The period beginning in 2011 for San José and 2012 for Cooprogreso and Nyèsigiso through the end of 2013 represents the pilot period, and shows actual or estimated results. The period from 2014–2018 is the period for which results are projected.

Salary expenses (Chart 1) for 2012 were significant for San José and Cooprogreso, but were the dominant component of the total cost for Nyèsigiso. One reason for this is that the field agents are still learning and have a relatively low level of productivity. The three FSPs estimate their staff spends either 7 percent (Ecuadorian credit unions) or 14 percent (Nyèsigiso) of their time to financial education.

In 2012, marketing and administrative costs represented the largest cost area for Cooprogreso and San José.

Chart 1. Partner Cost Structure 2012

For the projection period (2014–2018), it is worth noting the relative stability of some portions of the operating costs.

Show Me the Money 15 For Nyèsigiso, salary costs remain high, at about two-thirds of all costs. Transportation costs are expected to increase slightly from 20 to 27 percent by the end of the projection period. For Cooprogreso, marketing and administrative costs are expected to decrease from 44 to 34 percent of the total operating costs by 2018. San José is expected to experience more fluctuations in its major operating costs; its marketing and administrative costs will vary between 25 and 35 percent of their total costs, whereas salaries are expected to increase from 24 to 32 percent (of the total costs) by 2018.

Chart 2. Nyèsigiso Projected Cost Structure

Chart 3. Cooprogreso Projected Cost Structure

Show Me the Money 16 Chart 4. San José Projected Cost Structure

The relative stability of the major cost areas for the three organizations reflects a conservative and risk- minimizing approach, typical of organizations entering new territories. While this might be appropriate from a business point of view, these institutions might also learn from their innovations and modify their approaches as they gain experience with the youth segments. With competitive pressure for market and service delivery that many financial institutions face, they do not take adequate measures or time to learn or evaluate, but it is essential to evaluate their strategic positioning in the market—current and future. This will help them seize opportunities to improve their results. Analysis of the operational costs A detailed analysis of the operating costs reveals significant trends for each organization.

Salaries Salaries represent the largest cost for Nyèsigiso and the second largest for Cooprogreso and San José during their initial period offering youth integrated services (2011 through 2013). Thus, salaries are an important area to focus on to explore potential cost-reduction opportunities.

The current higher proportion of salaries to Nyèsigiso’s overall cost structure compared to that of the Ecuador credit unions can be explained by several factors. Nyèsigiso’s business model under the pilot phase consists of dedicating marketing agents to promote integrated services at the federation level. Six marketing agents are responsible for forming the youth groups (a time-intensive process), opening the GSA, and delivering the financial education sessions.

In the short term, the growth of Nyèsigiso’s service depends directly on the number of agents assigned to savings with education. In the longer term, as they gain experience, growth will depend on their productivity.44 In addition, Nyèsigiso benefitted from external funding to support the marketing agents’ salaries during the project implementation, and is now faced with the challenge of covering these costs on a sustainable basis. While Nyèsigiso has been offering integrated services primarily to fulfill its social performance agenda, the organization should explore ways to generate sufficient revenues from this offering in the long term to cover its costs. This question is further analyzed in the Profitability Section.

Show Me the Money 17 Cooprogreso and San José allocate approximately 20 percent of field staff time to marketing the youth product. The remaining time is devoted to promote other financial products for adults. Project funding did not cover salary costs for Cooprogreso, however, San José benefitted from external funding to help cover salary costs for the first year of implementation (2011).

Salary cost projections (based on the assumptions in Annex 1) as well as the percentage of salary costs in the total costs for youth integrated service are shown in the table below:

Table 9. Projections of Salary Costs for Youth Integrated Service in USD and Percentage in Total Operating Costs (2012–2018)*

2011 2012 2013 2014 2015 2016 2017 2018 Nyèsigiso N/A $23,334 $24,035 $25,813 $27,190 $29,195 $30,735 $31,964 Percentage of N/A 73% 73% 71.50% 70% 69% 67.50% 67.50% operating costs Cooprogreso N/A $9,769 $10,296 $16,865 $20,292. $26,804 $46,807 $54,014 Percentage of N/A 46.% 46.% 51% 52% 54.% 60% 59% operating costs San José $10,877 $11,466 $12,084 $16,733 $22,530 $29,713 $34,289 $39,570 Percentage of 38% 39% 36% 38.50% 41% 43% 45% 48% operating costs *Based on data collected from the FSPs.

Nyèsigiso’s plan is to add new staff only as needed. San José plans to increase the total staff time allocated to savings with education as part of their overall institutional growth (field agents devote 20 percent of their time to savings with education). Cooprogreso plans a more aggressive growth strategy and is assigning three new staff to savings with education between 2013 and 2014 and six more between 2016 and 2017. This will represent a 63 and 75 percent increase in their salary costs, respectively.45 This aggressive growth strategy confirms Cooprogreso’s strong commitment to offering savings with education. However, rapid growth may subject the institution to higher risk, given its limited experience with youth financial services, especially if it does not succeed in reaching more youth with quality services.

Marketing and administrative costs Like salary costs, marketing and administrative costs have been relatively high for all three FSPs since the launch of the service. It is therefore an area to monitor for potential cost-saving or cost-reduction opportunities.

In the case of the Ecuadorian credit unions, marketing and administrative expenses represent the largest cost. A closer look at the details of this category shows that the marketing expenses are double the administrative costs for San José. Since the Ecuador financial services market is more competitive, and given the new target market of young people, Cooprogreso and San José needed to be more aggressive in their promotional approach to sell their youth products—a trend that is expected to continue (as illustrated in Table 10). Cooprogreso and San José have both implemented various incentives, including discount cards, movie tickets, t-shirts and cell-phone accessories such as recharge cards, to encourage youth to try the products. Cooprogreso’s and San José’s additional investments in marketing (Table 10) represent between 40 and 50 percent of the total costs for the Ecuadorian credit unions but less than 10 percent for Nyèsigiso.

At Nyèsigiso, field agents’ promotional activities consist of selling the product in schools, training centers and workshops. Field agents also encourage Nyèsigiso’s adult clients to let their children know about the

Show Me the Money 18 youth integrated services. In addition to a less competitive environment, Nyèsigiso’s lower marketing costs, as compared to its Ecuadorian peers, can also be explained by its service-delivery approach. The marketing agents don’t need to interact with every single potential youth client since they work through groups. Thus, Nyèsigiso’s marketing agents need only approach one or two potential youth clients who then seek other interested peers to form a group and open an account.

The projections of marketing and administrative costs for 2014 through 2018 (Table 10) reflect the organizations’ respective institutional strategies and show the percentage of the marketing and administrative costs against the total cost of youth integrated services implementation.

Table 10. Projections of Marketing and Administrative Costs for Youth Integrated Services and Percentage of Total Operating Costs (2011–2018)*

2011 2012 2013 2014 2015 2016 2017 2018 Nyèsigiso NA $1,843 $1,900 $2,008 $2,153 $1,783 $1,931 $1,990 Percentage of NA 6% 6% 5.50% 5.50% 4% 4% 4% operating costs Cooprogreso NA $10,812 $11,396 $15,446 $17,908 $21,705 $29,742 $36,050 Percentage of NA 51% 51% 47% 46% 44% 38% 39% operating costs San José $12,198 $11,778 $14,697 $18,587 $22,857 $27,126 $28,590 $30,135 Percentage of 42% 40% 44% 43% 41% 39% 38% 36% operating costs *Based on data collected from the FSPs.

The projections reflect the diverse growth strategies adopted by the different organizations. For Cooprogreso, costs are expected to spike in 2014, 2016 and 2017, which corresponds with the projected addition of field staff. By comparison, Nyèsigiso and San José have adopted a more conservative growth strategy and expect a more gradual increase in their marketing and administrative costs.

Transportation costs Transportation (Table 11) represents a fairly important expense for Nyèsigiso as a percentage of total operating costs in comparison to San José and Cooprogreso. This trend seems to be dependent on an organization’s adopted growth strategy.

Table 11. Projections of Transportation Costs for Youth Integrated Service and Percentage in Total Operating Costs (2011–2018)*

2011 2012 2013 2014 2015 2016 2017 2018 Nyèsigiso N/A $6,860 $7,067 $8,322 $9,612 $11,302 $12,858 $13,373 Percentage of total N/A 21% 21% 23% 25% 27% 28% 28% operating costs Cooprogreso N/A $547 $576 $789 $915 $1,109 $1,519 $1,852 Percentage of total N/A 2.50% 2.50% 2% 2% 2% 2% 2% operating costs San José $4,333 $5,777 $6,089 $6,417 $8,117 $9,981 $12,023 $12,672 Percentage of total 14.50% 20% 21% 19% 19% 18% 17% 17% operating costs *Based on data collected from the FSPs.

Show Me the Money 19 In Mali, as in most of West African countries, public transportation is not well-developed. This is particularly true in rural areas so Nyèsigiso marketing agents use motorcycles for transportation. They travel frequently to meet rural youth and assist them in forming and developing their groups and working on the requirements of their GSA. This extensive travel results in high fuel costs.

In Ecuador, credit union field agents rely heavily on public transportation to reach their target communities. This enables Cooprogreso, with its greater concentration in urban areas, to control transportation costs more effectively than San José, whose agents must sometimes rely on taxis when traveling to areas where no bus service is available. Cooprogreso’s transportation costs average about $40 per agent per month, compared with $106 for San José. Other costs In addition to operating costs, other expenses impact the overall cost structure of FSPs providing integrated services to youth.

Interest paid on savings The three organizations decided to pay interest as an incentive to encourage clients to save. Nyèsigiso Cooprogreso and San José pay 6, 2 and 4 percent, respectively.

For context, Table 12 provides information about interest rates offered by other institutions that provide savings services for youth.

