Text Message Reminders and Incentives to Save in Bolivia

Policy Issue:

Due to the absence of efficient credit and insurance markets, household savings are often a crucial determinant of welfare in developing countries. Without savings, households have few other mechanisms to smooth out unexpected variations in their income, and so shocks, such as health emergencies, can force households into selling assets or taking on debt. Additionally, since savings are one of the few means to accumulate assets in the absence of credit and insurance markets, the capacity to save becomes one of the main vehicles of social mobility and of enhancing future income-earning possibilities. Many people express a desire to save more in the future, but when the time comes, find it difficult to do so. Financial institutions have designed saving products to help clients commit to saving in the future, however the effectiveness of many such products has yet to be evaluated.

Context of the Evaluation:

The savings rate in Bolivia is low compared to elsewhere in the South American region. Encouraging savings, however, can be costly and risky. Since microfinance institutions (MFIs) often struggle to control costs and are highly risk averse, many MFIs in Bolivia have preferred to recapitalize their loan portfolio with ‘easy money’ such as donor funds and concessionary loans. However, some MFIs in Bolivia are now beginning to realize that, while savings services seem to be more costly and risky relative to other sources of financing, they may be handicapping themselves by not developing robust deposit taking services and the systems to support them. Clients of the for-profit bank Ecofuturo express a clear desire to save: over 56,000 clients held savings accounts in 2008, a greater number even than the approximately 42,500 active borrowers.[1] One of the savings accounts offered by the bank is a “programmed” savings account, which offers clients a favorable interest rate and free life and accident insurance in exchange for making regular deposits and accepting limits on withdrawals.  In particular, clients must make a deposit each month and can withdraw funds from the savings account only in the month of December.   Yet despite the popularity of the savings accounts, over 40% of savings clients fail to deposit each month as required.

Description of Intervention:

Researchers are working with Ecofuturo to measure the effectiveness of sending text message reminders to clients holding these programmed savings accounts.  The evaluation focuses on a specific programmed savings account called Ecoaguinaldo that is similar to a Christmas Savings Club. The Ecoaguinaldo mimicks the aguinaldo, the year-end bonus many salaried Bolivians receive at the year’s end. The Ecoaguinaldo is used by unsalaried workers and those who want to supplement existing savings accounts, as well as by small business owners who wish to ensure that they have sufficient funds to provide their employees with the expected holiday bonus.  Clients typically open an Ecoaguinaldo account at the beginning of the year and withdraw the savings they have accumulated over the year in December. Receiving a lump sum in December allows clients to meet their end-of-the year financial obligations. The text message reminders provide an opportunity to explore what types of messages are most effective at motivating clients to follow through on their desires to save.

Half of the savings clients with a listed cell phone number were randomly selected to receive a monthly text message reminding them about their Ecoaguinaldo account. There were four distinct messages, which combined a mention of either the savings goal (monthly goal amount in order to receive a year end monetary bonus) or the reward (an active and free life insurance product if all monthly deposits made), and framed the message as either a loss or gain.  The messages to the four treatment groups were:

1.   Goal-Gain: Earn your Aguinaldo! With this month's deposit you will be one step closer to reaching your savings goal.

2.   Goal-Loss: Don't fail to earn you Aguinaldo! If you miss this month's deposit you may not reach your savings goal.

3.   Reward-Gain: Earn your reward! Don't forget you deposit this month. Remember, you will earn a reward of X if you make all of your deposits on time.

4.   Reward-Loss: Don't lose your reward! Don't forget you deposit this month. Remember, you will lose your reward of X if you do not make all of your deposits on time.

Half of the people who received messages in 2008 were in the comparison group the next year, so that the impact of receiving messages one year but not the next could be measured. In the last three months of the project in 2008, the number of treatments was doubled to eight. Each of the four original treatments were split in half, and preceded by the phrase “Ecofuturo supports your decision to save,” to one of the halves. Based upon the 2008 results, in 2009 only messages that focused on the reward were sent.

Results and Policy Lessons:

Overall the reminder message increased savings balances weakly (not statistically significant) and the probability of meeting the savings goal of making one deposit a month by 3%. When results are pooled across similar experiments in Peru and the Philippines, we increase the power of our study, finding the same sized effects statistically significant at the 10% level for savings balances and the 1% level for the proportion of clients meeting their goal.  Messages that mentioned the incentives of maintaining your life insurance policy and receiving reward interest were most effective, increasing savings balances by 10%.  We see no difference between the effectiveness of messages framed with “gain” and “loss language.”  Preliminary results from 2009 suggest that the effectiveness of reminders may decrease over time.  The increase in savings due to the reminders was large enough to make it a profitable venture for the bank. Moving forward, reminders will be a standard component to the bank’s programmed savings accounts.



[1] http://www.mixmarket.org/mfi/ecofuturo-ffp

Text Message Loan Repayment Reminders for Micro-Borrowers in the Philippines

Policy Issue:

The recent and rapid growth of the microfinance industry in the developing world can be attributed, in large part, to the achievement of impressively high loan repayment rates among microborrowers. However, although final default rates are low amongst microfinance borrowers, late repayment is a much larger issue. While microborrowers have surprised skeptics with their ability to repay loans, microfinance institutions (MFIs) and commercial banks lending to the poor still struggle with relatively high transaction costs and low rates of return. All types of MFIs, from strictly for-profit to mission-oriented, would benefit from inexpensive mechanisms for boosting timely repayment rates and lowering administrative costs per borrower. One such solution may be automated loan repayment reminders sent via text (or SMS) on mobile phones. This study tests the effectiveness of one such intervention in improving repayment and reducing default.

Context of the Evaluation:

Known as the text message capital of the world, the Philippines witnesses the transmission of over 1 billion text messages every day and thus offers a prime setting for testing the effectiveness of text message reminders on improving client repayment rates.

IPA, in partnership with Microenterprise Access to Banking (MABS) and two rural banks in the Philippines, designed a study to test the effectiveness of text message reminders as a tool for boosting repayment among micro-borrowers.  Both banks are for-profit institutions that operate individual-liability microfinance lending programs. All new clients at select branches of both banks who had provided cell phone numbers to the bank and who availed of these loans during the study period were automatically enrolled in the study.  MABS, a national initiative established to expand financial services, provides technical assistance and training to local banks.

Description of Intervention:

IPA randomly assigned approximately 1,259 new borrowers who had just received their first loans from their respective banks into a comparison group or one of 12 treatment groups (with various combinations of timing, framing, and personalized messages).  Beyond assessing the overall impact of text reminders, the study was designed to explore the importance of timing, framing and personalization of the text message reminders. Regarding timing, researchers explore whether messages received two days before the due date, one day before the due date, or on the due date itself prove to be the more useful for reminding borrowers to pay. Secondly, the framing, or psychology, of the message sent was varied between emphasizing either the benefit of compliance or the cost of non-compliance to motivate repayment. Finally the importance of personalizing the text message was assessed by comparing messages with the account officer’s name with those containing the client’s name.

Over the course of 16 months between January 2009 and April 2010, cell phone numbers and payment due dates were submitted by the three partner banks on a weekly basis to an automated text message application that sent the assigned text message to borrowers on the appropriate date. All loans required payments on a weekly basis, and the average loan term at the Rural Bank of Mabitac was three months, while the average loan term at Green Bank was six months.

Following the enrollment of clients into the study, IPA analyzed bank data through June 2010 to examine differences in repayment rates, instances of default, and late payments across the 12 treatment groups. IPA also analyzed the cost of the text message system to the banks, taking into account loan officer time, cost of the software development, and administrative costs.

Results and Policy Lessons:

Results forthcoming. 

Access to Savings in Nepal

The majority of the poor lack access to bank accounts and rely on informal savings mechanisms (Banerjee and Duflo 2007)1. There is little evidence on how poor households’ behavior changes when offered access to a traditional savings account. Would poor households open a basic savings account if given access to one? Would this access help them accumulate small sums into increased savings over time? In this field experiment households in 19 slums in Nepal were randomly offered simple bank accounts with no fees at local bank branches. Results show that there is untapped demand for savings accounts. Access to the savings accounts increased monetary assets and total assets without crowding out other kinds of assets or formal savings in institutions. Finally, households with this new financial access increased investments in education.   

Policy Question:

The potential benefits of a formal savings account are manifold and include improved ability to cope with shocks, asset accumulation and capacity to plan for the future. There has been promising though limited evidence to date on the benefits of access to savings accounts for the poor. Additionally, such studies have thus far focused on specific subsets of the population such as entrepreneurs or, for commitment savings studies, existing clients of a bank or microfinance institution. The current literature lacks studies that consider how generally poor households’ behavior changes when offered access to financial markets through a savings account.

Context of the Evaluation:

This study takes place in Pokhara, Nepal in 19 areas commonly referred to as slums. The slums, which are actually permanent settlements, vary in population from 20 to 150 households. At the time of the study baseline, households in these areas had an average weekly salary of 1,600 Nepalese rupees, roughly $20 USD. Study participants were primarily involved in the agricultural and construction industries, engaged in activities such as collecting sand and stones, selling produce, and raising livestock. Researchers collaborated with a local NGO, Good Neighbour Service Association Nepal (GONESA), as it was offering savings products in new locations, to assess the impact on the population. 

Description of the Intervention:

A baseline survey was administered to 1,236 households. Shortly thereafter, public lotteries were held to randomly offer new savings accounts at a local GONESA branch to half of the surveyed households. The other half served as a comparison group and was restricted from opening accounts.

The new bank branch offices in the 19 slums are open twice a week for three hours on an established schedule. Customers cannot make deposits or withdrawals outside these hours at the branches, but they can visit the bank's main office at the city center all days of the week. The bank accounts have no opening or transaction fees and pay 10% annualized interest rate to customers.

One year after the accounts were opened, an endline survey was administered to both the beneficiaries and comparison group participants to collect data on consumption levels, financial behavior, and asset accumulation, among other indicators. Administrative data were also collected from GONESA on savings account usage at the individual level which includes the date, location, and amount of every deposit and withdrawal. 

Results and Policy Lessons:

This field experiment provides detailed evidence on the causal effects of access to a fully liquid bank account on savings and investment behavior. Results show first, that there is untapped demand for fully liquid savings accounts: 84 percent of the households that were offered the account opened one. Second, the poor can save: 80 percent of the households that were offered the account used it frequently, making deposits of about 8 percent of their weekly income 0.8 times per week, on average.

Third, a year after the start of the intervention, households with access to the GONESA savings accounts had 25% more monetary assets than households who did not have access. In addition, their total assets, which include monetary and non-monetary assets (consumer durables and livestock), were 12% higher than the ones of comparison households. Hence, the increase in monetary assets did not seem to come at the cost of crowding out savings in non-monetary assets.

Fourth, being offered access to a savings account strongly increased household investment in education. Furthermore, households with access to the savings account who had suffered health shocks in the previous month did not seem to suffer large changes in weekly income, suggesting that having savings may serve as a buffer against adverse circumstances.

Overall, findings suggest that if given access to a basic savings account with no fees, poor households save more than those who only have informal strategies at their disposal. They accumulate greater assets and invest more in education. These results highlight that savings accounts can be beneficial even when the households do not use the money saved for microenterprise development because they permit households to make productivity-enhancing investments in human capital.

1 Banerjee, Abhijit V., and Esther Duflo. 2007. “The Economic Lives of the Poor.” Journal of Economic Perspectives, 21(1): 141–167.

 

 

Silvia Prina

Reducing Barriers to Saving in Malawi

On average, developing countries have fewer than 20 bank branches per 100,000 adults, and people deposit money at a rate one-third of that in developed countries.[i] This lack of formal financial services, along with many other factors, may inhibit farmers and other entrepreneurs, particularly in rural areas, from increasing savings and investments, and smoothing household consumption. Financial services could help farmers to accumulate funds to purchase tools such as fertilizer which are helpful for increasing production. If barriers to financial services are reduced or eliminated by offering enhanced savings products, what is the impact on the use of different agricultural inputs, farm output, and overall well-being in rural farming households?

Context:

Tobacco is one of Malawi’s primary exports, employing many of the country’s farmers. Income volatility influenced by macroeconomic forces can be particularly harmful to those farmers living near the poverty line, causing households to skip meals and forgo necessary healthcare expenses.

Opportunity International, an international NGO, opened the Opportunity Bank of Malawi (OBM) in 2002 with a license from the Central Bank of Malawi. OBM provides financial services to the rural poor and has partnered with researchers and two private agricultural buyers, Alliance One and Limbe Leaf, to offer enhanced savings products to tobacco farmers.

Description of Intervention:

The study assessed the impact of OBM’s savings programs on the behavior and well-being of local farmers. Farmers were organized in farmers clubs, with an average of 10-15 members, by one of the agricultural buyers. In exchange for group loans in the form of fertilizer and extension services, administered by OBM, the club allowed the commercial buyer to make the first offer on the national auction floor, essentially creating an exclusive relationship. Farmer clubs in this sample were randomly assigned to one of two savings account treatment groups or a comparison group. Clubs in the comparison group received information about the benefits of having a formal savings account. Clubs in the treatment groups received the same information about savings accounts and were also offered individual savings accounts into which proceeds, after loan repayment, would be directly deposited.

Farmers in the first treatment group were offered an “ordinary” savings account with an annual interest rate of 2.5%. Those in the second treatment group received the same individual savings account, in addition to a “commitment” savings account which allows farmers to specify an amount of money to be frozen until a specified date (e.g. immediately prior to the planting season, so that funds are preserved for farm input purchases).

To assess the impact of public information on financial behavior, farmer clubs in both treatment groups were randomly assigned to one of three raffle schemes providing information about club level savings. Raffle tickets to win a bicycle were distributed to participants on two occasions based on savings balances as of two pre-announced dates. One third of farmers received raffle tickets in private, one third received tickets in public when names and numbers of tickets were announced to the club, and one third was ineligible for the raffle.

