Child Savings Accounts

Child savings accounts have been provided by an array of groups, including non-governmental organizations (NGO’s), financial institutions, and national governments.  Each has its own method and agenda for providing the accounts.  A common form of these accounts is a regular savings account that is open to minors and either held in the minor’s name or jointly with a parent.  This product is generally delivered through the same channels as other savings products.  In addition to providing accounts, the group may also offer courses to teach financial literacy and lifestyle practices.  These subjects can include life skills, entrepreneurship, and sexual and reproductive health.

Child Savings Account Benefits

A benefit of the child savings account is the security it can provide children.  Parents are burdened with paying school fees, medical expenses, clothes and other child needs. Children rely on their parents to make these payments, but there is a risk that unexpected events (e.g. sudden unemployment or death) may render parents incapable of making these purchases.  Savings held by the child enables him/her to afford some of these payments when parents are unable or unwilling to do so.

Child Savings Accounts in Microfinance

Microfinance institutes (MFI’s) have been slow to create child savings accounts because they have been seen as prohibitively costly to administer.   For their potential clientele, the size of the savings accounts would usually be small and the transaction costs from withdraws and deposits would likely outweigh the income generated.

New methods of offering child savings accounts are being considered to make the accounts sustainable and possibly even beneficial for MFI’s.   One method is to limit transactions per year, reducing the administrative costs for the MFI.   These limits can be imposed directly according to frequency, amount, or timing, or indirectly in the form of fees or rewards.   Overall, fewer withdraws can often encourage the client to increase his/her savings level, benefiting both the client and MFI.  Another option is to combine children’s accounts into one account for the children of a family.  This can reduce the processing involved compared to multiple accounts, however it can also lead to conflicts of ownership when the savings are distributed to the children.

Unforeseen Advantages of Child Savings

MFI’s are also finding that child savings accounts can have benefits for the MFI beyond the immediate income gained from deposits.  Starting a savings account when a client is young will likely enhance the child’s knowledge and familiarity with financial services.  Children’s understanding of the benefits of saving should increase an MFI’s ability to retain youth customers into their adulthood.  Also instilling the practice of saving into children can make this easier to maintain when they become adults.  Child savings accounts can thus lead to years of potential benefit for the MFI as the youth become adults and continue to increase their amount of savings and utilize other financial services offered by the MFI.  Child savings can also influence other family and community members to create accounts, broadening the MFI customer base.  All of these factors can improve an MFI’s image in the community and reinforce its social responsibility.

Assessing Child Savings Accounts at Urwego Opportunity Bank, Rwanda

Urwego Opportunity Bank (UOB) in Rwanda recently conducted a survey of 73 rural poor from regions spread over the country to assess the reception to starting child savings accounts.  Those surveyed were either clients of UOB who had savings accounts or had a loan.  UOB savers and loan clients expressed overwhelming support of CSA’s, with 72 of the 73 surveyed expressing their willingness to open a CSA for their children or if they have children in future.

Many survey respondents claimed they usually save for their children by purchasing insecure assets, such as coin-boxes, houses, and livestock. The potential of destruction, theft, or death of these types of assets makes this form of saving risky.  A significant or complete loss of this type of savings could jeopardize the education, health, and well being of their children.

Type of business is categorized into farm, shop owner, other and business on the street, in the home, or in the market.

From the survey, four of six groups of UOB clients or savers expressed fear for what would happen if their children were to die or become disabled.  Many parents rely on their children to provide financial support when he or she begins earning an income.  Losing this source of income could threaten the welfare of the parents.  Child savings provide insurance for the parents in that they either help with expenses for their children or ease the financial burden created from death or disability.

The most popular independent suggestion from four survey groups was for a loan system tied to the child savings account that may become available in circumstances that make it impossible for a family to pay for their child’s education (and other major expenses).  The savings could serve as collateral for the loan and enable the family to have access to greater finances.

Urwego Opportunity Bank Conclusion

UOB has assessed that they should be able to provide a sustainable child savings program at a fixed interest rate of 4% annually (0.33% monthly). This is comparable to the higher interest rates on UOB savings accounts.  However, the rate appears to be low compared with other children’s accounts offered by financial institutions in the country, such as Fina Bank’s (9% annually).

The interest rate to be provided by Urwego, or even the most generous interest rates in Rwanda, is below the current inflation rate of 10.4% (2009 estimate).  In real terms (i.e. subtracting the rate of return by the inflation rate), these accounts have a negative return for the client.  This poor return is likely preferable to no system of savings or savings that are susceptible to theft or destruction.  However, the rate of return makes building wealth through a savings account a struggle.  Child savings accounts are move in the right direction to help the poor amass wealth for the youth and for families.  Evidently there is progress to be made to make these accounts profitable for the client and microfinance institute.

Austin Harris is a Kiva Fellow with Urwego Opportunity Bank in Rwanda.  He is also a member of the Friends of Urwego lending group.

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