Table 12. Examples of Interest Rates Paid on Youth Savings Products*

Type of Organizations Country Products Interest Rate Organization

Savings Account for Peace Ethiopia MFI 6% savings, 7% for 1-year term deposits 12–24 year olds 2% above $19 to $188 Savings Account for UFT Uganda MFI 2.5% above $188 to $355 and 12–24 years olds 3% above $355 Savings Account for UCU Rwanda MFI 6% 12–24 years olds Faulu Kenya Hazina Junior Account Up to 5%, depending on balance Cooperative Bank Kenya Cooperative Jumbo Junior Account .25% to .75% depending on balance of Kenya Diamond Bank Nigeria Formal bank Diamond Kiddies 2% annual rate, paid quarterly National Bank Kenya Formal bank Vision Account Max 5.5% PostBank Uganda Uganda Postal bank Early Start Savings 6% *Source: www.spinnakernetwork.org

Interest expenses are a function of the interest rate and the savings balances. They represent about 1, 12 and 23 percent of total costs, respectively for Nyèsigiso, Cooprogreso and San José in 2012 (see Table 13).

Because its balances are relatively low, Nyèsigiso’s interest expenses are commensurately low (as a percentage of their total costs) despite its relatively high interest rate. Even though each GSA represents multiple individual savers, the group savings approach enables the institution to reach very small savers ($3.25 per saver on average) who would not otherwise have access to formal savings services.

Show Me the Money 20 Among the three organizations, San José has the highest interest expenses. Its savings balances are two to five times higher than Cooprogreso’s, which may be explained in part by its launch a year earlier and, in part, by its 4 percent interest rate, which is twice as that of Cooprogreso’s.

Table 13. Projections of Interest Expense and Percentages of Total Costs (2011–2018)*

2011 2012 2013 2014 2015 2016 2017 2018 N/A $397 $409 $565 $753 $986 $1,203 $1,384 Nyèsigiso N/A 1.24% 1.24% 1.56% 1.93% 2.33% 2.64% 2.92% N/A $2,452 $2,584 $4,128 $5,847 $6,931 $8,188 $10,006 Cooprogreso N/A 11.61% 11.60% 12.47% 14.95% 13.97% 10.49% 10.89% $1,714 $6,857 $12,161 $15,440 $24,228 $33,193 $36,512 $39,207 San José 5.94% 23.38% 36.63% 35.55% 43.76% 48.20% 48.33% 47.20% *Based on data collected from the FSPs.

Over the seven-year time frame from 2012–2018, Nyèsigiso is expected to experience a gradual increase of interest expenses as a percentage of its total costs. Interest expenses remain low, since the projected savings balances are expected to grow relatively slowly. Cooprogreso, which is beginning from a higher base, also projects a gradual increase in interest expenses, though the percent of total costs is expected to reach a peak and begins to decline as salary expenses grows. For San José, because of their ambitious growth targets for savings balances, interest expenses are expected to be the most rapidly growing area of operating costs, reaching 47 percent by 2018. With little experience in the youth market, it is difficult to estimate future savings balances with great precision, so these projections carry significant uncertainty.

It will be important for both Ecuadorian cooperatives to monitor their progress against expectations and adjust this course along the way if goals are not met. They may learn that their growth targets will not be met, even with a significant investment in outreach. On the other hand, if the youth market is eager to adopt this service, they may even be able to reduce the interest rate paid on savings, thus reducing their interest expenses. Table 14 shows the reduction of total costs that San José would experience if the organization adopts a lower interest rate of 2 percent (similar to Cooprogreso), on savings.

Table 14. San José Total Youth Savings Costs with Interest Rate Reduction on Savings (2011–2018)*

2012 2013 2014 2015 2016 2017 2018 Current $40,764 $49,933 $58,877 $79,596 $102,055 $112,064 $122,267 Projections Adjusted interest rate $37,335 $43,852 $51,156 $67,482 $85,458 $93,807 $102,664 (2%) *Based on data collected from the FSPs.

It is important that FSPs balance the potential returns of new accounts opened or savings amounts collected against the costs they incur through higher interest expenses on savings balances.

Education costs Although education costs were considered in the analysis of cost items above, it is important to point out that as part of an integrated service, education is an important cost driver. While youth integrated services have the potential to result in positive institutional return on investment over the long term, the costs of offering education in the short term are worth examining in close detail.

Show Me the Money 21 Nyèsigiso devotes an estimated 14 percent of field agent “The education helps us to time to education, while Cooprogreso and San José devote only 7 percent. The different models explain this know how to use our money difference.46 and how to save, and to

The Ecuadorian credit unions facilitate the education understand how not to sessions in classrooms, where youth are already formed spend money on silly things into groups and only participate in the education, whereas Nyèsigiso marketing agents are not only facilitating the we don’t need”. (from San sessions of financial education, but are also training youth Jose youth) in group management, including making collective decisions on savings deposits and withdrawals. While the percentage of time spent delivering the education does not include the time to gather the groups, the Nyèsigiso marketing agents spend more time forming groups compared to the Ecuador staff. Charts 5, 6 and 7 illustrate the proportion of costs related to providing the saving component as compared to the education component of the integrated services for each organization.

Chart 5. Proportion of Costs for Nyèsigiso: Savings vs. Education

Chart 6. Proportion of Costs for Cooprogreso and San José: Savings vs. Education

Show Me the Money 22 Cost-per-youth ratio During the first year of implementation for Nyèsigiso and Cooprogreso (2012) and the second year for San José, we see that Nyèsigiso’s cost per youth was $17.36, whereas Cooprogreso and San José have higher ratios, $24.22 and $20.04, respectively (see Chart 7). Nyèsigiso’s performance is much better than the two Ecuadorian cooperatives because the group-based model adopted by the Malian credit union federation uses a single GSA that includes an average of 10 savers. This approach tends to make Nyèsigiso’s outreach more productive compared to the Ecuadorian cooperatives whose business model targets youth with individual accounts.

In 2013, a decrease of the ratios is expected because of a growth in the number of saving accounts: 73 percent increase at Nyèsigiso, 100 percent increase at Cooprogreso and a 76 percent increase at San José. Cooprogreso’s aggressive growth explains the more dramatic decrease of the cost-per-youth ratio for this cooperative.

It is interesting to note that AIM Youth partner performance in this area is comparable to the performance of UNCDF YouthStart partners, including PEACE ($22), UFT ($27) and UCU ($13) for the years 2012 and 2013.47 This indicates that some benchmarking data is emerging in the industry for integrated services for youth.

The bar graph (Chart 7) below shows the projections of the cost-per-youth ratio based on the respective organizations’ anticipated growth.

Chart 7. Cost per Youth Trend in US$ (2011–2018)

*Based on information gathered from partners. As mentioned above, a decrease in the cost-per-youth ratio is expected as a result of the institutional experience gained coupled with a better understanding of the market and target segment. A decrease in the cost-per-youth ratio is a necessary condition for the long-term sustainable growth and scale-up of the services.

While this trend is maintained for Nyèsigiso throughout the projection period (until 2018), we observe the opposite pattern for the two Ecuadorian cooperatives, which show an increase in the ratio beginning in 2015 for Cooprogreso and 2014 for San José. This unexpected trend presented by the Ecuadorian credit unions may be explained by the uncertainties of projecting future performance in a rapidly changing and competitive environment. It is important to continually monitor and assess the market over time in order to adjust as needed.

Show Me the Money 23 The diagrams below present five-year projected costs for the three organizations.

Chart 8. Nyèsigiso: Projected Costs

Chart 9. Cooprogreso: Projected Costs

Show Me the Money 24 Chart 10. San José: Projected Costs

Summary of Cost Analysis From this cost analysis we conclude that it may be possible for FSPs to reduce their costs over time for offering youth services, but it is likely to require concerted attention to the drivers of cost. As UNCDF noted in its financial analysis of youth savings services, financial institutions need to “optimize expenses.48”

Below is the summary of the main findings from the analysis of the costs of the three organizations: Salary costs This cost element is one of the most significant expenses. It is also a rigid cost that can be difficult to reduce, though it depends on the business model adopted. An approach that leverages staff to offer other financial products, as is the case for the Ecuador credit unions, presents advantages in terms of salary cost control. In addition, FSPs must analyze more closely the potential return from investing in additional staff resources. It is also important,to optimize productivity of existing staff, balancing quality with outreach. Marketing costs While marketing expenses are variable, they can represent significant costs when launching a new product, especially to a previously untapped market segment such as youth. The analysis of AIM Youth partners’ experiences shows that group-based models present some advantages over individual-targeting models in that regard. There is also some evidence that the small incentives offered to youth might not be enough to motivate them to open a savings account. Money invested in those incentives could instead be devoted to (or combined with) other promotional strategies, such as community-wide events that might reach the adult relatives of young people.

Show Me the Money 25 Transportation costs These costs seem to be more manageable in the context of a business model that utilizes public transportation instead of investing in private transportation. Additionally, working through aggregation points such as schools, clubs, community events and centers can support transportation cost efficiencies. Interest expense Paying interest on savings is a strategy to incentivize youth to open accounts and add to their balances. It is important for each institution to pay close attention to its interest expense in the context of the costs of alternative funding sources and the expected return on the use of the funds. Education costs Education is an important strategy for supporting youth on their journey to access and effectively use formal financial services. Overall, it has great institutional promise in the long term. However, FSPs need to adopt cost-effective strategies to enable their field agents to deliver high-impact education sessions.

Revenue Analysis

While the youth segment represents an untapped market and a new business opportunity, many financial institutions perceive this population as risky and expensive to serve.

When considering savings services to youth, the perceived risk is even higher since savings do not yield revenues in the short term the way loans, insurance or transfer services do. Limited experience in serving this segment makes it difficult to anticipate with confidence the financial implications of youth savings on the bottom line.

Three main categories of revenues characterize the youth savings activity of the three AIM Youth partner organizations: 1. Direct revenues from opening and maintenance fees. 2. Revenues from cross-selling loans or insurance to youth and their relatives and networks. 3. Revenues from on-lending youth savings.