Results and Policy Lessons:

Savings Behavior: Twenty-one percent of farmers who were offered a commitment savings product (no raffle), made transfers to their account, while 16% of farmers who were offered the ordinary savings product (no raffle) had their harvest proceeds directly deposited into their individual account, and no farmers in the comparison groups received funds directly in an OBM account. Overall, farmers in the six treatment groups deposited substantial amounts into their individual bank accounts; among farmers who were offered the commitment savings account, most of these deposits were made into the ordinary savings account.

Farmers in the commitment savings group had higher net savings during the pre-planting period, and the commitment savings treatment group overall withdrew more money during the planting season. This finding implies that these farmers were better able to save money and delay consumption until the lean season when food supplies from the last harvest were scarcer. Farmers in the ordinary savings group did not experience an increase in net savings during the pre-planting season, or an increase in withdrawals during the planting season, suggesting they were not able to smooth consumption as effectively.

Inputs, crop sales, and expenditures: In relation to those in the comparison group, farmers who were offered commitment savings accounts had more land cultivated, higher value of inputs, and greater value of harvest at a statistically significant level. These commitment savings farmers cultivated .33 more acres of land (compared to an average of 4.3 acres of land in the comparison group) and used 17.1% more inputs. This increase in land under cultivation and inputs used by the commitment savings group led to a 20.1% increase in value of crop output above the levels in the comparison group. Finally, farmers in the commitment treatment group increased total expenditures reported in the last 30 days by 13.5%. Overall, farmers in the ordinary savings group did not have outcomes that were different from those in the comparison group at a statistically significant level.

Evidence suggests that the positive results in the commitment savings group were not due to helping farmers solve self-control problems since most money accrued in ordinary savings accounts and actual commitment account balances were low. There was also no direct evidence that the results were derived from farmers keeping funds from their social networks. Psychological phenomena such as mental accounting may be behind the impact of the commitment accounts. However, the current study does not empirically test this hypothesis and psychological mechanisms are addressed in future research. Results from the public and private raffle treatments were inconclusive.

 


[i]Consultative Group to Assist the Poor/The World Bank, “Financial Access 2009:  Measuring Access to Financial Services around the World,” http://www.cgap.org/gm/document-1.9.38735/FA2009.pdf(Accessed January 9, 2011).

For more details, see the Gates Foundation briefing note on this project.

Saving for Health Expenditures in Kenya

Health remains a major barrier to economic development in poor rural areas. Access to effective health products, whether preventive or curative, has so far remained limited due in large part to poverty and the absence of financial markets that would enable poor households to invest in health on credit. Given such constraints, poor households should save in anticipation of future health shocks. However, substantial evidence suggests that they lack adequate savings products, and, as a result, households are quite vulnerable to health shocks. In order to afford medical expenditures, they resort to drawing down productive assets or business capital or to other costly risk-coping strategies.

Policy Issue

The benefits of investing in health are thought to be very high. For example, it has been estimated that 63 percent of under-5 mortality could be averted if households invested in preventative health products. Despite this, investment levels remain quite low in many developing countries. While many people point to credit constraints as the primary impediment, barriers to savings also appear to be a significant obstacle to investing in health. There are several major pathways through which savings may be constrained. Inter-household barriers may be relevant if social norms that necessitate that an individual provide support to friends and relatives if she is asked and has the cash on hand. Intra-household barriers may arise if members of a household have different spending preferences. Intra-personal barriers may arise if an individual’s saving and spending preferences are not constant over time. It is necessary to better understand these pathways and their relative importance so that we may develop more efficient health saving devices.

Context of the Evaluation

The researchers chose to work with a common social structure in the area: a ROSCA (Rotating Saving and Credit Association) - a group of individuals who make regular cyclical contribution to a fund, which is then given as a lump sump to a different member at each meeting. Recent studies reveal very high participation rates in these organizations; across Sub-Saharan Africa, average membership among adults ranges between 50 and 95 percent.i

Details of the Intervention

To estimate the relative importance of the different types of barriers to savings, the researchers randomly varied access to a set of saving devices specifically designed to alleviate one or more of the barriers discussed above. One hundred and thirteen ROSCAs were randomly assigned to five groups: four of the groups were given specific savings devices to use in addition to their regular weekly savings, while the fifth group served as a comparison.

In the first two treatment groups, members of the ROSCAs were given a locked metal box (with an opening in which deposits could be made) in which they could save at home. In the first group – the “Safe Box” group – members were given the key to the lock and could therefore take money from the box whenever they wanted, even to spend on non-health products. In the second group – the “Lock Box” group – members were not given the key and had to call the program officer in order to open the box. Once opened, the money in the box could only be used to buy health products.

The other two treatments were at the ROSCA level. In the third treatment group, individuals were encouraged to use their existing ROSCA to create a “Health Pot” in which members would contribute an additional amount during regular meetings earmarked for health products only. In the fourth group, individuals were encouraged to save in an individual “Health Savings Account” (HSA) that would be held at the ROSCA and earmarked for emergency health costs only (i.e. respondents were only allowed to withdraw this money if they needed it for a health emergency).

In all five groups, participants were encouraged to save for health savings goals. Thus, any effect of a savings product above and beyond the control group should be attributable to the product itself.

Results and Policy Lessons

Overall, the results indicate a significant demand for such savings products. Take-up of all four treatments was extremely high, suggesting that the primary effect of all treatments is simply the provision of a mechanism to protect money from others. 

In terms of health impacts, the researchers looked at two outcomes: (1) how much people invested in preventative health in the year following the program; and (2) whether people had enough money to deal with health emergencies. Note that the Lock Box and Health Pot were geared towards outcome (1), the Health Savings Account was geared towards outcome (2), and the Safe Box was geared to both outcomes.

Investments in Preventative Health: A year after the intervention, individuals in the Safe Box andHealth Pot groups had significantly higher levels of investments in preventative health products than those in the comparison group. Relative to comparison group individuals, the Safe Boxincreased investment by 67 percent, while the Health Pot increased investment by 128 percent. As expected, the Health Savings Account had no effect on this measure. Surprisingly, however, the Lock Box had no effect either. This lack of an effect is because the value of tying up money towards health is outweighed by the cost of completely limiting liquidity (for instance, to deal with unexpected income shocks). 

Coping with Health Shocks: Individuals in the Health Savings Account treatment were less vulnerable to unexpected emergencies. People in the Safe Box group also appeared somewhat less vulnerable, though the effects were not significant at conventional levels. As expected, there was no effect in risk coping in the two treatments groups that were not designed for emergency savings.

Prevalence of Savings Barriers: The results confirm the presence of all three types of savings barriers. First, inter-personal barriers are substantial - those who were previously giving assistance to others without receiving assistance in return benefited more than others. Second, intra-personal barriers also matter. Those whose savings preferences were not constant over time (as measured by survey questions) were not able to benefit from the Safe Box (because it was too easy for them to access the money). They also did not benefit from the Lock Box – this is because even though the savings in the box was illiquid, there wasn’t a strong incentive to actually put money into the box in the first place. However, they did benefit from the stronger commitment and social pressure to make deposits that was provided by the Health Pot. Third, there is some evidence of intra-household barriers. The effects of several of the interventions were larger (though not statistically significantly so) for married individuals. 

 

i Anderson, Siwan and Jean-Marie Baland. 2002. “Economics of Roscas and Intrahousehold Resource Allocation.” The Quarterly Journal of Economics 117 (3): 963-995

    Using Encouragement to Overcome Psychological Barriers to Saving in Peru

    This research examines whether bank marketing and communication tools can help individuals save more and, in particular, switch from informal savings vehicles to formal sector methods (e.g., a bank account). In conjunction with Caja Municipal de Ica (CMI), IPA examines various methods of product design, beyond the financial incentive, of encouraging clients to complete their savings commitment.

    Policy Issue:

    Microfinance has generated worldwide enthusiasm as a possible strategy to help people living in poverty get the resources they need to start a business, receive additional education, or make investments. While much of the focus of microfinance has been on microcredit, formal savings services can also have a dramatic impact on the lives of the poor. Savings are important both as insurance in the case of illness or other economic shocks, and as a way to purchase productive assets. Savings can also substitute the need for loans among clients who have enough funds to finance their expenditures themselves. But savings strategies are less tested than credit services, and microfinance institutions struggle to effectively expand their savings services.

    Context of the Evaluation:

    The semi-urban poor living in Ica and Ayacucho, cities in southern Peru, often earn income through small enterprises and self-employment. In Ica, agriculture represents the most important industry, while Ayacucho is well known for its artisans and handicrafts. Many of the poor in this part of Peru save through informal means. They often keep savings in their own homes, a practice referred to as a colchón banco (mattress-bank), or join Merry-go-Round savings groups called ROSCAs, where members pool their money into a pot, and each week or month a different member takes home the pot.  Due to their informal nature, both of these savings practices can be risky and unreliable.

    Details of the Intervention:

    Researchers will examine whether an initiative to promote savings can help individuals save more and switch from informal savings to formal sector methods. The study is implemented by the Caja Ica, a bank designed to serve the needs of poor clients with microsavings and microcredit programs, with program support from Catholic Relief Services (CRS) and technical assistance from COPEME. The Caja Ica is offering a new commitment savings product called “Ahorro Programmado”. Clients who choose to participate in this service commit to saving an amount of their choosing, amounting to at least 20 soles (US$6.50) per month for 6, 12, 18, or 24 months. As an incentive for meeting their savings commitment, clients receive a preferential interest rate of more than twice what the normal interest rate is for savings accounts.

    This research will examine various product designs, beyond the already increased financial incentive, to see which are more effective at encouraging clients to complete their savings commitment. Each of the estimated 5,000 clients expected to enroll in the program will be randomly assigned to receive one or more of the following: (1) reminder letters before the due date of their payment, (2) token gifts upon payment to bring forward the "benefit" of saving, (3) positive or negative incentive messages on each deposit slip, or (4) no services, serving as a comparison. This study will determine the commitment device that most effectively encourages clients to meet their savings goals.

    Results and Policy Lessons:

    Clients began opening bank accounts in February 2006. The last group to be tracked completed their savings commitments in Oct 2007.  Preliminary results indicate that sign-up gifts, letters, and deposit slips all increased the probability that clients would reach their savings goal by several percentage points.  However, negatively framed messages appear to be more effective than the corresponding positive messages in getting people to save.

     

    Transaction Costs, Bargaining Power, and Savings Account Use

    Transaction costs, such as those associated with opening, maintaining, and withdrawing funds may be a barrier to using formal savings accounts for those with low income. Couples in Western Kenya were offered the opportunity to open bank accounts, in the husband’s name, wife’s name or both names jointly.  In addition, a subsample accounts were randomly selected to come with a free ATM card, which lowered withdrawal fees and made the accounts more accessible through ATM machines. Results show that lowering costs via ATM cards significantly increased the use of savings bank accounts owned by men and accounts jointly owned by men and women. In contrast, savings accounts owned by women with low household bargaining power were used significantly less when ATM cards were provided.
     
    Policy Issue:
    Transaction costs such as account opening, maintenance, and operating fees pose significant barriers to the adoption of formal savings by the poor. Recent evidence on commitment savings, however, suggests that individuals may actually benefit from some transaction costs on savings accounts: Both internal and external constraints to saving such as time inconsistent preferences (valuing present over future consumption) and pressures to share resources with other members of the household and community may be reduced when money is locked away and costly to access. These observations raise a number of unanswered questions about the savings behavior of the unbanked: Would making formal sector accounts cheaper and more convenient substantially increase use of these accounts? Would the use of the savings account vary by account type (individual versus joint) or identity of the account owner (husband or wife)? To inform product design, this project aims to understand how the poor respond to reduced transaction costs on formal savings accounts.
     
    Context of the Evaluation:
    ATM cards are a common tool for reducing bank account transaction costs in the developed world as they facilitate withdrawals and, in some cases, are associated with reduced fees. This randomized evaluation assesses the impact of providing ATM cards for savings account holders in Western Kenya. While formal financial services in Kenya have traditionally been outside the reach of the poor, banks have recently begun to offer lower cost formal savings products marketed to a broader swathe of the population. This project was implemented in collaboration with Family Bank, a formal bank in Kenya that offers products suitable for lower income savers.  All study participants were offered Family Bank’s Mwananchi account, which has no recurring fees, a minimum balance of $1.25 US, and no deposit fees. Withdrawal fees are $0.78 US without an ATM card and $0.38 US with an ATM card. The account does not require the purchase of an ATM card, which costs about $3.75 US. In addition to reducing withdrawal fees, the ATM card enables account holders to make withdrawals at any time of the day.
     
    Description of the Intervention:
    Seven hundred forty nine low-income married couples were given the opportunity to open up to three accounts with Family Bank of Kenya: a joint account, an individual account for the husband, and an individual account for the wife. Each account was randomly assigned a temporary 6-month interest rate, which ranged from zero percent to 10 percent. Altogether, these couples opened 1,122 accounts. One quarter of the opened accounts were randomly selected to receive a free ATM card. The cost of the card was prohibitive for the vast majority of the study participants – consequently the “free ATM” treatment increased ATM card take-up by 89 percentage points.
     
    In addition to survey data from one-on-one baseline questionnaires administered during group sessions (which collected basic demographic information, as well as information on individual discount rates and time inconsistency, decision making power in the household, income, and current use of a variety of savings devices.), administrative data on bank account use was also collected for the first six months following account opening.  
     
    In 2012, a follow-up survey was conducted to (1) assess the longer run impacts of ATM cards, (2) determine whether the initial results reflect changes in total savings or substitution between different savings devices, and (3) delve more deeply into the results pertaining to bargaining power and women's account use.  Couples were revisited and spouses were interviewed separately about their savings, assets, income generating activities, and decision making in the household. This survey particularly focused on measuring total household saving and measuring individual bargaining power in the household. In addition, administrative data on Family Bank account use will provide a three year time series of account use for individuals in the study’s sample.
     
