Page Comparison

• Targeted at micro and small savers
• Interest rate is 'base rate' but can be setup to increase with increasing account balance
• Zero or low minimum required opening deposit
• Zero or low minimum passbook balance (before accruing interest)
• Unlimited/fully liquid withdrawals

Some credit unions establish a minimum passbook balance before interest can accrue.

Accounts below the minimum balance do not earn interest. This allows an institution to offset the maintenance costs of smaller accounts, where transaction costs are high relative to the balance of the account. At the same time, it offers the smallest savers a store of value for their savings as well as the opportunity to build their accounts over time from small amounts to larger ones that do earn interest.

Withdrawal policy. As fully liquid products, passbook accounts generally allow unlimited withdrawals. Some credit unions have experimented with semi-liquid variations of passbook accounts that limit the number of withdrawals per month or charge fees for withdrawals over a certain number. Such limited passbook accounts have proven to be less popular than basic passbook products;

Advantages:The advantages of the passbook account for the client are twofold:

1. it provides easy access for withdrawals,and
2. it offers a market return on savings.

For the savings institution, the passbook savings product can be an abundant and low-cost source of funds. It is also the master account that supports other financial services and products. For instance, passbook accounts can serve as the crediting accounts for loan disbursements, as the receiving accounts for wire transfers, or for the liquidation of fixed-term certificates of deposit when they mature.

Disadvantages:

The drawbacks of this account for a savings institution are:

1. high transaction costs when the balances are low or when withdrawals are frequent,
2. high operating costs to administer transactions and calculate interest in non-computerized institutions, and
3. volatility of deposits and withdrawals. These factors can complicate daily and weekly cash flow management and therefore command disciplined savings management.

Fixed-Term

Certificates of Deposit

• Net savers who seek to maximise returns
• Interest rate is higher than base rate (2-3%) and even higher for longer terms / higher deposits
• High minimum opening deposit required
• Minimum balance is define at opening of account
• Withdrawals typically only when reaching maturity

Interest rate: The interest rate is set when the certificate of deposit is signed. The interest is paid upon maturity for all fixed-term products. To compensate the saver for sacrificing liquidity, these accounts offer higher rates of return than other products. Fixed-term funds tend to be interest rate sensitive. As fixed-term deposits come to maturity, clients will renew the certificates or move them elsewhere, according to where they find the best returns.

Withdrawal policy. As a general rule, fixed-term deposits may not be withdrawn until the date of maturity. In some cases, however, the early withdrawal of some or all funds may be approved, but the client pays a penalty for early withdrawal.

Advantages: For the client, fixed-term certificates of deposit offer higher interest rates than other savings products. Fixed-term savings can also serve as security for loans.

The primary advantages of fixed-term products for a savings institution are in cash flow and liquidity management. Since both the price and the term of the product are fixed through a contract at the outset, the savings institution can use the funds in fixed-term accounts to finance longer-term loans or investments. Fixed-term products have lower administrative costs, with only one initial deposit transaction and one withdrawal transaction upon maturity.

Disadvantages: The higher financial cost of funds from fixed-term accounts is the primary disadvantage for the savings institution. Another drawback is that there is no guarantee of renewal upon maturity of the term, as renewal decisions are sensitive to interest rates.