Our analysis shows that Cooprogreso and San José revenues are generated mainly from cross-selling to youth and youth relatives and networks and from on-lending youth savings. For Nyèsigiso, revenues originated from account opening and maintenance fees and from on-lending youth savings. For 2014, the organization projected an additional revenue source from cross-selling to youth relatives and their networks and, beginning in 2016, another source from cross-selling other services to youth. According to the assumptions from the three credit unions, revenues from cross-selling to youth will not take place before 2014 for Cooprogreso and San José and 2016 for Nyèsigiso.

This difference between Nyèsigiso and the Ecuadorian credit unions can be explained by the different contexts. The more competitive Ecuadoran context forces the FSPs to propose a wider range of service options to youth clients sooner than Nyèsigiso in Mali to ensure their retention. In addition, given the very small amounts collected by Nyèsigiso through the GSAs, the organization has been targeting very small youth savers who are likely very poor and not likely to be granted a loan in the near future.

Show Me the Money 26 Table 15. List of Revenue Drivers*

Revenues Items Drivers Revenue from loan to youth parents and networks Average size of loan to parents (cross-selling) Interest rate charged on loans Number of borrowers Revenue from loans to youth (cross-selling) Average size of loan to youth Interest rate charged on loans Number of youth borrowers Revenue from youth savings on-lending Institution’s rate of portfolio yield Percentage of amounts of savings for on-lending Average savings account balance and number of accounts created Account maintenance fees Amount of maintenance fees Number of savings accounts Account opening fees Amount of opening fees Number of new accounts opened *Developed in collaboration with partners

Revenue Structure The revenue structure for each of the FSPs throughout the analysis period is analyzed below. Table 16 shows the revenue structure for Nyèsigiso from 2012 to 2018. Our analysis covers 2011 through 201349 and the projection period of 2014 through 2018.

Table 16. Nyèsigiso Revenue Structure from Youth Integrated Service (2012, 2016 and 2018)*

Revenue from Account Opening Revenue from Revenue from Cross-selling to and Maintenance Cross-selling to Savings On-lending Youth Relatives Fees Youth and Networks 2012 40.75% 59.25% 0.00% — (actual) 2016 6.61% 6.76% 78.31% 8.32% (projected) 2018 2.57% 2.63% 91.37% 3.43% (projected) *Data collected from Nyèsigiso.

In 2012, according to the analysis, this projection 41 percent of Nyèsigiso’s revenues were generated by account fees (opening and maintenance) and 59 percent by on-lending the youth savings accounts (Chart 11). This revenue structure is expected to remain stable through 2016 when Nyèsigiso anticipates youth will begin accessing loans. At that point, the revenues generated from selling loans to youth are expected to dominate Nyèsigiso’s revenue structure, comprising 78 percent of their total revenue with the remainder from account fees, on-lending savings, and cross-selling to youth relatives and networks. A growing trend for revenues from cross-selling to youth will continue in the following years and create a completely different revenue structure for Nyèsigiso. In 2018, revenues from cross-selling to youth are expected to make up 91 percent of its revenues, with the remaining portions originating from account fees, savings on-lending and cross-selling to youth relatives and networks. Revenues from cross-selling to youth are expected to exceed

Show Me the Money 27 those from on-lending because the very low savings balances collected by Nyèsigiso significantly reduces the potential for on-lending. In addition, Nyèsigiso prefers not to anticipate substantial revenues from cross-selling to youth relatives and networks. Chart 11. Nyèsigiso RevenueNyèsigiso Structure Revenue Structure 100% 91% 90% 78% 80% 70% 59% 60% 50% 41% 40% 30% 20% 7% 7% 8% 10% 0% 0% 3% 3% 3% 0% 2012 2016 2018

Account Maintenance & Opening Fees Savings On-lending Cross-selling to youth Cross-selling to parents

The table below projects the revenue structure for Cooprogreso.

Table 17. Cooprogreso Revenue Structure from Youth Integrated Service (2012, 2014 and 2018)*

Revenue from Revenue from Savings Revenue from Cross- Cross-selling to On-lending selling to Youth Youth Relatives and Networks 2012 (actual) 100% — — 2014 (projected) 39.22% 15.20% 45.59% 2018 (projected) 50.07% 42.46% 7.47% *Based on data collected from the FSPs.

Cooprogreso will rely on revenues generated from on-lending savings, cross-selling to youth and cross-selling to youth relatives and networks. In 2012, Cooprogreso’s revenue was generated by the on-lending of youth savings. The organization is not anticipating any cross-selling activity until 2014. At that time, cross-selling is expected to represent 15 percent of their revenues (Chart 12), becoming a proportionately larger portion of revenues compared with the other sources. The trend analysis through the end of the period is expected to show a steady increase in revenues from cross-selling to youth, reaching 42 percent in 2018, while cross-selling to youth relatives and networks is expected to shrink from 45 to 7 percent between 2014 and 2018.

Show Me the Money 28 Chart 12. Cooprogreso Revenue Structure Cooprogreso Revenue Structure 100% 100%

80%

60% 46% 50% 39% 42% 40%

20% 15% 7% 0% 0% 0% 2012 2014 2018

Savings On-lending Cross-selling to youth Cross-selling to parents

Table 18. San José Revenue Structure from Youth Integrated Service (2011, 2014 and 2018)*

Accounts Revenue from Revenue from Revenue from Opening and Savings On- Youth Cross- Parents Cross- Maintenance lending selling selling Fees 2011 (actual) N/A 100% — — 2014 (projected) N/A 55.89% 12.46% 31.65% 2018 (projected) N/A 67.99% 18.47% 13.54% *Based on data collected from the FSPs.

Like Cooprogreso, San José expects to generate the same revenue streams from the on-lending of savings, cross-selling to youth and cross-selling to youth relatives and networks. The analysis of San José’s projected performance also produces similar results as those of Cooprogreso. San José projects youth accessing loans starting in 2014, capturing 12 percent of the total revenues (Chart 13). Between 2014 and 2018, we expect a steady growth of the proportion of revenue generated by the on-lending of savings and cross-selling to youth (68 and 18 percent in 2018, respectively), while the share of cross-selling to youth relatives and networks is expected to fall from 31 to 14 percent.

Show Me the Money 29 Chart 13. San José Revenue Structure San Jose Revenue Structure 100% 100%

80% 68% 56% 60%

40% 32% 18% 20% 12% 14% 0% 0% 0% 2012 2014 2018

Savings On-lending Cross-selling to youth Cross-selling to parents

For Nyèsigiso, by 2018, cross-selling (both to youth and to youth relatives and networks) is expected to become the largest revenue source. These projections are in line with the business case hypothesis for integrated services: that investing in young people is an effective strategy to developing a future clientele. Savings on-lending is an especially important revenue source for the Ecuadorian credit unions given the higher amounts of savings they are collecting (an average of $185 for Cooprogreso and $125 for San José) compared to savings amounts collected by Nyèsigiso (an average of $30.27). Detailed analysis of revenue streams Account opening and maintenance fees Of these three FSPs, only Nyèsigiso in Mali is charging fees to open and maintain youth accounts. Although these revenues represent 40 percent of the total revenues in 2012 and 51 percent in 2013, they represent on average only 10 percent of the revenues over the projection period (2014–2018). This indicates that account fees are not expected to be an important revenue stream in the long term when compared to cross-selling and the on-lending of savings.

It is also worth noting that the BCEAO (West African Central Bank) requires member shares for all credit unon members. This is non-negotiable and a barrier for youth access to financial services.

When separating the revenues generated by opening fees from the maintenance fees, the former represents a larger proportion during the first two years of implementation (37.5% in 2012 and 28.2% in 2013).This percentage falls gradually to 8 percent in 2018, with maintenance fees becoming a more significant revenue driver as this revenue source is based on the cumulative number of accounts created compared to the number of accounts created each year. Yet, these amounts are still modest given the small number of accounts at Nyèsigiso, which is a reflection of their group-based service-delivery approach. As youth integrated services develop and competition increases in this area, these account fees should be lowered or even dropped as account fees are one of the commonly cited barriers to youth accessing financial services and could potentially represent a major challenge to greater growth.

Show Me the Money 30 Table 19. Account Opening and Maintenance Revenues at Nyèsigiso*

2012 2013 2014 2015 2016 2017 2018 Account Opening and $507.69 $1,089.23 $1,284.00 $1,669.20 $2,362.62 $2,717.01 $3,124.56 Maintenance Fees Total Revenues $1,245.84 $2,114.87 $4,429.74 $5,809.36 $35,738.73 $69,260.86 $121,519.83 Percentage of 0.41 0.52 0.29 0.29 0.07 0.04 0.03 Account Fees *Based on data collected from the FSPs; 2012 data are actual, 2013 are estimates and the rest projected.

Cross-selling revenues to youth and to youth relatives and networks Although none of the organizations have reported revenues from cross-selling to youth parents and other relatives, they all expect it to become a significant revenue source over time. As such, it is important to understand the factors that influence both types of cross-selling revenues. All three organizations anticipate a rapid growth of this revenue source through 2018 (Table 20).

Table 20. Total Amounts of Revenues from Cross-Selling (to youth and to youth relatives and networks) and Percentage of Total Revenues (2011—2018)*

2011 2012 2013 2014 2015 2016 2017 2018 Nyèsigiso N/A — — $1,732 $2,302 $30,960 $63,765 $115,200 Percentage of total N/A 0.00% 0.00% 39.09% 39.62% 86.63% 92.07% 94.80% revenues Cooprogreso N/A — — $33,300 $41,958 $29,808 $36,671 $51,922 Percentage of total N/A 0.00% 0.00% 60.78% 57.96% 45.25% 46.25% 49.93% revenues San José — — — $41,923 $50,308 $53,754 $59,129 $63,493 Percentage of total 0.00% 0.00% 0.00% 44.11% 37.64% 32.01% 32.01% 32.01% revenues *Based on data collected from the FSPs: 2011 and 2012 data are actual, 2013 estimated and the following years are projected.