    Preliminary Results:
    Using administrative account use data of the six months following the intervention, results showed relatively low overall usage of formal accounts with only 27 percent of the couples who opened accounts saving in at least one of their new accounts.
     
    Data from the three-year follow-up shows that lowering costs via ATM cards significantly increased savings rates (by 8 percentage points) and average daily balances (by 74 percent) in bank accounts owned by men and accounts jointly owned by men and women. In contrast, accounts owned by women with low household bargaining power were used significantly less when ATM cards were provided.
     
    Preliminary results from the follow-up survey indicate the ATM cards had important long-run effects. For example, the ATM treatment significantly increased long-run use of accounts (by 4.1 percentage points). Ongoing research is studying impacts on overall income and asset levels.
     
    These results imply that lowering transaction costs to formal savings will increase access for many savers. However, the findings also suggest that transaction cost saving technologies that make account balances easier to view and access may favor individuals who have more bargaining power within the household, and that incorporating additional security features into transaction-cost reducing technologies (such as biometric scanning) may be a promising way of both reducing costs and making accounts more attractive to individuals with weaker bargaining positions in the household.
    Simone Schaner

    Borrower Responses to Fingerprinting for Loan Enforcement in Malawi

    Can fingerprinting borrowers improve repayment rates? For micro-lending to be viable microfinance institutions need to ensure that their clients repay their loans. We worked with the Malawi Rural Finance Corporation (MRFC) to create a more reliable system for identifying and tracking, by fingerprinting borrowers. Fingerprinting improved repayment rates, especially for those borrowers predicted to have the worst repayment rates.  Fingerprinted borrowers are as much as 40% more likely to fully repay their loan than non fingerprinted borrowers. Borrowers who were fingerprinted also took out smaller loans, perhaps to be sure of their ability to repay. Even with conservative estimates of the benefit of increased repayment and the cost of outsourced fingerprint matching, the results suggest an attractive cost-benefit ratio. 

    Policy Issue: 

    Identity theft is a common crime the world over. In developing countries, the damage caused by identity theft and identity fraud goes far beyond the individual victim, however, and ultimately creates a direct impediment to progress, particularly in credit markets. Biometric technology can help to reduce these problems. A biometric is a measurement of physical or behavioral characteristics used to verify or analyze identity. Common biometrics include a person’s fingerprints, face, iris, or retina patterns; speech; or handwritten signature. These are effective personal identifiers because they are unique and intrinsic to each person, so, unlike conventional identification methods (such as passport numbers or government‐issued identification cards), they cannot be forgotten, lost, or stolen.

    Biometric technology can improve access to credit and insurance markets, especially in countries that do not have a unique identification system to prevent identity fraud—the use of someone else’s identity or a fictitious one to gain access to services otherwise unavailable. In the case of credit, biometric technology can make the idea of future credit denial more than an empty threat by making it easier for financial institutions to withhold new loans from past defaulters and reward responsible past borrowers with increased credit.

    Context of the Evaluation: 

    With 80% of its population residing in rural areas, Malawi’s economy is focused on agriculture.1 In these rural areas where there is limited access to credit, farmers, often have difficultly investing in agricultural inputs such as fertilizer that can dramatically increase harvest size.  

    To fill this gap in demand for credit, Malawi Rural Finance Corporation (MRFC), a government-owned microfinance institution, provides a loan product designed for farmers purchasing “starter kits” from Cheetah Paprika Limited (CP). CP is a privately owned agri‐business company that offers extension services and a package of seeds, pesticides, and fungicides at subsidized rates in exchange for farmers’ commitment to sell the paprika crop to CP at harvest time. The MRFC loans, roughly 17,000 Malawi Kwacha (approximately US$120), come in the form of vouchers, allowing borrowers to collect inputs from pre-approved suppliers who directly bill MRFC. Expected yield for farmers using two bags of fertilizer, the maximum quantity covered by the loan, on one acre of land is between 400‐ 600kg, compared to 200kg with no inputs.

    Details of the Intervention: 

    Smallholder farmers organized in groups of 15‐20 members applied for agricultural input loans to grow paprika and were randomly allocated to either a treatment or comparison group. The study sample covered four districts of the country and consisted of 249 clubs with approximately 3,500 farmers. In keeping with standard MRFC practices, farmers were expected to raise a 15% deposit, and were charged interest of 33% per year (or 30% for repeat borrowers).

    After the baseline survey was administered to individual farmers gathering information about demographics, income, assets, risk preferences, and borrowing activities, a training session was held for all clubs on the importance of credit history in ensuring future access to credit. Then, in treatment clubs only, fingerprints were collected as part of the loan application and an explanation was given that this would be used to determine their identity on any future loan applications. Farmers in treatment clubs were given a demonstration of how a computer could identify an individual with a fingerprint scan. In the absence of fingerprinting, identification of farmers relied on the personal knowledge of loan officers.

    MRFC loan officers, informed of which groups were fingerprinted, proceeded with normal loan application screening and approval. An endline survey was administered after the harvested crops were sold to CP.

    Results and Policy Lessons:

    The study shows that within the subgroup of farmers who had the highest ex ante default risk, based on risk taking and default behavior, fingerprinting led to increases in repayment rates of about 40 percent. By contrast, fingerprinting had no impact on repayment for farmers with low ex ante default risk. These higher repayment rates are due to fingerprinted borrowers requesting smaller loans amounts to ensure they would be able to repay them and devoting more land and inputs to paprika thus diverting fewer resources to other crops compared to their non‐fingerprinted counterparts. This study demonstrates the benefits of using biometric technology for lending institutions to identify borrowers and enforce loan repayment.

    Cost Effectiveness: A rough cost‐benefit analysis of the pilot experiment suggests that the benefits from improved repayment greatly outweigh the costs of biometric equipment and fingerprint collection, which accounts for basic training and the time for credit officers to collect biometric data. The benefit‐cost ratio is 2.27.

    1 CIA World Factbook, "Malawi." Available from https://www.cia.gov/library/publications/the-world-factbook/geos/mi.html

     

    Impact of Rural Microcredit in Morocco

    This project is one of the few to rigorously evaluate the impact of a microcredit program. It takes advantage of the expansion of Al Amana, Morocco's largest microfinance institution, into rural areas of Morocco where access to formal credit is very low. 50% of households sampled in initial surveys indicated that they were in need of credit in the previous year, but never actually requested it.

    Policy Issue: 

    Microcredit is the most visible innovation in anti-poverty policy in the last half-century, and in three decades it has grown dramatically. Now with almost 130 million borrowers, microcredit has undoubtedly been successful in bringing formal financial services to the poor. Many believe it has done much more, and that by putting money into the hands of poor families (and often women) it has the potential to increase investments in health and education and empower women. Skeptics, however, see microcredit organizations as extremely similar to the old fashioned money-lenders, making their profits based on the inability of the poor to resist the temptation of a new loan. They point to the large number of very small businesses created, with few maturing into larger businesses, and worry that they compete against each other. Until recently there has been very little rigorous evidence to help arbitrate between these very different viewpoints.

    Context of the Evaluation: 

    Those who live on less than 2 dollars a day represent 19% of the population in the dispersed rural areas of Morocco. In the past, most microfinance services in Morocco have been concentrated in the urban and peri-urban areas, while people in rural areas used various forms of informal credit. The level of access to formal credit from a bank or financial institution is very low in these locations: the initial surveys of this project have shown that only 2.5% of those in Morocco living on less than 2 dollars a day borrow from formal credit sources.

    Between 2006 and 2007, Al Amana opened around 60 new branches in sparsely populated rural areas . The main product Al Amana offers in rural areas is a group-liability loan, and, since March 2008 , individual loans for housing and non-agriculture businesses were also introduced in these areas. Groups are formed by three to four members  who agree to mutually guarantee the reimbursement of their loans, with amounts ranging from $124 to $1,855  USD per group member. Individual loans are also offered, usually for clients that can provide some sort of collateral.

    Details of the Intervention: 

    Within the catchment areas of new MFI branches opened in areas that had previously no access to microcredit, 81  pairs of matched villages were selected. Within each pair, one village was randomly selected to receive microcredit services just after the branch opening, while the other received service two years later.

    The baseline survey was grouped in four waves to follow Al Amana’s timeline of branch openings between 2006  and 2007 . Data on socio-economic characteristics, households’ production, members’ outside work, consumption, credit, and women’s role in the household was collected among a sample of households. An endline survey was administered two years after Al Amana intervention started in each wave.

    By the time of the endline survey, 16%  of surveyed households living in treatment villages had taken a loan from Al Amana. Three-fourths  of those who had taken loans from Al Amana received group-liability loans, and borrowers were predominantly men. Households in areas where credit was offered had borrowed an average total of $117 USD  from Al Amana at the endline, at an average of about $964 USD per loan.

    Results and Policy Lessons: 

    Al Amana program increased access to credit significantly: households were more than twice  as likely to have a loan of some kind in treatment villages relative to comparison villages. The main effect of improved access to credit was to expand the scale of existing self-employment activities of households, including both keeping livestock and agricultural activities.

    Among livestock-rearing households, there was an increase in the stock of animals held, and households appeared to diversify the types of animals they held and the types of livestock products sold. This leads to an increase in sales and self-consumption, but no increase in profits. Agricultural sales and profits also increase, but households did not appear to expand into new sectors or create new businesses. A fraction of the extra profits were saved, while another fraction were offset by reduced wage earnings, and so on there was no average effect on consumption across all households.

    Treatment effects vary significantly depending on whether a household had an existing self-employment activity at baseline. Households that had a pre-existing activity decrease their non-durable consumption (social expenditures) and consumption overall. This group saves more and borrows more from Al Amana, which is consistent with the need to fund the expansion of their activities. But households that did not have a pre-existing activity increased their food and durable expenditure (with no effect on overall consumption) and, did not see any change in their business outcomes.

    The Impact of Microcredit in the Philippines

    This is one of a handful of new studies which provide a rigorous estimate of the impact of microfinance. Accepted applicants used credit to change the structures of their business investments, resulting in smaller, lower-cost, more profitable businesses. So while business investments did not actually increase, profitability did increase because the capital allowed businesses to be reorganized. This happened most often by shedding unproductive employees.

    The results also highlight the importance of replicating tests and program evaluations across different settings. We are working towards that goal, and are currently implementing microfinance impact studies in Morocco,  as well as continuing studies in the Philippines. See here for other studies on varying interest rates in Mexico, Peru and South Africa

     
    Policy Issue: 

    Microcredit, or the practice of providing very small loans to the poor, often with group liability, is an increasingly common tool intended to fight poverty and promote economic growth. But microlending has expanded and evolved into what might be called its “second generation,” often looking more like traditional retail or small business lending where for-profit lenders extend individual liability credit in increasingly urban and competitive settings. The motivation for the continued expansion of microcredit is the presumption that expanding credit access is an efficient way to fight poverty and promote growth. Yet, despite optimistic claims about the effects of microcredit on borrowers and their businesses, there is relatively little empirical evidence on its impact.

     
    Context of the Evaluation: 

    First Macro Bank (FMB) is a for-profit lender that operates in the outskirts of Manila. A second generation lender, like many other Filipino microlenders, FMB offers small, short-term, uncollateralized credit with fixed repayment schedules to microentrepreneurs. Interest rates at this bank are high by developed country standards: several up-front fees combined with a monthly interest rate of 2.5 percent produce an effective annual interest rate greater than 60 percent.

    The borrowers sampled in this study are representative of most mircrolending clients; they lack the credit history or collateral which are needed to borrow from formal financial institutions like commercial banks. Most clients are female (85 percent), and average household size (5.1 individuals), household income (nearly 25,000 Filipino pesos per month), and levels of educational attainment (44 percent finished high school and 45 percent had postsecondary or college education) were in line with averages for the area. The most common business owned by these clients is a sari-sari store, or small grocery/convenience store (49 percent own one). Other popular occupations among clients are in the service sector, such as hair dressing, barbering, tailoring, and tire repair.

     

    Details of the Intervention: 

    The researchers, with FMB, used credit-scoring software to identify marginally creditworthy applicants based on business capacity, personal financial resources, outside financial resources, personal and business stability, and demographic characteristics. Those with scores falling in the middle comprised the sample for this study, totaling 1,601 applicants, most of whom were first time borrowers. They were randomly placed in two groups: 1,272 accepted applicants served as the treatment and 329 rejected applicants served as the comparison. These rejected applicants could still pursue loans from other lenders, but it is unlikely they obtained one due to their marginal creditworthiness. 

    Approved applicants then received loans of about 5,000 to 25,000 pesos, a substantial amount relative to the borrowers’ incomes—for example, the median loan size (10,000 pesos, or USD $220) was 37 percent of the median borrower’s net monthly income. Loan maturity was 13 weeks, with weekly repayments, and with a monthly interest rate of 2.5 percent. Several upfront fees combine with the interest rate to produce an annual percentage rate of over 60 percent.

    Data was collected on business condition, household resources, demographics, assets, household member occupation, consumption, well-being, and political and community participation one to two years after the application process was completed.

     

    Results and Policy Lessons: 

    Impact on Borrowing: Being randomly assigned to receive a loan did increase overall borrowing: the probability of having a loan out in the month prior to the survey increased by 9.4 percentage points in the treatment group relative to comparison. 

    Impact on Business Outcomes: Accepted applicants used credit to shrink their businesses. Treated clients who owned businesses operated 0.1 fewer businesses and employed 0.27 fewer paid employees. One explanation could be that these smaller businesses cost less and are thus more profitable. Perhaps clients would more readily invest in and grow their businesses if loan proceeds are tied to detailed business planning or closer monitoring by the lender. 