Cross-selling revenues (including cross-selling to youth and to their relatives and networks) represent a significantly larger proportion of Nyèsigiso’s total revenues in comparison to those of the Ecuadorian credit unions. For Nyèsigiso, this proportion is expected to reach 94 percent in 2018, while Cooprogreso and San José only anticipate 51 and 32 percent, respectively. The significant difference between Nyèsigiso and the Ecuadorian credit unions reflects the small savings balances expected at Nyèsigiso, which makes on-lending unattractive and cross-selling revenues proportionately larger. Cooprogreso expects a cross-selling revenue that is much lower than San José but which represents a larger percentage of the total revenue. This is due to the higher amounts of revenue generated by the on-lending of savings, which reduces the proportion of cross- selling revenues (Table 21).

It appears through more detailed analysis of cross-selling revenues that until the year youth are expected to begin accessing other services (2014 for Cooprogreso and San José and 2016 for Nyèsigiso), revenues from cross-selling to youth relatives and networks will represent 100 percent of the total cross-selling revenues. Once cross-selling to youth begins, it is expected to grow very quickly to become the main element of cross-selling revenues for all three organizations (Table 21). However, it is important to note that

Show Me the Money 31 revenues from cross-selling to youth parents might not materialize as expected by the Ecuadorian credit unions. Research in Ecuador has determined that 92 percent of youth reported that their parents had an account before youth opened theirs.50 Given this information, cross-selling opportunities to parents are limited.

Table 21. Percentage of Cross-Selling to Youth in the Total Cross-Selling Revenues*

2011 2012 2013 2014 2015 2016 2017 2018 Nyèsigiso N/A 0.00% 0.00% 0.00% 0.00% 90.40% 94.64% 96.39% Cooprogreso N/A 0.00% 0.00% 25.00% 25.00% 82.56% 82.56% 85.03% San José 0.00% 0.00% 0.00% 28.26% 28.26% 57.70% 57.70% 57.70% *Based on data collected from the FSPs.

Revenues from cross-selling to youth are expected to increase faster than revenues from cross-selling to youth relatives and networks and are expected to become a more significant source of revenue over the long term. Nyèsigiso projects the highest percentage of revenues from cross-selling to youth as compared to the projections of Cooprogreso and San José. However, it is important that the FSPs are concerned with credit risk and restrain from pushing youth into credit; lending to youth should be based on a thorough analysis of their credit needs. In fact, the business model adopted by Nyèsigiso makes cross-selling to youth the most significant revenue source, while Cooprogreso and San José anticipate a greater diversification of revenue sources, including those generated by parents.

Revenues from on-lending savings Using the savings collected from youth to increase institutional on-lending capacity is an important motivation for FSPs to offer youth savings products. The data gathered for this study and ensuing analysis shows why. The on-lending savings for all three organizations has been growing fast since 2011 for San José and 2012 for Cooprogreso and Nyèsigiso (Table 22). Between 2012 and 2013, this revenue stream grew by 39 percent for Nyèsigiso and more than double for Cooprogreso. For San José, the 2013 revenue increased by six fold over 2011. All three organizations expect a continuing increase over the projection period through 2018. For Nyèsigiso, by 2018 the on-lending of savings is expected to be more than four times the 2012 amount and for Cooprogreso 10 times larger. San José expects it to be more than five times the 2012 level.

It is important to note that these amounts don’t represent the total amounts of youth savings collected by the organizations. Credit union regulation in the respective countries prevents them from using the totality of their savings collected for on-lending: Nyèsigiso is using 70 percent of its total savings collected for on-lending, Cooprogreso 80 percent and San José 86 percent.

Table 22. On-lending Savings Revenues and Percentage of Total Revenues (2011–2018)*

2011 2012 2013 2014 2015 2016 2017 2018 Nyèsigiso N/A $738 $1026 $1414 $1838 $2416 $2778 $3195 Percentage of total N/A 34.77% 31.51% 31.92% 31.65% 6.76% 4.01% 2.63% revenue Cooprogreso N/A $5,431 $13,449 $21,483 $30,432. $36,074 $42,614 $52,072 Percentage of total N/A 52.66% 47.49% 39.22% 42.04% 54.75% 53.75% 50.07% revenue San José $5,897 $23,587 $41,833 $53,112 $83,344 $114,184 $125,603 $134,873 Percentage of total 69.65% 69.56% 66.13% 55.89% 62.36% 67.99% 67.99% 67.99% revenue *Based on data collected from the FSPs.

Our analysis of on-lending savings revenues for Nyèsigiso indicates that this revenue source could represent Show Me the Money 32 approximately one-third of all its youth-related revenues until 2015, then drop to single-digit percentages for the rest of the period. For Cooprogreso, this revenue source is expected to remain stable over the projection period, representing a key revenue stream when combined with cross-selling. For San José, the on-lending of youth savings represents their largest source of revenue.

The difference between the Nyèsigiso trend (smaller percentage, which falls over time) and that of the two Ecuadorian credit unions can be explained by the different contexts. Nyèsigiso is only able to collect small amounts of savings compared to amounts Cooprogreso and San José collect. San José’s higher revenue, as compared to Cooprogreso, is partly a result of the more aggressive savings-mobilization approach and higher performance of San José and by the longer period of time that San José has been offering youth integrated services (San José started in 2011 and Cooprogreso in 2012). Evolution of projected revenues for the three organizations Charts 14–16 present the revenue streams for each organization throughout the projection period.

Chart 14. Nyèsigiso Projected Revenues

Chart 15. Cooprogreso Projected Revenues

Show Me the Money 33 Chart 16. San José Projected Revenues

Summary of Revenue Analysis The analysis shows that the revenue structure is directly determined by the strategy and the design of the service of the respective organizations.

A common trend for all organizations involves revenues from cross-selling to youth. Although it is expected that this revenue stream will begin to materialize more slowly (after all other revenue streams), it is expected to grow rapidly to become an important revenue source (the most important in size for Nyèsigiso). Cross- selling to youth relatives and networks is not expected to be as reliable a revenue stream as cross-selling to youth, particularly for Nyèsigiso and Cooprogreso.

On-lending savings is also an important revenue source for the expected steady growth of this revenue stream over the study period (2011–2018).

Overall Profitability Analysis

While the financial-service industry recognizes that offering a savings service to youth is important as part of a financial-inclusion strategy, a key question to answer is, “How long will it take to reach a profitable point?” Drawing on the experience of Nyèsigiso, Cooprogreso and San José, we now turn to further analyze the potential for FSPs to achieve profitability based on their specific contexts and strategies.

Charts 17–19 present the profitability projections from 2014 to 2018 of savings with education for the three organizations, based on their current experience since 2011 for San José and 2012 for Cooprogreso and Nyèsigiso. These projections reflect the organizations’ own anticipated growth, based on their experience to date and understanding of their respective youth financial service markets.The tables present actual profitability of savings with education during the pilot period (before 2013) and the anticipated profitability during the projection period (2014–2018) for the three organizations.

(Note: The “Cumulative Deficit/Surplus” line takes into account the annual deficits incurred by the organizations due to the offering of the service.)

Show Me the Money 34 Chart 17. Nyèsigiso’s Profitability Projections Throughout the Study Period (2012–2018)*

100000

50000

0 2012 2013 2014 2015 2016 2017 2018 -50000

-100000

-150000

Net Deﬁcit/Surplus Cumulative Deﬁcit/Surplus

*Based on data collected from the FSPs.

Chart 18. Cooprogreso’s Profitability Projections Throughout the Study Period (2012–2018)*

40000

30000

20000

10000 Net Deﬁcit/Surplus 0 2012 2013 2014 2015 2016 2017 2018 Cumulative Deﬁcit/Surplus -10000

-20000

-30000

-40000 *Based on data collected from the FSPs.

Chart 19. San José’s Profitability Projections Throughout the Study Period (2011–2018)*

300000

250000

200000

150000 Net Deﬁcit/Surplus 100000 Cumulative Deﬁcit/Surplus 50000

0 2011 2012 2013 2014 2015 2016 2017 2018 -50000

-100000

*Based on data collected from the FSPs.

Show Me the Money 35 The analysis shows that the two Ecuadorian cooperatives will reach their breakeven point in 2015, while Nyèsigiso will need a few more years after 2018 to reach a breakeven point (in 2020). The primary difference is the greater revenues projected by the Ecuadorian credit unions, resulting from the following factors:

Cooprogreso and San José expect to begin cross-selling loans to youth in 2014, while Nyèsigiso plans to start in 2016. In addition, youth in Ecuador are expected to taking larger loans than their counterparts in Mali; the average loan to youth is $1,000 in Ecuador (2014–2018) while it is $500 in Mali (2016–2018). Cooprogreso and San José collect much higher savings amounts than Nyèsigiso, which creates a substantial on-lending fund base, thereby ensuring higher revenues for the Ecuadorian organizations. Average loan amounts offered to parents are expected to be much higher in Ecuador than in Mali. Average loan amount to parents for Cooprogreso are expected to be $4,800 and at San José it will range from $4,000 to $4,500. Nyèsigiso expects loan sizes in the range of $600–$750. Nyèsigiso is incurring higher salary costs (representing a greater proportion of their total operating costs) that tend to grow rapidly over time given their service-delivery approach (increase of outreach involves a direct increase of the number of field agents).

The projected trends confirm that savings with youth savings and financial education services may take some time to become financially viable.

In 2013, the cumulative deficit incurred by Cooprogreso and San José from youth integrated service represents 2 and 5 percent of their respective profit.51 The break-even period will depend on the business model (including delivery channels) and in the ability of an organization to contain its expenses and maximize its revenues. For example, Nyèsigiso’s group-based model allows the organization to serve very small savers, but the small balances make it more challenging for the service to reach the breakeven point. However, this approach also reflects Nyèsigiso’s economic context: Mali has a low GDP per capita of $694 (compared to $5,426 in Ecuador) with a population that is poorer than Ecuador’s. This is consistent with the institution’s vision of offering youth services as part of their corporate social responsibility agenda and their desire to respond to the needs of a vulnerable segment of the community they serve. Nyèsigiso is a perfect illustration of the tension experienced by FSPs seeking greater financial inclusion while maintaining profitability.