    Impact on Risk Management: Evidence suggests that increased access to formal credit complements, rather than crowds-out local and family risk-sharing mechanisms. Treated clients substituted away from formal insurance into informal risk sharing mechanisms: there was a 7.9 percentage point reduction in holding various types of formal insurance, including life, home, fire, property, and car insurance, and treated clients reported increased access to informal sources of credit in an emergency, such as family and friends. In all, these results suggest that microcredit improves the ability of households to manage risk by giving them additional options: using credit instead of insurance or savings, and strengthening family and community risk-sharing. 

    Examining the Effects of Crop Price Insurance for Farmers in Ghana

    Policy Issue:
    Many small-scale farmers in the developing world face significant income uncertainty, and rural farmers who live from harvest to harvest don’t have much room for error. Variables beyond the farmers’ control, such as fluctuating crop prices, can make a significant difference in how much a family earns for the year.  Farmers may be unwilling to take on additional risks by borrowing and making long-term investments due this uncertainty. This reluctance is thought to contribute to the decision of many farmers not to invest in technologies such as hybrid seeds, fertilizer, or irrigation that could potentially improve crop yields. Many lenders are also extremely wary of extending credit to farmers, fearful that they will inherit the risks inherent to farming. Crop price insurance could help solve this problem, reducing the risk to farmers and providing them with encouragement to make investments in their farms. Lenders, too, may feel more confident in lending to farmers with greater income certainty, facilitating even more capital investments.
     
    Context of the Evaluation:
    In Ghana, 50 percent of the rural population lives in poverty. In the Eastern Region where Mumuadu Rural Bank (MRB) operates, an estimated 70 percent of households make a living in the agricultural sector, but agricultural loans make up only 2 percent of the bank’s loan portfolio. Focus groups with maize and eggplant farmers in the area revealed that farmers were hesitant to borrow for fear that fluctuations in crop prices could force them to default. Rainfall fluctuations, typically an important source of risk for farmers, are not a great concern in this part of Ghana. The prices offered for traded crops, however, do fluctuate greatly. Information gathered in baseline surveys suggested that there was a potential but untapped market for crop price insurance: farmers in the area served by MRB expressed that they would be willing to pay to guarantee a certain minimum crop price. Despite this encouraging baseline finding, banks and insurance providers face the challenge that insurance is not a commonly understood concept among farmers in the region.
     
    Details of Intervention:
    Researchers developed an agricultural loan product in coordination with MRB that had an insurance component that partially indemnified farmers against low crop prices. Specifically, if crop prices at harvest dropped below a set price floor (the 10th percentile of historical prices for eggplant and the 7th percentile for historical maize prices), the bank would forgive 50 percent of the loan and interest payments. Borrowers were not required to pay any premium for the insurance product. The goal of incorporating insurance into the loan product was to reduce farmers’ risk in borrowing to invest in agriculture inputs. The intervention targeted maize and eggplant farmers in particular because the crops are both commonly grown in the region and subject to volatile (but historically well documented) prices.
     
    Standard Mumuadu procedure is to invite farmers to meet in a group with Mumuadu employees to discuss the bank’s financial services, and to encourage farmers to come to a branch to apply for a loan. The average loan size is approximately US$159, which represents a significant change in cash flow for the borrower. For this project, Mumuadu employees approached community leaders to obtain a list of all maize and eggplant farmers in the village. The same community leaders then invited farmers to attend one of the bank’s information sessions. Farmers on the list were randomly assigned to one of four groups, each of which received a variation on the Mumuadu marketing pitch. The four groups were:
    1. Farmers who were offered the standard Mumuadu loan product;
    2. Farmers who were offered the Mumuadu loan product with complimentary crop price insurance;
    3. Farmers who received financial literacy training, before being offered the standard Mumuadu loan product;
    4. Farmers who received financial literacy training, before being offered the Mumuadu loan product with complimentary crop price insurance.
    Prior to the marketing of the loans, Mumuadu employees conducted a survey of the farmers, gathering information relating to their credit history, risk perception, financial management skills, and cognitive ability. An analysis of baseline data, bank administrative data, and a followup survey that focused on farmer investment decisions allowed researchers to draw conclusions on the effect of crop price insurance on borrower behavior and agricultural investment in Ghana.
     
    Results:
    Take up of loans among farmers was quite high, with 86 percent of farmers in the comparison groups choosing to borrow and 92 percent of farmers in the treatment groups taking out a loan.  This high take up across both treatment and control groups made an analysis of the features that predicted take up difficult.  In fact, the researchers found no systematic difference across the treatment and control groups when considering which features predicted borrowing. Overall, those who borrowed tended to be older, with higher scores on tests of cognitive ability.  They were also more likely to have a record of previous borrowing.  
     
    Apart from predictors of borrowing, researchers were interested in whether crop price insurance changed farmers’ investment behavior. There is evidence that it did, but not overwhelmingly. The small sample and high take up across both groups may have played a role in this outcome. Farmers offered the insurance spent 17.9 percentage points more on agricultural chemicals (mostly fertilizer) than those who had not been offered the product. There was also a trend towards growing more eggplants and less maize among these farmers. Farmers offered the insurance were also between 15 and 25 percent more likely to bring their produce to markets rather than sell to brokers who come to pick up the crop. Anecdotally, it is believed that the so-called “farmgate” sellers offer guaranteed purchase contracts, but at lower prices locked in before harvest. Selling in the market, on the other hand, is a potentially more profitable but riskier option.  
     
    There are a number of potential reasons why the researchers did not find large effects of the crop price insurance product on either or take up or investment, and further research in necessary to determine their roles. It is uncertain, for example, whether farmers truly understood the benefits of the insurance. Farmers may also have been reluctant to make long term investments changes before an insurance product demonstrates an established presence in the area. Alternatively, crop price uncertainty may not be as important of an indicator of investment decisions as previously thought. Further research, with a larger sample size, is needed to better understand the roles of risk, financial literacy, and product design in determining microinsurance impact.

    Credit with Health Insurance: Evidence from the Philippines

    The addition of health insurance to microcredit products is increasingly popular; but is it sustainable for microfinance institutions? This study complements other IPA research on hospitalization insurance in the Philippines and should provide important policy lessons on providing public services. We partner with Green Bank to evaluate the impact of providing access to the national health insurance program (PhilHealth) among microfinance clients.  Anecdotal evidence from Green Bank field staff suggests that illness among clients and their families is one of the biggest causes of delinquency.  The PhilHealth program offers an opportunity to reduce clients' vulnerability to unexpected health shocks. 

    Policy Issue:
    Health shocks, such as illness or injury, have the potential to cause significant financial strain for low income households, possibly contributing to late payment or default among microcredit borrowers. Insurance could protect households from health shocks, but is unavailable to many in developing countries. High transaction costs and information problems complicate efforts to offer health insurance in a cost-effective way. There is also potential for moral hazard: once clients become insured, they may be less inclined to care for their health. Adverse selection may also occur, as clients predisposed to sickness may be those most willing to purchase insurance, dampening the profitability of insurers. But research has failed to produce a consensus on the impact of adverse selection and moral hazard for insurers in the developing world. How will these impact the market for health insurance? And how will health insurance impact the lives of microcredit clients?
     
    Context of the Evaluation: 
    The majority of residents in the Visayas and Northern Mindanao regions of the Philippines live in small towns and rural villages. A large for-profit bank, The Green Bank of Caraga, has been a strong presence in these regions for the past decade. The majority of microfinance clients they service engage in small-scale sales or work as tailors, drivers of local transport, and operators of bakeshops and roadside eateries. Anecdotal information suggests that health shocks are a leading cause of default and drop-out among their clients. Most of the respondents in this study reported that their ability work or do related productive activities was restricted at least some of the time.
     
    Details of the Intervention: 
    Researchers worked with the health insurer Philippine Health Insurance Corporation (PhilHealth), which offers the KaSAPI program to help organizations such as microfinance institutions provide affordable health insurance to their members. KaSAPI provided information about the availability and benefits of the insurance to microfinance clients through a marketing campaign. Bank clients were able to use existing savings or loan proceeds to pay for the insurance premium of 300 Philippine Pesos (approximately US$6) per quarter.
     
    Clients were randomly assigned to compulsory insurance, voluntary insurance, or no insurance to serve as a comparison. For clients in the voluntary treatment group, loan officers presented the schedule of PhilHealth benefits and explained that the bank was offering KaSAPI as an optional service for its clients. Premiums were deducted from the loan proceeds. For clients in the compulsory treatment group, loan officers presented PhilHealth materials but also explained that PhilHealth was now a requirement to continue participating in the lending program. Clients’ loans in compulsory PhilHealth treatment group were not released unless they agreed to the premium deduction from their loan proceeds.
     
    End line surveys will establish whether access to health insurance increased risk-taking behavior, if it improved the health status of beneficiaries and if formal insurance crowded out informal insurance arrangements. Evidence will also reveal how health insurance affected institutional outcomes such as profit, client retention, and default.
     
    Results and Policy Lessons:
    Results forthcoming. 

    Using a Referrals Program to Test for Asymmetric Information and Borrowers’ Ability to Influence Repayment Behavior of Fellow Borrowers in South Africa

    In recent years, the shift in microcredit from group-liability to individual-liability has accelerated. The most commonly cited driving force behind this trend is borrowers’ aversion to both group tension and free-riding by fellow group members. Usually, the shift to individual-liability microcredit results in the loss of group-liability's two biggest advantages: peer screening and peer pressure. In this study, however, we test a “client referrals” promotional campaign that seeks to recapture these efficiencies.

    Our partner lender is interested in increasing the number of first-time applicants via a client referrals promotional campaign. In addition, this lender would like to attract good applicants and encourage good repayment behavior. By randomizing the rules of the promotion, we will be able to detect whether clients have asymmetric information on the borrowing “type” of fellow borrowers, and if clients are able to influence the repayment behavior of fellow clients. Based on this information, we will be able to design an optimal referrals program going forward.

    Our partner lender operates in South Africa’s “cash loan” industry, offering high-interest, short-term credit with fixed repayment schedules to a “working poor” population. As part of the promotional campaign, first-time borrowers receive two Refer-A-Friend Vouchers with their loan. These vouchers follow one of four sets of rules that dictate how the client becomes eligible for a Referral Bonus. The randomized variation in the rules will allow us to answer our research questions.

    Marketing Effects in a Consumer Credit Market in South Africa

    The study investigates whether borrowers' choices can be manipulated by frames, cues, and other features that change the presentation of the choice, but not its actual content or inherent value.  IPA partnered with a consumer lender in South Africa to identify which psychological features of a mass-mailing advertising campaign are the most effective. Showing a photo of an attractive woman increased demand for the loan by the same amount as a 25% reduction in the monthly interest rate.

    Policy Issue: 

    Firms in all industries together spend billions of dollars each year advertising consumer products to influence demand, and microfinance institutions are no exception. Economic theories emphasize the informational content of advertising, but advertisers also spend resources trying to persuade consumers with “creative” content and design elements that are not purely informational. Advertising decisions are not inconsequential: decisions about whether to take up loans or savings accounts may be a crucial component of the success of interventions aimed at increasing access to financial services. Although laboratory studies in marketing have shown that “creative” content may affect demand, academic researchers have rarely used field experiments to study advertising content effects. Thus, although attempts to persuade consumers with non-informative advertising are common, little is known about how and how much such advertising influences consumer choice in natural settings like South Africa.   

     
    Context of the Evaluation: 

    Credit Indemnity, the cooperating consumer lender in this study, has operated for over 20 years as one of the largest, most profitable lenders in South Africa. The lender offers small, high-interest, short-term, uncollateralized credit with fixed monthly repayment schedules to the working poor, who generally lack the credit history or collateral wealth needed to borrow from traditional institutional sources such as commercial banks. The available data suggest that borrowers use their loans for a variety of consumption and investment uses, including food, clothing, transportation, education, housing, and paying off other debt.

     
    Details of the Intervention: 

    Working closely with a highly profitable consumer lender in South Africa, researchers sought to determine the effects of advertising content, price, and offer deadlines on loan take up. The lender sent direct mail solicitations to 53,194 predominantly urban former clients offering them a new loan at randomly assigned interest rates ranging from 3.25 percent per month to 11.75 percent per month. These mailers varied in a number of ways. First, there were eight variations in advertising content– (1) a person’s photograph on the letter, (2) a suggestion of how to use the loan, (3) a table featuring either a small or large number of example loans, (4) information about interest rate and payments, (5) a comparison to competitors’ rates, (6) mention of a promotional raffle, (7) a reference to the “special” or “low” rate, and (8) a mention of the lender offering services in the local language. Additional randomization included the time before the offer’s deadline, which varied from two to six weeks.

    About 8.5 percent of clients who received the mailing applied for a loan, of which approximately 4,000 were approved according to the bank’s established criteria. Because the content of the mailer was recorded in their client profile, researchers could determine what kind of advertising scheme was associated with higher demand for loan products.

     
    Results and Policy Lessons: 

    Impact of Advertising Content on Demand: All eight advertising randomizations had significant effects on loan take up, but not on loan amount or default rates. Advertising content effects were large relative to price effects. Showing one loan option instead of four increased demand by the same amount as a 25 percent reduction in the monthly interest rate. Showing a female photo or not suggesting a particular use for the loan also had a similar effect.  These results suggest that seemingly non-informative advertising may play a large role in real consumer decisions.

    Impact of Advertising Channels: Clients demonstrated the strongest responses to the non-price components of loan offers.  They preferred to be presented with fewer example loans, an attractive photo, and to not be told on what they should consider spending their loan. The success of these features suggests that advertising content is more effective when it aims to trigger an intuitive, or quick, effortless response, rather than a deliberative, or conscious, reasoned response.  

    Impact of Deadlines: In contrast with the view that shorter deadlines help overcome limited attention or procrastination, there was little evidence that shorter deadlines increased demand. In fact, demand increased dramatically as deadlines randomly increased from two to six weeks. Even in a competitive market setting with high rates and experienced customers, subtle psychological features appear to be powerful drivers of behavior. 

     
    Selected Media Coverage:

    Returns to Capital and MSE Management Consulting in Ghana

    There are a number of development organizations in Ghana that provide services to micro and small enterprises (MSEs) seeking to expand their operations.  However, as there are few rigorous evaluations of entrepreneurial development programs, IPA is working with local consultants to undertake a rigorous study aimed at understanding the key factors that prevent MSE entrepreneurs from developing and expanding their businesses as well as identifying the value of providing consulting services to them. 
     
    Policy Issue:
    Microenterprises and small enterprises make up a large portion of employment in the developing world. As an alternative to employment in large firms in formal sectors, small enterprises create opportunity for the poor with few resources.  Despite implications for public policy, little is understood about the constraints of these small enterprises. It is unclear which factors prevent small businesses from expanding and employing more workers. This study focuses on two possible constraints, capital and business acumen, in assessing the potential for small business growth.
     
    Context of the Evaluation:
    In Ghana businesses of less than 99 workers (commonly called small or medium enterprises), employ around 66% of the nation’s work force[1].  These businesses are diverse in product offerings, ranging from agricultural produce to crafts to tourism services.  
     
    Ernst and Young, a professional services firm, works in assurance, tax, transaction, advisory services and strategic growth markets.  Around the globe, Ernst and Young works with a range of organizations to provide consulting services, in this case tailors in Ghana. The entrepreneurs participating in the study were diverse: 57% of them were female, they came from 26 different ethnic groups, and spoke 12 different languages at home.  The businesses they operated were in general very small- all had less than 5 employees, and 35% of them had no employees at all.
     
    Description of Intervention:
    IPA partnered with Ernst and Young to offer business consulting services to small businesses in the city of Accra. Out of a group of 157 tailors, 77 were randomly selected to receive one year of free consulting services while the others served as a comparison group.  Four consultants from Ernst and Young met with twenty tailors each between February 2009 and February 2010.  Each tailor received an average of ten hours of consulting over the course of the intervention, with the consultants visiting each tailor two to three times per month. All tailors received thirteen training modules on topics like record keeping, time management, and costing, in addition to individualized mentorship.  After six months, a randomly selected38 tailors who were receiving the consulting and 36 additional tailors in the comparison group were awarded a grant of 200 Ghana Cedi (about $133 US) to invest in their businesses.  Eight rounds of surveys were administered to measure the impact of the consulting services, the cash investment, and the combination of the two.
     
    Results and Policy Lessons:
    Results forthcoming.
     

    [1]Kozak, Marta “Micro, Small, and Medium Enterprises: A Collection of Published Data,” http://rru.worldbank.org/Documents/other/MSMEdatabase/msme_database.htm.

    Commitment Savings Accounts and Quitting Smoking in the Philippines

    Can financial incentives work to help people quit smoking?  The CARES (Committed Action to Reduce and End Smoking) Program, creates a commitment contract that provides financial incentives for smokers who wish to quit smoking. Smokers offered the product were more likely to be smoke-free 6 and 12 months afterwards.

    Policy Issue: 

    Despite detrimental effects, people throughout the world habitually engage in damaging or inefficient habits such as smoking, eating poorly, or failing to save money. Experts believe that this is because people’s preferences change over time: in the long-run an individual may wish to quit smoking, for example, but in the moment their preference for a cigarette may outweigh their desire to quit. Such behavior, known as time inconsistent preferences, may help to explain why people make inefficient choices that result in poor health or a lack of financial cushioning. Some researchers theorize that habits that have negative long-term effects can be discouraged by giving people commitment devices: contracts which constrain their future behavior, and may exact a financial penalty if they revert to bad habits. 

    Context of the Evaluation: 

    Despite its serious health effects, smoking is extremely commonplace in the Philippines: in 2009, 28.3 percent of Filipinos aged 15 years or older were current smokers, and 22.5 percent smoked on a daily basis. Smoking is also a considerable expense, with the average surveyed smoker spending approximately 100 pesos (US$2) per week on cigarettes, nearly 15 percent of their monthly income. Even though it is a common behavior, 72 percent of survey respondents reported that they wanted to stop smoking at some point in their life, and nearly 45 percent indicated that they had tried to stop smoking within the last year. Survey responses suggest that their lack of success may be due to time inconsistent preferences: though 72 percent reported that they wanted to stop smoking at some point, only about 18 percent of people said that they wanted to stop smoking now. 

    Details of the Intervention: 

    Committed Action to Reduce and End Smoking (“CARES”) is a voluntary commitment savings program. The basic design of the product allows a smoker to deposit a self-selected amount of his own money that will be forfeited unless he passes a biochemical test of smoking cessation. To enroll people in the CARES program, the Green Bank of Caraga identified regular smokers off the street and asked them if they wanted to participate in a short survey on smoking. All subjects received an informational pamphlet on the dangers of smoking, and a tip sheet on how to quit. After completing this baseline survey, subjects were randomly assigned to receive one of four offers:

    1. CARES with deposit collection: A minimum balance of 50 pesos (about US$1) was required to open a CARES account, and individuals were encouraged by marketers to deposit the money they would normally spend on cigarettes into this account each week. This group also received weekly visits from deposit collectors, saving them the weekly trip to the bank. All CARES clients were able to deposit into, but not to withdraw from these accounts, and the accounts yielded no interest, to discourage non-smokers people from using them as a substitute for normal savings accounts. 
    2. CARES without deposit collection: Same as above, except these clients had to go to a bank branch themselves to make deposits.
    3. Cue Cards: These individuals got to choose from among four wallet-sized cards depicting negative health consequences of smoking: premature babies, bad teeth, black lung, or a child hooked up to a respirator. They were encouraged by the marketers to keep them in a prominent location. 
    4. Comparison Group: These individuals received no additional information. 

    Six months after the baseline survey, all survey respondents took a urine test to determine if they were still smoking. Individuals in the CARES treatment groups would receive their entire balance back if they passed the test, but would forfeit it if they failed or refused to take the test. Non-clients (those assigned to the cues and comparison groups) were paid 30 pesos (US$0.60) for taking the six-month test, and all respondents were paid 30 pesos for taking another test 12 months after the baseline. 

    Results and Policy Lessons: 

    In total, about 11 percent of individuals who were offered CARES signed a contract. Individuals who reported wanting to quit, who were optimistic about quitting, and who already exhibited strategic behavior to manage their cravings (i.e. avoiding situations that made them want to smoke) were more likely to sign a contract. On the other hand, individuals who reported wanting to quite more than a year in the future, and who showed signs of being heavy smokers were less likely to sign a contract. Ninety percent of CARES clients opened with the minimum amount of 50 pesos, and 80 percent made additional contributions. The average client contributed about every two weeks, and after six months had a final balance of around 553 pesos, equal to approximately six months’ worth of cigarette spending.

    Individuals who were offered a CARES contract were 3.3 to 5.8 percentage points more likely to pass a urine test for nicotine after six months than those in the comparison group, and were 3.4 to 5.7 percentage points more likely to pass after 12 months—a substantial effect considering that only 8.9 to 14.7 percent of comparison individuals passed the test. This represents an over 35 percent increase in the likelihood of smoking cessation compared to baseline.  However, despite these large treatment effects, a surprisingly large proportion (66 percent) of smokers who voluntarily committed to CARES ended up failing to quit. Still, the results of the CARES program were far above the reductions in smoking associated with the cue card treatment, which had no effect on smoking cessation: though over 99 percent of clients offered the cue cards accepted them, fewer than half remembered the cards and knew where they had put them one year later, and only about 5 percent reported still using them to manage cravings. However, it is still not known how much of the CARES treatment effect was due to the financial commitment that all clients made, and how much was due to the frequent contact that some clients had with deposit collectors. 

     

    Selected Media Coverage:
    Sticking to It - Project Syndicate
     

    Commitment Savings Accounts for Remittance Receivers in Mexico

    Policy Issue:

    By the year 2000, individuals living outside their country of birth had grown to nearly 3% of the world’s population, reaching a total 175 million people.[i] The money many of these migrants send home, remittances, is an important but relatively poorly understood type of international financial flow. Currently, the use of savings services is low among many remittance receivers. Increasing savings has the possibility to mitigate the negative impacts of unforeseen circumstances, such as medical emergencies or economic hardship.

    Context of the Evaluation: 

    In Mexico, the financial intermediary Caja Nacional del Sureste (CNS) observed that it was transferring a large amount of remittances to their clients but that very little savings was captured from this flow of money. At the start of the study, only 38 percent of the sample of remittance receivers had a savings account at the Caja, and only about one half of these clients had actually saved any portion of their remittance.

    Details of the Intervention: 

    In an effort to increase savings among remittance receivers, at the onset of the project, CNS offered a saving account called “Tu Futuro Seguro” (TFS), or “Your Secure Future,” to any remittance receivers in its four branches. The account paid 7 percent annually, compounded every month, with no restrictions on withdrawals or deposits. It had no starting fees but required the client to sign a non-binding agreement to save a predetermined amount of money for every remittance received. The client decided that amount, although CNS suggested US$20, US$50, or US$100, The client could also make deposits from any other source of income. As the name suggests, the account was marketed to clients as an account to save for emergencies, future economic shocks, and future illnesses. Though clients could withdraw funds, they were encouraged to only use the money only for an emergency purpose.  

    The total sample of 783 remittance receivers were randomly assigned to either the treatment or the comparison group. For clients assigned to the treatment group, the system automatically informed CNS staff to offer TFS product. During their subsequent visits, CNS staff continued to offer the product until clients opened the account. For those who were assigned to the comparison group, CNS staff followed routine process, and did not offer the TFS product.

    There were two sources of data to inform the study. The baseline survey, which was administered when clients first arrived at the branch, included questions on poverty, children’s attendance in school and information about remittances (who makes decision about remittances, relationship with the sender, and savings level). Administrative data, including account information such as daily transaction amount, monthly balance, basic demographic information, date to join as a member, purpose of the transaction, remittance amounts, committed saving amount, etc, was also collected from the CNS information system.

    Results and Policy Lessons: 

    Take-up of TFS Accounts: Among the 386 remittance beneficiaries who were randomly assigned to receive the TFS offer, 101 (26.17 percent) opened a savings account. Take-up of TFS was higher among those who live below poverty line. Typically, these people were more likely to be female, with fewer years of education and were more likely to speak indigenous language.

    Impact on Savings: The product did not appear to have any significant impact on savings, measured by monthly deposits, monthly withdrawals, and monthly net deposits. 

    The failure to find significant treatment effects may be partly because of the difficulties encountered during implementation. Upon going to the bank to receive one’s remittance, a proportion was supposed to be set aside by default unless the client asks otherwise. However, this is not what happened in reality. Also, the total sample frame was lower than expected, thus lowering the precision of the results. The sample frame was determined by approaching individuals as they came to CNS to receive a remittance, but fewer individuals came forward than was expected in the study intake time period. 

     


    [i]Ashraf, Nava, Diego Aycinena, Claudia Martinez and Dean Yang. “Remittances and the Problem of Control: A Field Experiment Among Migrants from El Salvador,” August 2009.

    Debt Traps for Micro-Entrepreneurs in Chennai, India

    Why are some entrepreneurs perpetually in debt? Around the world, individuals pay high interest rates to moneylenders or microfinance institutions in order to finance their working capital. In many cases, however, the enterprises are not growing. It is unclear why these businesses need financing, and why these entrepreneurs are unable to save sufficiently from their own income to finance their businesses. In this study, we study the characteristics of vendors who repeatedly fall into debt.

    Using a randomized controlled design, the study aims to assess the impact of two interventions—financial training and debt pay-off (a grant equal to working capital) on vendors’ borrowing and saving behaviors. In India, the sample population consists of 1000 small scale fruit/vegetable/flower vendors in Chennai who have been selected on the basis of two criteria – buying goods on credit at a premium or taking a daily loan for working capital. Baseline data and three follow-up surveys collect information on business activities, debt, and household expenditures.

    See here for a similar study in the Phillipines.

    Peeling Back the Layers of Group Liability in Bolivia

    Policy Issue:
    Since its inception in the 1970s, the group liability model has been hailed as the innovation that made lending to the poor possible.  Under the group liability model, borrowers take out loans with groups of other borrowers and all group members are  jointly liable for loans extended to others within the same group.  Many microfinance institutions continue to work under this model, yet some practitioners and scholars have begun to question the assumption that the benefits of group liability outweigh the costs. Many contend that group liability not only fails to increase repayment rates but that the policy also locks out those who could potentially benefit from credit access but are unwilling to take responsibility for other people’s loans. It is still unknown whether group liability or self-selection produce better outcomes for microfinance clients and lenders.
     
    Context:
    Despite abundant natural resources, Bolivia remains one of the poorest countries in South America. El Alto, a fast growing suburb of La Paz located in the highlands above the capital, is known for its politically active inhabitants whose protests over the use of natural resources have led to clashes with authorities. Cochabamba, on the other hand, is well known for its agriculture production of grains, coffee, cacao, and coca leaf. Pro Mujer, a prominent microfinance lender in Bolivia, provides loans to female clients in these areas. A majority of these clients engage in commercial activity, very often in local markets or selling goods produced in home-based businesses. Pro Mujer calls their borrowing groups “Communal Associations”, and a typical group has between 18 and 25 members.
     
    Description of Intervention:
    Researchers randomly selected 300 of the sample 400 Communal Associations to test the impacts of various forms of group liability. In these 300 groups, the Communal Associations were divided into sub-groups called “solidarity groups”.  Each solidarity group included 5-7 individual borrowers.  Rather than being responsible for the repayment of all loans in the Association, borrowers in the treatment Associations were only liable for the loans of the members within their solidarity group, effectively reducing the number of loans for which each woman was liable. 
     