Enhancing the Profitability of Youth Integrated Service Based on the analysis of the costs and the revenues, this section aims to propose some measures that could significantly reduce the profitability timeline for youth integrated services.These measures include opportunities for operating cost-optimization and revenue-maximizing strategies that are based on the cost and revenue areas presented above. Cost-optimization strategies in main cost areas The discussion below will cover short-term measures that can help expedite the path towards profitability and then address more long-term (deeper) measures.

Salaries Based on the analysis above, the following are strategies to reduce salary costs, many of which also apply to an adult market associated with offering services to young people.

Improving field agents’ productivity Organizations can work on improving staff productivity within their respective business models (product

Show Me the Money 36 design and service-delivery approach). Possible measures include increasing the number of accounts per agent through training or by incentive, which will reduce the need to increase staff as the service grows. This measure is particularly relevant to Nyèsigiso, which uses dedicated field agents for the youth service. Incorporating youth integrated service into all staff responsibilities The experience of Nyèsigiso (compared to that of the Ecuadorian credit unions) shows that dedicating staff to any newly launched service is more expensive than building the capacity of existing staff to promote and provide the new service. Embedding youth integrated service into all staff responsibilities, primarily the field agents, would reduce salary costs. This can be achieved by training field agents. Leveraging existing delivery channels FSPs may use an existing network of field agents, developed either by themselves or by another organization, to reach out to their target youth groups. This strategy is particularly relevant for Nyèsigiso, which used dedicated staff and for San José, which has a significant rural outreach. For example, Nyèsigiso can use its existing network of savings collectors deployed in areas around Bamako.52 If the delivery channel is developed by another organization, a partnership negotiation will be required and may take some time to materialize. If successful, however, it may help reduce the organization’s staffing needs and salary costs while increasing outreach.

Marketing and administrative costs As a less rigid category of expenses, marketing presents more cost-saving opportunities than salaries. The American Marketing Association (AMA) defines marketing as “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners and society at large.”

Based on this definition, there are a variety of options to consider in the process of optimizing and even reducing marketing costs:

Building capacity in marketing FSPs can strengthen their field agents’ skills in marketing and communication in general and equip them with relevant materials to help them market the youth integrated service more actively and effectively. Bundling the promotion of savings with education with other financial products attractive to youth. Youth 18 years and older are very interested in loans. By combining the savings service with a loan, and marketing them as a package, youth may value the product more. Leveraging youth groups By leveraging group dynamics, youth can share information about savings accounts with their peers. This is particularly relevant for Nyèsigiso, which uses a group-based service-delivery approach. However, Cooprogreso and San José can explore ways to leverage classrooms by, for example, challenging them to share their experiences with younger classrooms. Targeting youth networks Marketing financial services to both adults and youth might be an effective way to promote youth savings services. Research data from AIM Youth in Ecuador suggests that youth whose parents are already banked may be more likely to open an account themselves.53 Reducing or eliminating small prize incentives Research and monitoring activities conducted in Ecuador suggest that small incentives (T-shirts, caps, cell- phone charge cards) may not provide enough motivation for a young person to open an account.

Show Me the Money 37 Engaging with youth support organizations (YSOs) through strategic partnerships Youth savings and education can be promoted to YSOs as a value-added service to their current offerings.

Transportation costs As a variable cost, linked to the number of field agents and their level of activities, transportation expenses are an area to monitor closely during the growth process.

The experiences of Cooprogreso and San José show that the transportation policy adopted by an organization matters considerably. Nyèsigiso can explore the opportunity to adjust its transportation policy in order to reduce costs in this area. As transportation is linked to the number of active field agents on the ground, most of the measures related to salary optimization presented above will have a positive impact on the transportation costs—particularly those pertaining to field agent productivity improvement—leveraging existing delivery channels and reducing the amount of physical time spent by field agents for youth group formation and education sessions.

Interest expense The determination of the interest rate to pay on savings is based on the potential amount of savings to be collected.

Research conducted by Simone Schanery with adults showed that, “six-month interest rate subsidies on individual bank accounts lead to significantly greater total income and assets over 2.5 years after subsidies expire.54” This suggests that a well-structured interest rate feature could have very positive outcomes on the savers going beyond mere savings accumulation. Schanery also posits, however, that the interest subsidies may have had very large effects on a small fraction of the total participant population, meaning that the interest rates are only going to influence a specific type of saver.

There are other experiences showing that people are willing to save with low (even negative) interest rates. Karlan and Zinman pointed out that “there is relatively little empirical evidence on how demand responds to market-driven variation savings account yields and features” and concluded that there is a low elasticity of savings demand to interest rate.55 This implies that FSPs may not, in some contexts, need to offer high interest rates (or perhaps any at all) to make their products more attractive to youth and to encourage them to open an account and save more. It shows the importance of a product well- adapted to clients’ needs with affordable transaction costs. The value of a well-adapted product outweighs the anticipation of interest rewards and creates great cost-reduction opportunities.

Education costs Strategies that FSPs can consider to reduce education-delivery costs include the following:

Make the delivery of education less time-consuming for staff As FSPs are promoting integrated services, it would be good to explore ways to reduce the amount of time field agents spend delivering the education sessions to youth. This is particularly relevant to Nyèsigiso. In their context, education and training in group formation are taking up to 14 percent of their field agents’ time.

The FSP may explore a model that consists of training more mature youth to be responsible for the ongoing training of their peers at a convenient convening place (schools, vocational training centers). These youth could act as “replicators,” reinforcing education sessions and should be equipped with simple training materials to refer to help aid their dissemination work.

Show Me the Money 38 In Mali, each youth group is associated with an adult tutor who is in charge of overseeing the group. These tutors could be leveraged to be responsible for providing the financial education reinforcement messages to complement the financial education sessions. In Ecuador, a teacher could play a similar role. The implementation of such models would greatly reduce the time that field agents spend with youth in the field to deliver their financial education content.

In the long run, the use of mobile technologies to deliver education content through SMS and/or IVR (Interactive Voice Response) offers great cost-reduction opportunities. These strategies require the FSPs to negotiate partnerships with technology companies, which may require some time to develop.

Focus on groups of youth already formed for the delivery of the education content This can be achieved by developing strategic partnerships with other organizations involved in providing services to youth through groups. The integrated services can be promoted as a value-added service to be provided to specific youth groups.

Additionally, as credit unions, Cooprogreso, San José and Nyèsigiso have an opportunity to leverage their strong involvement in the communities they serve to reach out to youth segments. They can target the children of their adult credit union members. Credit union leaders (who are usually highly regarded in the community) can play a central role in the marketing of youth integrated services, disseminating marketing content and acting as an informal marketing channel for the organizations. This approach seems more relevant for Nyèsigiso, which is composed of smaller, more localized and more community-focused credit unions. Leveraging community support will help reduce credit union-operating costs significantly.

Revenue-maximization Strategies This section proposes measures that could help increase the anticipated revenues for FSPs from youth integrated services. These include both short-term measures as well as longer-term strategies. Cross-selling revenues The following are some important measures that organizations can take to enhance their cross-selling potential:

Build information about other financial products as part of the financial education. The content of the financial education should be appropriate to the youth needs and should inform youth about their rights and responsibilities as consumers of financial products. Promote bundled services that allow youth to meet several of their financial needs with the same organization. For example, integrated services could be promoted along with a business loan to youth older than 18 years and sold as a package. Youth younger than 18 would be eligible for the loan component as soon as they reach 18 years of age. This will help ensure a better retention rate of youth segments by the organizations. Train the field agents in effective cross-selling techniques that would treat youth as customers with comprehensive financial needs instead of just selling them one specific product.The field agent may also

Show Me the Money 39 mention to youth the opportunity to access loans or other products (such as insurance or transfer services) and articulate how these other products complement savings as well as their benefits (what specific problem these additional services can solve for the customers). This approach also applies to cross- selling to adult relatives. By using this comprehensive approach and analyzing the needs of their client, field agents discover opportunities to offer additional services without imposing them on the youth. However, to be effective, this approach requires that field agents have extensive knowledge of the different services offered by their organizations. Savings on-lending revenues The revenue analysis of the Ecuador credit unions demonstrates that the collection of youth savings has the potential for generating significant revenues. However, there are some strategies that could further leverage and maximize the return on these savings balances:

Invest in business education for youth. This will help young people increase their earning capacity and subsequently, their savings. In addition, business education reduces risks for the FSP to invest in youth and increase the organization’s loan portfolio yield, which will increase FSP revenue opportunities from cross-selling to youth. As the organizations are already experienced in providing education sessions, they will need only to add business concepts to this existing channel, targeting the 18- to 24-year-old segment. Increase the amount of savings collected. This could be done by either increasing the individual youth savings amounts and/or increasing the number of savings accounts created. The on-lending savings capacity is dependent on the amount of savings collected by the organization. Nyèsigiso, with its collection of small savings amounts, should explore ways to increase the average amount of the GSAs while the Ecuadorian credit unions, which are already achieving high average balances in their youth accounts, should seek ways to increase the number of new accounts opened.

Two conclusions emerge from the analysis of revenue-maximizing strategies: Organizations such as Nyèsigiso that are collecting very small savings amounts tend to develop a revenue- maximizing strategy that focuses on cross-selling activities. Cross-selling opportunities can be bolstered by active promotion and effective marketing to their target communities. Organizations such as Cooprogreso and San José with high average savings balances tend to leverage cash savings to increase their loan portfolio.

Additional Considerations Improving youth targeting through segmentation Clearly identifying different youth segments is necessary for offering financial services to youth since young people do not make up a homogeneous group.

Young people as a group range in age, literacy and education level, geography and economic status. All of these factors impact their financial needs. A clear identification of specific segments enables the FSP to focus on the most effective acquisition approaches and sustainable models.

By focusing on youth ages 13 to 24 years old, AIM Youth has brought to light a segmentation dilemma. In both Ecuador and Mali, youth who open formal savings accounts tend to be older, between 18 and 24 years old. This group comprises 92 percent of Cooprogreso’s youth clientele, 90 percent of San José’s; and 74 percent of

Show Me the Money 40 Nyèsigiso’s. Freedom from Hunger’s quantitative research in Ecuador also found similar findings, with older youth more likely to indicate they are saving with a financial institution compared to younger youth. An older cohort will generate higher savings balances, and more revenues from on-lending. Equally important, a higher proportion of older youth creates greater opportunity for cross-selling (loans) for FSPs in both the short and long terms. From a cost- and revenue-management perspective, the higher the percentage of older youth clients, the sooner the financial institutions will breakeven and reach profitability.

Viewed from a strategic and financial-inclusion perspective, this raises a complex challenge. Marketing exclusively to youth 18 years and older excludes a significant and vulnerable segment of the population, adolescents who are transitioning from economic dependence to increasing adult responsibilities.

While targeting older youth could protect the financial bottom line of an organization, this strategy misses the opportunity to build a new future clientele among the younger segment. There is also emerging evidence that offering integrated services has the potential to improve the financial capability of young people. By ignoring this segment, an FSP would also miss the opportunity to develop better consumers of its financial products.

The challenge for FSPs is to find the right balance between serving these two segments. Solutions to this challenge, however, can be achieved by identifying strategies to optimize their youth services business model. Serving the older youth market could help subsidize some of the costs for the younger segment. Group-based models and technology also offer potential perspectives to consider.

The use of external funding: can FSPs absorb all the necessary expenses and become profitable? To test the viability of offering savings and financial education to young people over the long term, Freedom from Hunger financed some of the expenses of the credit unions.

These funds were initially applied to investment costs, including the development of the financial product and education modules. External funding also purchased some assets, such as motorcycles in the case of Nyèsigiso, and computers in the case of the Ecuador credit unions. Financial support was also provided to partners to cover some operating costs such as salaries, marketing, administrative expenses and transportation. These funds were provided starting with San José in 2010, Nyèsigiso in 2011 and Cooprogreso in 2012.

The following analysis estimates the impact on the financial projections of Nyèsigiso and Cooprogreso if they hadn’t received those external funds.56

Table 23. Nyèsigiso: Projected Profitability Without External Funding for the Initial Projections (2012–2018)*

2012 2013 2014 2015 2016 2017 2018 Net Deficit/Surplus ($82,873) ($60,973) ($32,918) ($33,899) ($7,527) $22,533 $72,809 *Based on data collected from ($82,873) ($143,846) ($176,764) ($210,664) ($218,190) ($195,657) ($122,848) the FSPs. *Based on data collected from the FSPs.

Table 24. Cooprogreso: Projected Profitability Without External Funding for the Initial Projections (2012–2018)*

2012 2013 2014 2015 2016 2017 2018 Net Deficit/Surplus (35,714.74) (22,725.57) 20,053.48 39,540.79 9,332.34 (6,971.38) 2,072.24 Cumulative Deficit/ (35,714.74) (58,440.32) (38,386.84) 1,153.95 10,486.29 3,514.90 5,587.14 Surplus *Based on data collected from the FSPs. Show Me the Money 41 The deficits increase in the absence of external funding.The breakeven point for Nyèsigiso is delayed, increasing the cumulative deficit from about $43,000 to $123,000.While for Cooprogreso, the surplus in 2018 decreases by about 60 percent. Without external funding, Cooprogreso would be expected to show profitability (cumulative surplus) by the year 2015 instead of 2014 and the cumulative deficit for 2013 represents only 3 percent of the organization’s profit.The negative impact would be substantially larger for Nyèsigiso, which received a more substantial allocation of external funding. Nyèsigiso would show a net surplus by 2017 and a much longer profitability timeline compared to Cooprogreso’s.

This difference in impact between Cooprogreso and Nyèsigiso may be explained by the following two factors: 1. Nyèsigiso field agents devote a larger portion of their time to education sessions and the group formation process.

2. The higher amount of funding provided to Nyèsigiso may have led the organization to design a less cost- sensitive (or cost-effective) business model with features such as hiring new staff entirely dedicated to the project, instead of leveraging new or existing staff to work on other financial services offered by the organization.

While there is no doubt that FSPs need some level of funding to launch their services, test their model and move towards sustainability, Cooprogreso’s experience shows that some FSPs can eventually absorb all the costs and breakeven within seven years, while others (Nyèsigiso) need financial assistance to bring their service to financial viability.

Making this evaluation will depend on the context, institutional capacity and the cost-effectiveness of the business model given the operating environment. When external funding is needed, it is important to determine the level of the assistance in such a way as to avoid distorting the management decisions and the design of business models of the FSPs.

Summary on Profitability The analysis shows that achieving profitability for youth integrated services will take time.Thus, FSPs must carefully manage towards it, strategically using their internal and external resources. An effective business model, well adapted to the operating environment and combined with sound management decisions will help FSPs achieve profitability sooner and even in some cases without external funding.

In summary, the experiences presented in this paper show that achieving profitability takes a strong institutional vision, commitment to serve the youth segment and a deep confidence in the economic capability of youth when provided services that are appropriately adapted to meet their needs; a sound service-delivery approach and well-designed product; the ability to put in place effective cost-reduction and revenue-maximization strategies that will shorten the breakeven timeline; a multi-segment targeting approach that allows the organization to ensure its short-term financial bottom line (for example, serving youth workers or youth older than 18 years old), while preparing a more- educated and better-informed future clientele; and a strategic use of non-financial services, including financial and business education, to guide and empower youth toward the successful use of financial services.

Show Me the Money 42 Conclusion

Developing a solid understanding of the key cost drivers in the provision of youth savings and financial education is a necessary step towards a clear articulation of a business case for youth financial services. A sound and realistic analysis of the potential revenue drivers is also fundamental.

As shown in the experience of the three organizations studied in this paper, the cost and revenue structure and how they evolve over time depends primarily on the business model adopted by the organizations (service-delivery approach and the quality and adaptability of the product).

Salaries, marketing and, to a lesser extent, transportation are the main expenditures incurred by the organizations studied and should be monitored closely. As the most rigid cost, salary is the most difficult to control and FSPs should be careful in their decision to invest in additional staff to offer savings services to youth. This should be done only after a thorough analysis for optimizing the delivery approach is undertaken.

Business models that leverage staff to market and deliver both youth and adult products enable FSPs to be more cost-effective in the long term. Marketing costs can be significant because of the newness of the services. However, FSPs should look for ways to disseminate marketing information through available social networks. Group-based business models offer opportunities for youth to share information about the services among their peers and community events can reach out to youth as well as adults. Using public transportation can help FSPs control transportation costs as an alterative to investing in the purchase of private transportation (motorcycles), which comes with some recurrent costs (fuel, maintenance).

Other costs that represent a smaller proportion of the total cost structure are still important to monitor. Interest on youth savings can be a powerful incentive for youth but can impose a financial burden on the organization if the latter is not careful when setting the interest rate. It is important to consider the amount of savings anticipated and whether the rate will be attractive to youth.

As an integrated service, the cost-effectiveness of the education component is central. Group-based models offer many opportunities for reducing the physical time that field agents spend with youth for education.

Cross-selling and the opportunity to on-lend youth savings provide important revenue opportunities. Further, this is consistent with the argument that investing in youth offers long-term rewards. Like costs, the revenue opportunities depend on the business model adopted by FSPs and their savings collection performance. Organizations that anticipate or show a high savings collection performance have more revenue opportunities for on-lending this additional revenue. Effective business education geared towards youth and opportunities to partner with other YSOs are options worth consideration for increasing the returns generated by the on-lending of youth savings.

At the opposite end, organizations with low savings collection performance have more revenue-generating opportunities through cross-selling. A comprehensive marketing strategy and offering bundled services can help increase on-lending savings activities.

Understanding both the costs and revenue drivers enables an FSP to determine the strategic and operational adjustments it can make to improve the financial viability of the services in a shorter timeline.

The time frame to reach profitability is also driven by how much the FSP considers its operating environment, including key market factors: competitiveness of the microfinance sector, the positioning of the organization in that market, the youth financial-inclusion performance in the country, the percentage of youth in the total population and the profile of the target group.Together, these elements determine the business model that

Show Me the Money 43 should be adopted. While this study confirms that offering integrated services to young people requires a long- term investment to become profitable, it also confirms there are ways for FSPs to reduce the time frame to reaching profitability.

Annexes

Annex 1: Assumptions for projections

Cooprogreso

Projections Assumptions Revenues Items Drivers for Projections Summary Revenues from loan to youth parents Impact research in Ecuador shows Average size of loan to parents (cross-selling) that 44% of youth parents have a Interest charged on loans bank account and Cooprogreso Number of parents borrowers assumes that only 0.5% of these parents will take a loan Cooprogreso’s average loan was $4,800 in 2013 (from The Mix Market) Interest rate charged: 18.5% Revenues from loan to youth (cross- 3% of youth in 2014 and 2015 take Average size of loan to youth selling) an average $800 in loan and pay Interest charged on loans 18.5% annual interest Number of youth borrowers 5% of youth in 2016 through 2018 take in average $1,000 in loan and pay 18.5% annual interest Revenues from youth savings on- Cooprogreso’s portfolio yield Institution’s rate of portfolio yield lending is 13.01% and the organization Percentage of amounts of savings on-lends up to 80% of their total for on-lending savings Average savings accounts balance and number of accounts created Investment Costs Product development costs Proxy: Cost of time of senior Personnel time (including staff involved in the product consultants) development process + consulting costs associated with product development Operating Costs Total Salaries and benefits of field Basis: Field agent salary amount; Monthly salary of field agents agents Cooprogreso applies an annual Number of field agents growth of 15.4%, including 5.4% Annual salary growth rate inflation rate (World Bank data) and 10% annual increase in performance. Cooprogreso anticipates the following growth rate for the service: 3 new staff in 2014, 1 in 2015, 2 in 2016 and 6 in 2017.