    Additionally, treatment groups were randomly allocated to be formed in different ways. In the first sub-treatment group, researchers shifted liability from the Association level to the solidarity group level without changing the self-selected composition of the solidarity groups. In the second sub-treatment, the solidarity groups were rearranged to be composed of borrowers with similarly-sized loans. In the final sub-treatment group, solidarity groups were rearranged and members were assigned to solidarity groups at random.
    Researchers collected data on institutional outcomes important to Pro Mujer, such as repayment rate, loan size, dropout rate, and new member acquisition rate. In addition to analyzing the impact of group liability on borrowers’ behavior, researchers also collected data on how credit officers used their time in order to determine if the new policy had an effect on the efficiency of bank operations.  Loan officers are required to spend much of their time traveling to Communal Association repayment meetings.  If changes to the liability structure improve overall repayment, loan officers may be able to lead meetings and oversee repayment in a more efficient manner, allowing them to take on more borrowing groups.  On the other hand, if the new liability structure worsens repayment, loan officers may end up spending more of their time enforcing repayment, and have less time for other required activities. 
     
    Results and Policy Lessons:
    Due to low compliance, data analysis has been delayed.

    Impact of Malaria Education on the Health of Microfinance Clients in Benin

    Policy Issue:
    Just as illness can keep a person from working or going to school, it can also cause microfinance recipients to fall back or default on loan payments. In some cases loan defaults are linked to illness, which consumes available cash and makes the victim unable to work. Community organizations and policy makers have therefore proposed including health education alongside microfinance services. As a complement to microfinance services, health education could potentially increase repayment rates for the microfinance institution (MFI), while also improving the lives of clients. Health education increases costs for MFIs, who must direct resources towards training loan officers as educators, and increase the time that loan officers spend at each village banking meeting where training is given. There is potential for benefit on measures of both health and microfinance outcomes, but if the additional trainings are ineffective, they could be drawing away an MFI’s resources away from its core activities.

    Context of the Evaluation:
    Located in West Africa, Benin’s economy is based primarily on agriculture and regional trade. The rural population in Benin suffers from very poor health. Although WHO estimates suggest that 20% of children in Benin under the age of 5 sleep under insecticide treated bed nets – a proven defense against malaria contraction -  27% of deaths in children under 5 are nonetheless attributed to malaria.  There are a number of MFIs in Benin, and PADME represents a significant share of the market, serving approximately 44,000 borrowers out of an estimated 140,000 in the entire country.[1]
     
    Description of Intervention:
    In 2006, Freedom from Hunger launched the Microfinance and Health Protection (MAHP) initiative in rural Benin to help local MFI partners create and sustain key health services that complement their credit offering. This evaluation seeks to test the impact of providing credit with education on health and microfinance indicators, as well as the impact of combining education with the provision of health care products, and the specific aspects of the solidarity lending design.
     
    In Benin, researchers will work with PADME to introduce the health education intervention to half of the villages they serve.  PADME typically markets their services by reaching out both to community leaders and individuals who may be interested in taking out loans, which vary in size with an average amount of nearly $1000 US.[2]  In the villages randomly assigned to receive the intervention, clients will be offered access to credit as well as health education.  In the comparison villages, potential clients will only be offered access to credit.  . The health education will consist of three modules: malaria education, integrated management of childhood diseases, and HIV/AIDS planning. An additional component of the study seeks to better understand the role of gender in microfinance.  In addition to the random assignment of health education services, researchers will also designate villages according to the gender composition of new borrowing groups.   In a random subset of villages, microfinance groups will be mixed-gender, while others will be female only.
     
    Results and Policy Lessons:
    Results forthcoming.


    [2] http://www.accion.org/Page.aspx?pid=659

    Ultra Poor Graduation Pilot in Honduras

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? This 24-month program provides beneficiaries with a holistic set of services including: livelihood trainings, productive asset transfers, consumption support, savings plans, and healthcare. By investing in this multifaceted approach, the program strives to eliminate the need for long-term safety net services. Spanning seven countries on three continents, the Ultra Poor Graduation program is being piloted around the globe. IPA is conducting randomized evaluations in IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana to understand the impact of this innovative model.

    Policy Issue:<--break->
    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Ultra Poor Graduation Pilots attempt to apply a model, developed by BRAC in Bangladesh, which recognizes that the ultra poor need the "breathing space" that is provided by temporary consumption support, but that public funds may be better used to build households’ capacities to maintain a sustainable livelihood. The idea is that this initial assistance, lasting two years, will place households securely on the first rung of the development ladder, which they can then climb with the help of appropriate development strategies. The model incorporates a comprehensive package of services: a productive asset (such as chickens or goats), consumption support, livelihood trainings, healthcare, and financial services. Ideally this wide set of support services will help households to weather any shocks they may face along during their climb out of ultra poverty.
     
    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts. 
     
    Context:
    As the second poorest country in Central America, Honduras suffers from a disparate distribution of wealth with about 60% of its population living below the poverty line[1]. The economy is centered around exports such as bananas and coffee, crops that are susceptible to weather fluctuations.   To aid households struggling to generate income, ODEF and Plan Honduras have joined together to implement the Mejoramiento Integral de la Familia Rural (MIRE).
     
    Description of Intervention:
    Ultra Poor households earning less than 600 Lempiras (about $30 US) each month are identified with a Participatory Wealth Ranking (PWR) during which villagers rate the economic status of all members of the community.  Eligible households are randomly assigned either a treatment or comparison group.  Treatment households receive consumption support in the form of a family garden  and training in two income generating activities including raising livestock (chicken or pigs) and growing crops (bananas or vegetables) production, or operating a pulperia (small grocery store). Participants are monitored throughout the process. 
     
    Female heads of households are required to open a savings account at ODEF and are randomly assigned to one of two savings treatments.  One savings group is incentivized with savings matching biannually equal to 50% of the average account balance while a second treatment group receives monthly direct savings transfers. Both of these treatment groups receive savings incentives valued at 400 Lempiras (about $20 US).
     
    By comparing ultra poor households in treatment villages who do not receive the program with those in pure comparison villages, the study is designed to measure spillover effects. IPA is also conducting qualitative research, consisting of interviews on life histories, family dynamics, and cultural traditions, to better understand the mechanisms by which the program functions.
     
    Results:
    Forthcoming.
     
    For additional information on the Ultra Poor Graduation Pilots, click here.
     
    [1]CIA, “World Fact Book” 

    Evaluating Village Savings and Loan Associations in Ghana

    What type of people participate in Village Savings & Loan Programs (VSLAs)? What impact do these programs have on households and communities?

    Policy Issue:

    Although during the last decades microfinance institutions have provided millions of people access to financial services, provision of access in rural areas remains a major challenge. It is costly for microfinance organizations to reach the rural poor, and as a consequence the great majority of them lack any access to formal financial services.  Traditional community methods of saving, such as the rotating savings and credit associations called ROSCAs, can provide an opportunity to save, but they do not allow savers to earn interest on their deposits as a formal account would.  In addition, ROSCAs do not provide a means for borrowing at will because though each member makes a regular deposit to the common fund, only one lottery-selected member is able to keep the proceeds from each meeting.

    Village Savings and Loan Associations (VSLAs) attempt to overcome the difficulties of offering credit to the rural poor by building on a ROSCA model to create groups of people who can pool their savings in order to have a source of lending funds.  Members make savings contributions to the pool, and can also borrow from it.  As a self-sustainable and self-replicating mechanism, VSLAs have the potential to bring access to more remote areas, but the impact of these groups on access to credit, savings and assets, income, food security, consumption education, and empowerment is not yet known. Moreover, it is not known whether VSLAs will be dominated by wealthier community members, simply shifting the ways in which people borrow rather than providing financial access to new populations.

    Context of the Evaluation:

    The Northern region of Ghana is one of the least developed parts of the country.   The majority of its residents make their living in agriculture.  Services including mail delivery, telephone, and medical clinics are very limited in this sparsely populated part of Ghana.

    Description of Intervention:

    In Ghana, researchers are working to measure the dynamics of self-selection with VSLAs.  This study is conducted with 180 communities selected by our partner, CARE, after being identified as villages in which VSLA programs could be initiated.  Ninety villages were randomly selected to receive the VSLA intervention, and the remaining 90 villages are used for comparison.  For those villages randomly assigned to receive the intervention, a CARE representative will enter the village to meet with residents and begin to form VSLAs there.  Interested participants form groups of 15 to 30 community members, pooling their capital to create a fund from which members can borrow.  Members pay back loans with interest, and savings also earn interest, with the rates determined by the group at its founding.  The CARE representatives initiate the formation of new VSLAs, but the eventual goal of the intervention is to provide the community with the capacity to make these groups self-sustaining by providing training on initiation and administration of new VSLAs.

    Three years after full implementation, a follow up survey will allow researchers to understand who chooses to participate in VSLAs in Ghana, as well as how their lives may be affected as a result.  

    Results and Policy Lessons:

    Results Forthcoming.

    We are also working with CARE to evaluate their VSLA programs in Malawi and Uganda.

    Financial Literacy, Short-run Impatience, and the Determinants of Saving and Financial Management in Chile

    Previous research suggests that many people lack the skills needed to calculate expected returns or present discounted values, which may cause them to make suboptimal financial decisions.  Previous work by Hastings and Tejeda-Ashton in Mexico showed that the way that returns to a pension program were presented (in pesos versus as an annual percentage) affected price sensitivity.  Another explanation offered for sub optimal financial decisions is the present bias of many decision makers, who are impatient and consistently choose immediate gratification instead of a more measured approach that allows for optimal saving for future consumption. 

    This project makes use of the biannual Encuesta de Protección Social (Social Protection Survey, EPS), a nationally representative panel survey of 17,000 households, to undertake two experiments that seek to better understand the determinants of saving and financial management decisions. 

    Chile has had a privatized national defined contribution system since 1981, in which participants can select which of five fund managers will handle their retirement accruals. Workers select the fund in which to place their money, and the government provides published statistics on load fees and past returns.  In the first experiment, we will provide information on returns net of fees to individuals in one of these randomly-assigned formats: either expected pension account gains or expected pension account costs over a ten year period, and either presented in Chilean pesos or in Annual Percentage Rates. Participants will view the information and be asked to indicate how they would rank the funds. They will then be given the information sheet to keep.  Using dministrative data in the Chilean pension system, we will track the impact this information has on the fund people choose.

    The second experiment will allow researchers to create a measurement for the participants' ability to delay gratification. We will use this measure to examine how well this ability to forgo current gratification to gain higher returns later explains pension investment decisions, weight and health investments, and propensity to spend on impulse products and carry credit card debt.  At the end of each survey, the participant will be asked to participate in an additional survey that will earn them a git certificate to the largest grocery store chain in Chile. They can choose to do the survey now for a set amount reward, or do the survey within the following month, and upon mailing it back receive a higher credit to the card.  The difference between immediate payment and future payment will be randomized so that the return on waiting ranges from 20 to 60 percent.  Links to both EPS and grocery store data (including store credit cards) will allow us to track future pension and consumption decisions and draw conclusions based on revealed ability to delay gratification.

    Trust and Microfinance in Poor Communities in Peru

    We evaluate a novel microfinance model in which new customers need to gain sponsorship by an existing customer. We investigate how relationships between individuals and social networks impact repayment behaviour. This individual lending program screens clients and enforces good practices much in the same way as more traditional group lending does, but allows microcredit to be extended to those who might not qualify or be interested in a group liability loan.

    See here for a similar study in the Philippines.

    Policy Issue: 

    Microfinance has generated worldwide enthusiasm as a potential catalyst for economic development and poverty reduction. The success of microcredit in providing access to capital without increasing default rates, despite a lack of physical collateral, was originally attributed to the group liability model, in which groups of people are jointly responsible for one another’s loans. However, as the microfinance industry grows and becomes more competitive, institutions must strive to develop new financing methodologies that keep institutional costs low while also extending access to credit. A major problem in microfinance is reaching borrowers who don’t qualify for or are not interested in communal, group liability, banks. Thus, different microfinance structures are needed that reach the poor with individual loans, while still harnessing some of the screening and enforcement benefits of group lending.

    Context of the Evaluation: 

    Since returning to democratic leadership in 1980, Peru has struggled to regain economic stability and growth. Currently, 44% of its 29 million people live in poverty.1 This plight has driven many rural residents to the outskirts of Lima in search of work, where they make their homes in self-built shantytowns that surround the city’s center. These shantytowns now contain a large proportion of Lima's inhabitants, and their residents have limited access to formal financial services such as savings accounts or loans. This study is located in fairly diverse shanty communities in Ancash, just north of Lima. The economy of these communities is primarily based on mining of gold, copper and zinc and fishing.

    Details of the Intervention: 

    In collaboration with PRISMA, a Peruvian NGO offering credit through village banks, researchers designed and implemented a new loan product and administered surveys to 9,000 shantytown households. This program sought to use social connections to screen for responsible clients, outside of the traditional group lending model, by requiring new clients to match up with sponsors who were already bank clients in order to obtain a loan.

    Existing communal bank members acted as a pool of potential sponsors who can cosign small, individual loans for residents of the community who are not already bank members. The sponsor was responsible for repaying a loan if the client defaulted, and thus they were incentivized to cosign with more responsible individuals whom they could easily monitor. Each adult household member in the village received a card, which outlined the rules of the program and included a list of all sponsors in the community as well as a map of the community showing sponsor location. Both spouses of a sponsoring household and a borrowing household had to act as co-signers.

    The two pilot shantytown communities consisted of 282 households with 26 sponsors, and 371 households with 25 sponsors, respectively. Social network surveys conducted in the communities before the implementation of the loan program allowed researchers to map the relationships between clients and sponsors. Researchers measured the strength of connections between individuals by time spent together per week, and whether individuals were considered trustworthy. Interest rates were randomly assigned between 3% and 5% a month across all client-sponsor pairs, in order determine whether the interest rate or the social distance from one’s sponsor had a greater impact on the likelihood of default.

    Results and Policy Lessons: 

    Reporting early results from the two pilot communities, researchers found that close social relationships and geographic closeness between sponsor and client effectively improves trust between agents, reducing the likelihood of default and the risk of cosigning such a loan. Estimates of the relative effectiveness of interest rates and social connections at reducing defaults suggest that lending with a close neighbor reduces the likelihood of default by the same amount as a 3-4 point decrease in the interest rate.

    These findings underscore the prediction on which the program was founded, namely that borrowers with close social relationships to their sponsors allow the bank to be more certain that this new client will repay their loan. Increased information from close social relationships ensures the sponsor, and thus the lender, knows what risk each client represents, and can act to minimize that risk. This individual program therefore effectively screens clients and enforces good practices much in the same way group lending does, and allows microcredit to be extended to those who might not qualify or be interested in a group liability loan.

    1 CIA World Factbook, “Peru,” https://www.cia.gov/library/publications/the-world-factbook/geos/pe.html.

    Health Education for Microcredit Clients in Peru

    Policy Issue:

    Health and education are areas affected by poverty.  Households with limited resources face barriers affording quality education and seeking access to health information.  As microfinance has become a popular development tool, its services have expanded to address other issues associated with poverty.   Credit with Education is one model that provides microfinance clients with training services. By simultaneously addressing needs for financial services and health information, these programs attempt to create synergistic positive effects on clients and their families.

    Context:

    Peru is a developing country rife with healthcare challenges. According to the World Health Organization, children have a 25% chance of dying before reaching the age of 5[1]. A lack of knowledge about preventable illness like diarrhea and access to immunization contributes to poor health status of vulnerable families.

    PRISMA,  a microfinance institution lending to over 20,000 clients, partnered with IPA to provide microfinance with health education[2].  Freedom from Hunger, an NGO that provides supportive services for the poor, provided guidance to PRISMA in developing an education program based on its worldwide Credit with Education module.

    Description of the Intervention:

    PRISMA village banks were randomly assigned to either a treatment or comparison group. During eight monthly bank meetings, villagers belonging to treatment banks received health education trainings from loan officers, trained by Freedom from Hunger and PRISMA.  The trainings included the following topics focusing on child and maternal health: common childhood illnesses, four danger signals (e.g. diarrhea, cough, fever), medical exams, indicators of quality medical visits, and care for sick children. Surveys administered before and after the trainings collected data on height, weight and hemoglobin ( to measure anemia), days absent from work due to illness, and child nutrition patterns. Institutional outcomes like client retention and repayment rates were also measured.

    Results and Policy Lessons:

    Adults who received the health education training had significantly higher levels of knowledge of module content than those in the comparison group.   There was no impact on health outcomes for children or institutional outcomes.



    [1]World Health Organization, “Peru,” http://www.who.int/countries/per/en/.

    [2]Prisma, “Microfinanzas, ” http://www.prisma.org.pe/#cabecera.

    Group versus Individual Liability for Microfinance Borrowers in the Philippines

    Microcredit has become a popular anti-poverty policy in the last decades. Now with more than 150 million borrowers, microcredit has undoubtedly increased access to formal financial services for the poor.

    Policy Issue:

    Microcredit has become a popular anti-poverty policy in the last decades. Now with more than 150 million borrowers, microcredit has undoubtedly increased access to formal financial services for the poor. An extensive debate exists about the advantages and disadvantages of group liability, where a group of individuals are all responsible for each others’ loans if one member defaults, versus individual liability, where only the borrower is at risk if they default. Group liability may improve repayment rates but it also raises the possibility that bad clients will take advantage of good clients in their liability group.

    While individual liability lending may address some of these issues, it also has potential drawbacks in the form of less intensive screening of members, and higher default rates due to the lack of member responsibility to cover group members’ loans. Additionally, credit officers may spend more time in securing payment or using a more intensive and time-consuming credit investigation and background checks.  

    Context:

    In the Philippines 25% of the population live below the national poverty line[1], and many depend on small and individual enterprise for their livelihood. The islands of Leyte, Cebu, and Bohol, where this study takes place, host a wide range of economic activities, including farming, fishing, manufacturing, and commerce. As is true in much of the Philippines, most of this area has been heavily penetrated by microfinance institutions. Rural banks, cooperatives, and NGOs offer both individual- and group-liability microcredit loans and competition is strong. Most of the lending centers involved in this study are located in small towns or rural villages, though some are located in mid-sized cities. The majority of the members of the Green Bank of Caraga, the sample of this study, are microentrepreneurs engaged in small-scale sales or activities such as tailoring, food processing, and small-scale farming. The average loan size for this sample is US$116), not an insignificant amount when compared against the Philippines GDP per capita of $3,300.[2]

    Description of Intervention:

    Researchers examined two trials conducted by the Green Bank of Caraga to evaluate the effects of group liability relative to individual liability on monitoring and enforcing loans.

    In the first trial, a randomly selected half of the bank’s 169 existing group-lending centers on the island of Leyte were converted to the individual liability model, phased in over time.Researchers could then isolate the impact of group liability on behavior through peer pressure by comparing the repayment behavior of existing clients in group-liability centers and converted individual liability centers. Centers were then assigned to comparison, individual liability or staggered individual liability (the first loan for each member is covered by group liability, but subsequent loans have individual liability). Critical to the design is the fact that individual-liability centers were converted from existing centers, and not newly created. By comparing the repayment behavior of existing clients in group-liability centers and converted centers, researchers were able to isolate the impact of group liability on employing peer pressure to mitigate moral hazard. 

    In the second trial, the sample consisted of 124 randomized communities in areas where the bank was not yet operating. Once feasible villages were identified, an independent survey team conducted a business census, a household roster, and a social network survey. Each of these villages was randomly assigned into one of three treatment groups before the bank established lending centers: liability program, individual-liability program, and group-liability program converted to individual-liability after the first cycle.

    Results:

    After three years, researchers found that individual liability compared to group liability leads to no change in repayment rates (clients in individual liability centers were no more likely to default than their peers in group liability centers) in the short as well as the long term. The removal of joint liability resulted in larger lending groups, hence further outreach and use of credit but the average loan size was smaller, leading to no change in overall group profitability. Loan sizes in converted groups were lower because members were more likely to withdraw savings, lowering their capacity to borrow. Under individual liability, members were also less likely to be forced out of their center, because they could only be removed by credit officers—not peers. Thus, individual liability made existing centers 13.7 percentage points less likely to be dissolved.

    Bank officers in new areas were lesswilling to open groups despite the fact that there had been no increase in defaults. This constrained the growth of the lending program.




    [1] United Nations Human Development Report, “Human Development Indices,” http://hdr.undp.org/en/media/HDI_2008_EN_Tables.pdf (accessed August 25, 2009).

    [2] As of 2008. CIA World Fact Book, “The Philippines,” https://www.cia.gov/library/publications/the-world-factbook/geos/rp.html , (accessed Nov, 20, 2009).

     

    Business Education for Microcredit Clients in Peru

     
    Policy Issue:

    Microfinance has generated worldwide enthusiasm as a potential answer to economic development and poverty reduction. But high default risk and unproductive use of loaned funds plagues many programs. A significant debate exists within the microfinance community as to whether lenders should focus solely on the lending business, or whether they should take advantage of the frequent meetings to integrate various types of training and improve microfinance outcomes. Integrating trainings on health or good business practices with group meetings poses a unique opportunity to deliver these services at minimal cost, but requires clients to spend more time at regular meetings, potentially leading to a higher dropout rate.

     
    Context of the Evaluation: 

    Of Peru’s 29 million people, almost half live in poverty,1 and microfinance institutions (MFIs) hope to improve the socio-economic situation of this population through the promotion of village banking. FINCA Peru, a small, non-profit, but financially sustainable MFI that has been operating in Peru since 1993 creates village banks for poor, female microentrepreneurs, giving them access to formal financial services. Their clients are relatively young, have little formal education and often have families to support. All clients have microenterprises, which may include selling food or handicrafts, or small scale agriculture. FINCA clients each hold, on average, $233 in savings and their average loan is US$203, with a recovery rate of 99%.

     
    Details of the Intervention:

    Researchers worked with FINCA in Ica and Ayacucho, Peru to measure the marginal impact of adding business training to a group lending program. FINCA sponsored 273 village banks with a total of 6,429 clients, most of whom were women. These banks were divided into treatment groups and comparison groups, with 104 mandatorily participating, 34 voluntarily participating, and 101 as the comparison.

    Individuals who held accounts at treatment banks received 22 entrepreneurship training sessions and materials during their normal weekly or monthly banking meeting. Training materials were developed through a collaborative effort between FINCA, Atinchik and Freedom from Hunger and had been used in past projects. Sessions included exercises and discussion with the clients, and a lecture which aimed to improve basic business practices such as how to treat clients, how to use profits, where to sell, and the use of special discounts and credit sales. For example, in one lesson the trainers had each microentrepreneur write out a budget for their enterprise. Comparison groups remained as they were before, meeting with the same frequency to make loan and savings payments. Data was collected on dropout rates, repayment rates, loan size, savings, business size and income to asses the impact of the training.

     
    Results and Policy Lessons:

    Impact on Business Practices: There was weak evidence that the training may have helped clients identify strategies to increase sales and reduce downward fluctuations: for clients in the treatment group, sales in the month prior to the follow up surveys were 15 percent higher than in the comparison group, and returns were an average 26 percent higher in "bad months" when they would have expected downward fluctuations in their sales. Clients who received business training were significantly more likely to keep records of their account withdrawals, and had better knowledge about business and how to use profits for business growth and innovation. Interestingly, there were actually larger effects for those individuals that expressed less interest in training at the outset of the program. This result implies that demand-driven market solutions may not be as simple as charging for the cost of the services. It is possible that after a free trial, clients with low prior demand would subsequently appreciate its value and demand the service.

    Impact on Business Outcomes: This study found little or no evidence of changes in key business outcomes such as business revenue, profits or employment.. For example, the business training had no effect on the number of workers employed at family businesses, did not change the profit margin of the most common products sold at retail businesses, did not increase the number of sales locations, and did not induce entrepreneurs to start new businesses. 

    Impact on Institutional Outcomes: Business trainings had effects on some institutional outcomes such as client retention, but not on others such as loan size or accumulated savings. Perfect repayment among treatment groups was three percentage points higher than among comparison groups. Treatment group clients were four percentage points less likely to drop out of the program (either permanently or temporarily) than were comparison group clients, although the proportion of client dropout still remained high in the treatment group, where 59 percent of clients left their banks at some point during the intervention, compared to 63 percent in the comparison group. The training is costly to run, as it requires labor costs for the organization to train their staff and acquire materials. This constituted a 10 percent increase in FINCA’s costs. However, the improved client retention rate generated significantly more increased net revenue than the marginal cost of providing the training, and so all in all providing business trainings was still a profitable undertaking for FINCA.

    1 CIA World Factbook, “Peru,” https://www.cia.gov/library/publications/the-world-factbook/geos/pe.html.

     
    Selected Media Coverage:

    Evaluating the Saving for Change Program in Mali

    While informal savings groups are common around the developing world, their formats can limit flexibility in responding to members’ needs, particularly when it comes to loans or coping with unexpected expenses. In Mali, Oxfam’s Saving for Change (SfC) program allows groups of women to form a savings group together. Members can also apply for loans from the group, to be paid back with interest. When the group ends, the pool of funds with the loan interest is redistributed to the members. In 200 villages in the Segou region where SfC was implemented, women were 5 percent more likely to be part of a savings group, and savings were 31 percent higher than in the 300 comparison villages without the program. Households in those villages experienced better food security, and had more livestock, but there were no significant differences observed in a number of other economic and social well-being outcomes.
     
    Policy Issue:
    Community-based methods of saving, such as Revolving Savings and Credit Associations (ROSCAs), can offer informal savings and credit options where access to formal financial services is limited. Under this system, a group of individuals meet regularly to contribute to a fund that is then given as a lump sum to a different member at each meeting. However, ROSCAs can be an inflexible means of borrowing since the pool of funds is fixed and is given to only one member at a time, often by lottery. As such, members cannot necessarily rely on ROSCA payouts to cover unexpected expenses, such as those due to illness or natural disasters. One way to overcome these challenges may be to encourage savings and credit groups to adopt flexible rules that cater better to the needs of their members. Additional research is needed to understand how to better organize ROSCAs and whether they enable participants, especially the poorest, to save and borrow more.
     
    Context of the Evaluation:
    The Saving for Change (SfC) program began in Mali in 2005 to assist women in organizing themselves into simple savings and credit groups. The program is meant to address the needs of those who are not reached by formal financial service providers or traditional ROSCAs. As part of the program, about twenty women voluntarily form a group that elects officers, establishes rules, and meets weekly to collect savings from each member. At meetings, each woman deposits a previously determined amount into a communal pool, which grows in aggregate size each time the group meets. When a member needs a loan, she asks the group for the desired amount; the group then collectively discusses whether, how, and to whom to disperse the funds. Loans must be repaid with interest, at a rate set by the members, and the interest collected is also added to the communal pool of funds. Saving for Change introduced a novel oral accounting system which helps the women manage each woman’s debts and savings totals.
     
    At a predetermined date, the group divides the entire pool among members in proportion to their savings contributions. The timing can coincide with times of high expenditure, such as festivals or the planting season. The interest from the loans generally gives each member a return on her savings of approximately 30 percent, annually. The group can then start a new cycle and establish new rules.  Groups sometimes opt to increase their weekly contributions, accept new members, or select new leaders.
     