Show Me the Money 44 Projections Assumptions Revenues Items Drivers for Projections Summary Operating Costs (continued) Transportation costs (field agents) • Cooprogreso uses 20% of the • Number of field agents field agents total transportation • Monthly transportation costs costs as only 20% of their • Rural outreach of the time is devoted to the youth organization (deeper rural product. The evolution of the outreach involves higher transportation costs is based on transportation costs) the number of additional staff assigned to the youth savings product and on a 5.4% annual inflation rate (World Bank). • Cost based on the growth of the Administrative and marketing costs number of accounts opened and • Number of field agents the number of field staff Financial Costs Amount of interest paid on youth Cost based on the interest rate and Interest rate offered savings accounts the amount of savings collected Amount of savings collected

San José

Revenues Assumptions Summary Drivers Revenues from loan to youth (cross- 3% of youth in 2014 and 2015 take Average size of loan to youth selling) an average $700 in loans and pay Interest charged on loans 18.5% annual interest Number of parents borrowers 5% of youth in 2016 through 2018 take average $800 in loan and pay 18.5% annual interest Revenues from loans to youth parents Impact research in Ecuador shows Average size of loan to parents (cross-selling) that 44% of youth parents have a Interest charged on loans bank account and San José assumes Number of youth borrowers that only 1.5% of these parents will take a loan San José assumes an average loan of $4,000 in 2014 and 2015 and $4,500 in 2016, 2017 and in 2018 ($4,000 in 2013 from The Mix Market) San José charges an interest rate of 18.5% on loan Revenues from youth savings on- San Jose’s rate of portfolio yield Institution’s rate of portfolio yield lending is 16% and the San José on-lends Percentage of amounts of savings maximum 80% of their total savings for on-lending Average savings accounts balance Number of accounts created

Show Me the Money 45 Revenues Assumptions Summary Drivers Investment Costs Product development costs Proxy: Cost of time of senior Personnel time (including staff involved in the product consultants) development process + consulting costs associated with product development Investment Costs Salaries and benefits of field agents Basis: Field agent salary amount; San Monthly salary of field agents José applies an annual growth of Number of field agents 15.4%, including 5.4% inflation rate Annual salary growth rate (World Bank data) and 10% annual increase in performance San José anticipates the following growth rate for the service: 1 new staff in 2014, 1 in 2015 and 1 in 2016 San José uses 20% of the field agents total transportation costs as only 20% of their time is Number of field agents devoted to the youth product. The Monthly transportation costs evolution of the transportation Transportation costs (field agents) costs is based on the number of Rural outreach of the organization additional staff assigned to the (deeper rural outreach involves youth savings product and on a higher transportation costs) 5.4% annual inflation rate (World Bank) Administrative costs Cost based on the growth of the Number of field agents number of accounts opened and the number of field staff Cost based on the growth of the Marketing costs number of accounts opened and Number of field agents the number of field staff Financial Costs Interest paid on youth savings Cost based on the interest rate and Interest rate offered accounts the amount of savings collected Amount of savings collected

Nyèsigiso

Revenues Assumptions Summary Drivers Accounts maintenance fees Cost based on fees applied to Amount of maintenance fees average number of accounts per Number of savings accounts year Account opening fees Cost based on fees applied to the Amount of opening fees number of new accounts opened Number of new accounts opened per year

Show Me the Money 46 Revenues Assumptions Summary Drivers Revenues from loans to youth parents Number of parents taking loans Number of borrowing partners (cross-selling) (as a percentage of the number of Average amount of loans to parents accounts created) Interest charged on loans Average amount of loan to parents Interest rate on loan, 15% Revenues from loan to youth (cross- 10% of youth in 2016 get an average Number of borrowing youth selling) loan of 400$ and pay 15% annual Average amount of loans to youth interest Interest charged on loan 15% of youth in 2017 take an average $500 in loan and pay 15% annual interest 20% of youth in 2018 take in average $600 in loan and pay 15% annual interest Revenues from youth savings on- Nyèsigiso’s rate of portfolio yield Institution’s rate of portfolio yield lending is 18.5% and the FSP on-lends Percentage of amounts of savings maximum 70% of total amount of for on-lending savings collected Average savings accounts balance Investment Costs Product development costs Proxy: Cost of the time of a senior Personnel time (including staff involved in the product consultants) development process Operating Costs Total salaries and benefits of field Salaries increase by 1% every year Number of field agents agents and 2% every other year Monthly salary for field agents 3% of inflation rate annually Annual salary growth rate Transportation costs (field agents) Cost based on fuel costs for Number of motorcycles (number of motorcycles and depreciation costs field agents) for motorcycles Price of fuel Field agents case-load (number of youth groups) Administrative costs related to youth Cost based on the growth of the Number of accounts opened financial services number of accounts opened and the number of field staff Marketing costs Cost based on the growth of the Number of accounts opened number of accounts opened and the number of field staff Financial Costs Interest paid on youth savings Cost based on the interest rate and Interest rate offered accounts the amount of savings collected Amount of savings collected

Show Me the Money 47 Annex 2a: Nyèsigiso’s overall projections

Financial Services 2012 2013 2014 2015 2016 2017 2018 Revenues Accounts Maintenance Fees 369.2307692 849.2307692 1,104.00 1,435.20 2,180.10 2,507.12 2,883.18 Account opening fees 138.4615385 240 180.00 234.00 182.52 209.90 241.38 Revenues from loans to youth parents 0 0 1,638.00 2,129.40 2,623.73 3,017.28 3,701.20 Revenues from other services to youth parents (savings accounts) 0 0 93.60 172.38 349.83 402.30 462.65 Revenues from loans to loyal youth (cross-selling) 0 0 0 0 27,986.40 60,345.68 111,036.04 Revenues from youth savings onlending 738.15 1025.64 1,414.14 1,838.38 2,416.16 2,778.58 3,195.37

Total Income Financial Service 1,245.84 2,114.87 4,429.74 5,809.36 35,738.73 69,260.86 121,519.83

Investment Costs Product Development Costs 640 640 640.00 Operating Costs Total Salaries and benefits of field Agents 20,067 20,670 22,199.18 23,383.40 25,107.70 26,432.10 27,489.04 Transportation costs (field agents) 5,900 6,078 7,156.92 8,266.32 9,719.72 11,057.88 11,500.78 Administrative costs related to youth financial service 753 775 841.94 940.84 1,064.68 1,177.34 1,214.32 Marketing costs 832 859 884.94 910.74 468.70 483.32 497.08

Total Operating Costs 27,552 28,382 31,083 33,501 36,361 39,151 40,701

Financial Costs Amount of interest paid on youth savings accounts 397 409 565.20 753.48 985.61 1,203.42 1,383.93 Total Costs Financial Service 28,589 29,431 32,288 34,255 37,346 40,354 42,085 Net Deficit/Surplus Financial Service (27,342.68) (27,315.88) (27,858.44) (28,445.42) (1,607.67) 28,906.80 79,434.68 EDUCATION SERVICE 2012 2013 2014 2015 2016 2017 2018 OPERATING COSTS Total Salaries and benefits of field Agents 3266.76 3364.9 3,613.82 3,806.60 4,087.30 4,302.90 4,474.96 Transportation costs (field agents) 960.4 989.38 1,165.08 1,345.68 1,582.28 1,800.12 1,872.22 Administrative costs related to youth financial services 122.5 126.21 137.06 153.16 173.32 191.66 197.68 Marketing costs 135.52 139.86 144.06 148.26 76.30 78.68 80.92 Total Costs Non financial service 4485.18 4620.35 5,060.02 5,453.70 5,919.20 6,373.36 6,625.78 Net Deficit/Surplus Integrated Service (31,827.86) (31,936.23) (32,918.46) (33,899.12) (7,526.87) 22,533.44 72,808.90 Cummulative Deficit/Surplus Integrated Service (31,827.86) (63,764.09) (96,682.55) (130,581.66) (138,108.54) (115,575.09) (42,766.19)

48 Annex 2a: Cooprogreso’s overall projections

Financial Service 2012 2013 2014 2015 2016 2017 2018 Revenues Revenues from loan to youth parents – – 24,975.00 31,468.50 5,197.80 6,394.50 7,770.71 Revenues from loans to loyal youth (cross-selling) – – 8,325.00 10,489.50 24,610.78 30,276.98 44,151.74 Revenues from youth savings onlending 5,431.26 13,449.43 21,483.52 30,431.69 36,073.67 42,613.79 52,071.92 Total Income Financial Service 5,431.26 13,449.43 54,783.52 72,389.69 65,882.25 79,285.28 103,994.37 Investment Costs Product Development Costs 1,243.00 1,243.00 1,243.00 Operating Costs Total Salaries and benefits of field Agents 9,085.17 9,575.28 15,684.45 18,871.56 24,927.72 43,530.51 50,233.02 Transportation costs (field agents) 508.71 535.68 733.77 850.95 1,031.37 1,412.67 1,722.36 Administrative and Marketing costs 10,055.16 10,598.28 14,364.78 16,654.44 20,185.65 27,660.06 33,526.50 Total Operating Costs 19,649.04 20,709.24 30,783.00 36,376.95 46,144.74 72,603.24 85,481.88 Financial Costs Amount of interest paid on youth savings accounts 2,452.00 2,584.00 4,128.27 5,847.75 6,931.91 8,188.66 10,006.13 Total Costs Financial Service 23,344.04 24,536.24 36,154.27 42,224.70 53,076.65 80,791.90 95,488.01 Net Deficit/Surplus Financial Service (17,912.78) (11,086.81) 18,629.25 30,164.99 12,805.60 (1,506.62) 8,506.36 Education Service 2012 2013 2014 2015 2016 2017 2018 Operating Costs Total Salaries and benefits of field Agents 683.83 720.72 1,180.55 1,420.44 1,876.28 3,276.49 3,780.98 Transportation costs (field agents) 38.29 40.32 55.23 64.05 77.63 106.33 129.64 Administrative and Marketing costs 756.84 797.72 1,081.22 1,253.56 1,519.35 2,081.94 2,523.50 Total Operating Costs Education Service 1,478.96 1,558.76 2,317.00 2,738.05 3,473.26 5,464.76 6,434.12 Net Deficit/Surplus Integrated Service (19,391.74) (12,645.57) 16,312.25 27,426.94 9,332.34 (6,971.38) 2,072.24 Cumulative Deficit/Surplus Integrated Service (19,391.74) (32,037.32) (15,725.07) 11,701.87 21,034.21 14,062.83 16,135.06

49 Annex 2a: San Jose’s overall projections

Financial Service 2011 2012 2013 2014 2015 2016 2017 2018 Revenues Revenues from loans to loyal youth (cross-selling) 11,846.14 14,215.37 31,015.35 34,116.89 36,635.04 Revenues from loans to youth parents (cross-selling) – – – 30,077.31 36,092.77 22,738.45 25,012.29 26,858.44 Revenues from youth savings onlending 5,896.86 23,587.43 41,832.64 53,112.56 83,344.02 114,184.41 125,602.85 134,873.54 Total Income Financial Service 5,896.86 23,587.43 41,832.64 95,036.01 133,652.16 167,938.21 184,732.03 198,367.01 Investment Costs Product Development Costs (Financial and non financial) 4,574.00 4,574.00 4,574.00 Operating Costs Total Salaries and benefits of field Agents 10,115.61 10,663.38 11,238.12 15,561.69 20,952.90 27,633.09 31,888.77 36,800.10 Transportation costs (field agents) 5,372.61 5,662.77 5,967.81 7,548.81 9,282.33 11,181.39 11,784.96 12,420.15 Administrative costs 4,232.43 4,462.14 4,702.08 5,946.42 7,312.59 8,808.03 9,283.26 9,785.46 Marketing costs 7,111.71 6,491.40 8,966.13 11,339.49 13,944.42 16,390.55 17,275.64 18,208.52 Total Operating Costs 26,832.36 27,279.69 30,874.14 40,396.41 51,492.24 64,013.06 70,232.63 77,214.23 Financial Costs Amount of interest paid on youth savings accounts 1,714.20 6,856.81 12,160.65 15,439.70 24,227.91 33,193.14 36,512.46 39,207.42 Total Costs Financial Service 33,120.56 38,710.50 47,608.79 55,836.11 75,720.15 97,206.20 106,745.08 116,421.66 Net Deficit/Surplus Financial Service (27,223.71) (15,123.07) (5,776.15) 39,199.90 57,932.00 70,732.01 77,986.95 81,945.36 Education Service 2011 2012 2013 2014 2015 2016 2017 2018 Operating Costs Total Salaries and benefits of field Agents 761.39 802.62 845.88 1,171.31 1,577.10 2,079.91 2,400.23 2,769.90 Transportation costs (field agents) 404.39 426.23 449.19 568.19 698.67 841.61 887.04 934.85 Administrative costs related to youth financial services 318.57 335.86 353.92 447.58 550.41 662.97 698.74 736.54 Marketing costs 535.29 488.60 674.87 853.51 1,049.58 1,264.27 1,332.59 1,404.48 Total Operating Costs Education Service 2,019.64 2,053.31 2,323.86 3,040.59 3,875.76 4,848.76 5,318.60 5,845.77 Net Deficit/Surplus Integrated Service (29,243.35) (17,176.38) (8,100.01) 36,159.31 54,056.24 65,883.25 72,668.35 76,099.59 Cumulative Deficit/Surplus Integrated Service (29,243.35) (46,419.73) (54,519.74) (18,360.43) 35,695.82 101,579.07 174,247.41 250,347.00

50 Endnotes

1. A detailed and complete analysis of the impact of these features will be presented in a separate paper soon to be issued by Freedom from Hunger. “A Spotlight on Using Technology to Promote Youth Savings.”

2. Global Findex Database, The World Bank.

3. USAID Youth in Development Policy: Realizing the Demographic Opportunity. October 2012.

4. Clinton, HR. “Youth Rising.” Tunisia. February 2012.

5. McKay, A. “Assets and Chronic Poverty: Background Paper.” Working Paper 100. Chronic Poverty Research Center. October 2009. | Sherraden, M. Assets and the Poor: A New American Welfare Policy. New York: M.E. Sharpe. 1991.

6. Kilara, T and A Latortue. “Emerging Perspectives on Youth Savings.” CGAP. July 2012.

7. San José launched in March 2011, Cooprogreso in April 2012 and Nyèsigiso in October 2011.

8. Cooprogreso and San José are credit unions and Nyèsigiso is credit union federation.

9. Latortue, A, T Kilara, B Magnoni, et al. “Building a Business Case for Youth Savings—A Framework.” September 2013.

10. Marginal costs: the cost pertaining to the addition of the youth financial service; it represents the costs that the organization will uniquely face when offering youth integrated services.

11. This analysis is carried out in a separate document soon to be issued by Freedom from Hunger: “A Spotlight on Using Technology to Promote Youth Savings.”

12. For more details on the research results of AIM Youth, see: Gray, B. AIM Youth in Ecuador—Comprehensive Research Report. Davis, CA: Freedom from Hunger. January 2014 | Gash, M. AIM Youth in Mali— Comprehensive Research Report. Davis, CA: Freedom from Hunger. January 2014.

13. While this structure is a great advantage for Nyèsigiso to ensure a wide presence across the country, it is at the same time a real challenge to the organization to scaling up a newly adopted product because the federation will need to engage individually with the credit unions to persuade them to adopt and distribute the new product.

14. Nyèsigiso has begun implementing a process to fully relocate the field agents with the credit unions.

15. For more details on AIM Youth project implementation and selection of partners, see Ramirez, R and C Nelson, “Models for Integrating Savings Services and Financial Education for Young People.” Forthcoming. Freedom from Hunger.

16. The YSG approach was based on Saving for Change, a community-based savings program originally developed for adults by Freedom from Hunger, Oxfam America and the Strømme Foundation.

17. The World Bank, Global Findex Database.

18. Below the poverty line.

Show Me the Money 51 19. Flecke, S. “Tackling Overindebtedness Through Financial Education in Ecuador.” Economics Honors Papers Connecticut College, January 2013.

20. The MIX Market.

21. The World Bank, Global Findex Database.

22. Late teens/early twenties.

23. The World Bank, Global Findex Database.

24. The Global Competitiveness Report 2013–2014. World Economic Forum.

25. The World Bank: Global Findex Database.

26. Central Bank for West African States.

27. Jigiyaso Ba, Miselini, FCRMD, Sotobajo.

28. MIX Market.

29. The Global Competitiveness Report 2013–2014. World Economic Forum.

30. Global Findex Database—World Bank.

31. Mali: All Demographic Indicators.

32. MIX Market: as of 31 December 2013.

33. MIX Market: as of 31 Dec. 31, 2013.

34. Kafo Jiginew is the largest MFI in Mali.

35. Kayes, Koulikoro, Ségou, Sikasso and Tombouctou.

36. MIX Market

37. The credit unions involved include: Commune 4, Commune 5, Commune 6, Bamako-centre, Bamako-est and Bagadadji-Medina-Coura.

38. Promote account opening to their members, offer affordable loans and provide financial education.

39. Nyèsigiso’s (the federation) board is composed of elected members from the individual credit union boards.

40. For more information about organizations studied, see section on Market-level Levers and Partner Context.

41. Credit with Education is an integrated credit-led service enabling MFIs to reach the very poor with loans along with education in business management, health and nutrition and financial education.

42. MIX market.

43. Westley, GD and XM Palomas. “CGAP Occasional Paper, # 18.” September 2010.

Show Me the Money 52 44. Nyèsigiso’s average number of accounts created by field agents is currently 40.

45. As with San José, field agents are using 20 percent of their time for the youth integrated service.

46. Ramirez, R and C Nelson. “Models for Integrating Savings with Financial Education for Young People.” Freedom from Hunger. Forthcoming.

47. Munoz, L, M Perdomo and D Hopkins. “Building the Business Case for Youth Services—Insights of the Youthstart Programme.” UNCDF and The Mastercard Foundation. 2013.

48. See note 31.

49. 2012 and 2013 for Nyèsigiso and Cooprogreso.

50. Gray, B. Impact of Integrated Financial Services for Young People in Ecuador: A Comprehensive Research Report for the Freedom from Hunger Advancing Integrated Microfinance for Youth Project. Davis CA: Freedom from Hunger. 2014.

51. Data about Nyèsigiso’s profit/loss was not yet available by the completion of this study.

52. SYSCOFOP product (Système de Collecte de Fonds Sur Place) is offered in urban and semi-urban areas around Bamako. The service currently includes 11 savings collectors going around local marketplaces to collect savings from targeted small savers on a daily basis.

53. Gray, B. Impact of Integrated Financial Services for Young People in Ecuador: A Comprehensive Research Report for the Freedom from Hunger Advancing Integrated Microfinance for Youth Project. Davis CA: Freedom from Hunger. 2014. | Ramirez, R. and V Torres. “From One Generation to the Next: The Role of Parents in the Financial Lives of Young People.” Freedom from Hunger. Forthcoming.

54. Schanery, S. “The Persistent Power of Behavioral Change: Long-Run Impacts of Temporary Savings Subsidies for the Poor.” May 21, 2013.

55. Karlan, D and J Zinman “Price and Control Elasticities of Demand for Savings.” Innovations for Poverty Action—M.I.T. Jameel Poverty Action Lab—NBER. October 2012.

56. San José was not included in these projections because of a temporary partnership hiatus.

Show Me the Money 53

Show Me the Money: Cost and Revenues of Youth Savings and Financial Education Services Offered by Credit Unions in Mali and Ecuador” for Those Sections Excerpted.­

Show Me the Money: Cost and Revenues of Youth Savings and Financial Education Services Offered by Credit Unions in Mali and Ecuador” for Those Sections Excerpted.