    Unlike formal lenders, SfC group members lend their own money, so collateral is not required. The fact that all money originates from the women themselves, as opposed to outside loans or savings-matching programs, also increases the incentives to manage this money well. In addition, the program is designed to be self-replicating through “replicating agents” in each village.Once the first group is established in an area, members themselves become trainers and set up new groups in their village and the surrounding area.  
     
    Prior to the study, approximately 22 percent of women in the sample area were members of ROSCAs and over 40 percent of households had experienced a large, unexpected fluctuation in income or expenditure during the last 12 months.
     
    Details of the Intervention:
    In order to test the impact of the SfC program as well as different strategies for encouraging replication, researchers randomly selected 500 villages in the Segou region of Mali  to participate in the study. These villages were randomly divided into two treatment groups of about 100 villages each, and one comparison group with nearly 300 villages. The first treatment group received the SfC program with a structured, three-day training for replicators who received a handbook on how to start and manage savings groups. The second treatment group received the SfC program with an informal, organic training program in which trainers answered questions but did not provide any formal instruction to replicators. The comparison group did not receive the SfC program.
     
    Results and Policy Lessons:
    Adoption of SfC: Nearly 30 percent of women in treatment villages joined a savings group as part of the SfC program. Those women who chose to participate in the SfC program were, on average, older, more socially connected, and wealthier than non-members. Take-up was higher in villages that received the structured training program than in those that received the informal training.
     
    Savings and Loans: Women in treatment villages were 5 percentage points more likely to be part of a savings group, and average savings in treatment villages increased by US$3.65 or 31 percent relative to the comparison villages. The SfC program also significantly increased women’s access to credit. Women in the treatment villages were 3 percentage points more likely to have received a loan in the past 12 months, and this loan was more likely to have come from a savings group rather than from family and friends.
     
    Resilience to income shocks: Households in the villages receiving SfC were 10 percent less likely to be chronically food insecure than those in control villages. In addition livestock holdings increased, and households in treatment villages owned on average US$120 more in livestock than those in comparison villages, a 13 percent increase. In Mali, owning livestock is a preferred way to store wealth and mitigate against risks such as drought or illness.
     
    Structured vs. Organic Replication: Villages that received structured replication training rather than informal training had higher participation rates in SfC. In addition, households in those villages were less likely to report not having enough food to eat and more likely to report owning assets such as livestock. Even though the structured training program was slightly more expensive to implement, it delivered greater benefits to villages assigned to that version of the SfC treatment.
     
    Researchers did not find any significant effects of the program on health outcomes, school enrollment, investment in small businesses or agriculture, or women’s empowerment. 

    Impact of Rural Credit in Peru

    Few studies have rigorously quantified the impacts of microcredit loans or determined the sensitivity of borrowers to interest rate pricing. In cooperation with the Peruvian microfinance institution ARARIWA, IPA is investigating the impact of microloans on the whole as well as determining the demand curve for microcredit.

    For the study, areas in Cuzco are divided into one of three groups: a control group with no access to credit during the 24 months of the study, a treatment group that will receive credit offers at a lower interest rate, and treatment group that will receive credit offers at a higher interest rate. Data is being collected to analyze the take-up of microcredit loans, changes in socioeconomic levels, and borrower sensitivity of interest rates.

    Dean Karlan

    Deposit Collectors in the Philippines

     

    Policy Issue: 

    In the last three decades, microfinance has generated worldwide enthusiasm as an innovation in anti-poverty policy by bringing formal financial services to the poor. But relatively little is known about the asset side of microfinance services – microsavings. Deposit-collection services, regular pickup of cash with unrestricted rights to withdraw it later, are a popular tool among both microfinance lenders and clients across the globe. Savings programs provide banks with a mechanism to learn more about potential lending clients, and for clients, the reward of a future loan may be incentive enough to encourage them to save regularly via the service. A high demand for formal savings mechanisms also implies that in-home solutions, such as hiding money in a mattress, are not satisfactory to people. But, it is yet unclear whether deposit-collection services will actually be utilized to generate higher savings rates than the status quo. 

     

    Context of the Evaluation: 

    Over the past several decades, savings in the Philippines has largely stagnated. In the 1960s, domestic savings rate was over 20 percent of GDP, making it one of the highest in Asia. At present, the country's savings rate hovers between 12 and 15 percent - far below the level of savings for most East Asian countries, which ranges from 25 to 30 percent. However, there is evidence that poor and low-income Filipinos do save, or at least have the capacity to do so, and informal savings mechanisms appear to be widespread throughout the country. In an effort to provide formal savings options to their microfinance clients, the well-established Green Bank of Caraga developed a deposit collection service. Sampled bank clients represent a wide cross-section of the Philippines, including individuals from broad economic and educational backgrounds.

     
    Details of the Intervention: 

    Researchers evaluated the impact on savings balances and borrowing behavior from a deposit-collecting program offered by the Green Bank of Caraga. To gain insight into the mechanisms that might cause increases in savings rates, and the type of individuals who demand this specialized savings service, researchers investigated the determinants of take-up.

    Green Bank first identified ten barangays (small political and community units) that were reasonably accessible and had a significant enough number of existing clients to warrant sending an employee into the area. These barangays were located around Butuan City in northern Mindanao, where the head office of the Green Bank is located. Green Bank marketing representatives were able to reach 137 existing clients' homes in five randomly selected treatment barangays. A door-to-door deposit-collector service was offered, which would collect funds to be deposited at the local bank. The cost of the service was 4 pesos per pickup, and clients could choose either a monthly or bi-weekly pickup schedule. If clients chose to participate, they committed to pay for the pick-up service regardless of whether they submitted a deposit, although this was not always enforced. The remaining five barangays were offered no collection services, serving as the comparison. In both treatment and control barangays, clients could withdraw their funds at any time. 

     

    Results and Policy Lessons: 

    Take-Up Determinants: Distance to the bank branch, a measure of the transaction cost that a client incurs by depositing money normally, was a strong determinant of take-up. Each additional 10 kilometers a client had to travel to make a deposit increased the probability that they would enroll in the deposit collection service by 6 percentage points. Additionally, married women were more likely to take up the service relative to single women - being married increased the probability that a woman would take-up the service by about 13 percent. However, married men were no more likely than single men to take up the service. The gender difference suggests that intra-household decision making factors play a strong role in the take-up of deposit-collection services.

    Impact on Take-Up: The deposit-collection service resulted in a substantial increase in savings for those offered the service. Of the 137 clients offered the service, 28 percent took up the deposit collection. Of those 38 individuals, 35 chose monthly service, though 18 never deposited money through the collectors during the 10-month study period. Despite the wide variance in the impact on savings of the deposit-collection, on average, the impact was positive relative to savings changes of clients in the comparison barangays. The deposit-collection service increased savings by about 25 percent after 10 months. The average person made 3.85 deposits over the 10 month period, and the average deposit amounted to 497 pesos. Overall, after 10 months treatment clients saved 228 pesos more than the comparison. These results could be attributed to decreased transaction costs, facilitating follow through on financial planning and providing a public commitment device for limiting spending, among other explanations. Further, there was a slight decrease in borrowing for those clients offered the deposit-collection service, possibly due to the increase in assets. 

    1 Lavado, Rouselle F., "Effects of Pension Payments on Savings in the Philippines," International Graduate Student Conference Series, East-West Center. Nov 23, 2006. http://www.eastwestcenter.org/fileadmin/stored/pdfs/IGSCwp023.pdf (Accessed November 4, 2009)

    Commitment Savings Products in the Philippines

    We evaluate a unique "commitment" savings account, in which individuals restrict their right to withdraw funds until they have reached a self-specified goal. Clients are also given the option to automate transfers from a primary account into the commitment savings account, and given the option of buying a lockbox to store their money, with only the bank possessing a key. The account helped people save more after one year, and increased decision making power for women in the household.

     
    Policy Issue: 

    A growing literature on intra-household bargaining finds that increases in female share of income, regardless of any other changes, can provide women with more power within the household. This can lead to an allocation of resources that better reflect preferences of women, including education, housing, and nutrition for children. Many development interventions have thus focused on transferring income as a way of promoting empowerment, and argue that these empowerment mechanisms justify increased attention and financing to microfinance institutions (MFIs), perhaps including subsidies. However, there is little rigorous evidence to confirm that expanding financial access and usage can promote female empowerment.

     
    Context of the Evaluation: 

    Over the past several decades, savings in the Philippines has largely stagnated. In the 1960s, the domestic savings rate was over 20 percent of GDP in the Philippines, making it one of the highest in Asia. At present, the country’s savings rate hovers between 12 and 15 percent – far below the level of savings for most East Asian countries, which ranges from 25 to 30 percent.  Low savings are believed to contribute to the country’s slow economic growth compared to the rest of the region. Past studies have led to a belief that Filipinos are consumption-oriented, with little desire or capacity to save. Filipinos are believed to use credit primarily for daily needs, and bankers report that salary deposits are often withdrawn within the same day. However, there is evidence to suggest poor and low-income Filipinos do save, or at least have the capacity to do so, as informal savings mechanisms appear to be widespread throughout the country.

     
    Details of the Intervention: 

    The Green Bank of Caraga, along with researchers, designed and implemented a commitment savings product called a SEED (Save, Earn, Enjoy Deposits) account. The SEED account provides individuals with a commitment to restrict access to their savings, thus potentially helping with either self-control or family-control issues. Each individual defines either a goal date or amount, and is subsequently unable to withdraw from the account until the goal is reached. Other than providing a possible commitment savings device, no further benefit accrued to individuals with this account: the interest rate paid on the SEED account is identical to the interest paid on a normal savings account (4 percent per annum).

    Researchers trained a team of marketers hired by the partnering bank to visit the homes or businesses of existing bank clients in the commitment-treatment group, to stress the importance of savings to them. This process included eliciting the clients’ motivations for savings, and emphasizing to the client that even small amounts of saving make a difference; marketers then offered them the SEED product. Another group of individuals (the marketing-treatment group) received the exact same marketing script, but was not expressly offered the SEED product. 

    The field experiment sample consists of 1,777 Green Bank clients who have savings accounts in one of two bank branches in the greater Butuan City area, randomly selected for the baseline interview. A second randomization assigned these individuals to three groups: commitment-treatment (T), marketing-treatment (M), and comparison (C) groups. One-half the sample was assigned to T, and a quarter of the sample was assigned to each of groups M and C.

    After one year, a follow-up survey was conducted to assess (1) inventory of assets (to measure whether the impact on savings represented a net increase in savings or merely a crowd-out of other assets); (2) impact on household decision making and savings attitudes; and (3) impact on economic decisions, such as purchase of durable goods, health and consumption.

     
    Results and Policy Lessons: 

    Savings Product Take-up: Twenty eight percent of those who were explicitly offered the SEED product opened an account. After twelve months, about half the clients had deposited money into their account beyond the initial opening deposit, and one third regularly made deposits. It appears that SEED helped about 10 percent of the treatment group to save more.

    Impact on Savings Balances: For the commitment savings group, average savings balance increased by 42 percent after six months and by 82 percent after one year. This increase in savings also does not appear to crowd out savings held outside of the participating bank. 

    Household Decision Making Power: The SEED product leads to more decision making power for women in the household, and likewise an increase in purchases of female-oriented durable goods. The outcome was measured as a decision-making indicator, calculated as the average of responses across nine decision categories (expensive purchases, assistance given to family members, recreational use, etc). Findings indicate that assignment to the treatment group leads to between 0.14 and 0.25 standard deviation increase in a decision making index. 

    Self-Perception of Savings Behavior: Results also indicate that the SEED product leads women who report themselves as favoring present consumption over future consumption in a baseline survey to self-report being a disciplined saver in the follow-up survey. The results here suggest that commitment features, in particular loss of liquidity combined with sole control of the account, are particularly appealing to people with greater self-control and have positive impacts on female decision-making power.

    1  Lavado, Rouselle F., “Effects of Pension Payments on Savings in the Philippines,” International Graduate Student Conference Series, East-West Center. Nov 23, 2006. http://www.eastwestcenter.org/fileadmin/stored/pdfs/IGSCwp023.pdf (Accessed November 4, 2009)

     

    Selected Media Coverage:
    Sticking to It - Project Syndicate
    Rationalizing Resolutions - Business Spectator
     

    The Psychology of Debt: An Experiment in the Philippines

    Policy Issue:

    In many developing countries it is common for street vendors or small-scale entrepreneurs to borrow small amounts of money for their working capital at very high rates of interest.  Over time, these interest rate payments can amount to a burdensome proportion of a vendor’s take-home profit. But if vendors saved small amounts of money over time, they may be able to build up a buffer of savings large enough to stop the practice of borrowing money from informal lenders. It is unclear, though, whether vendors may persist in borrowing due to lack of information about the benefits of saving and whether a financial literacy invention could benefit these entrepreneurs.

    Context:

    In urban markets in the Philippines, like the large covered market in Cayagan do Oro, street vendors are prevalent and often borrow from informal moneylenders at high rates of interest. Vendors in this study all ran their own businesses, had a history of indebtedness at interest rates of at least 5% per month over the previous 5 years, and had an outstanding debt of less than 5,000 pesos (US$100). Vendors were included in the study only if they met these conditions and operated a business in or near the public market in Cagayan de Oro.  Vendors most often used their loans to expand or maintain their current businesses.

    Description of Intervention:

    Researchers tested two interventions to help break the cycle of debt. After an initial baseline survey to gather information on history of debt, household consumption and financial literacy, 250 vendors were randomly assigned to one of four groups. They either (1) had their outstanding debt paid off, (2) were given financial literacy training, (3) received both, or (4) received nothing (comparison).

    For the debt payoff intervention, researchers gave respondents money equal to their previously reported debt and had them payoff their outstanding balances (an average of about $47). For the financial literacy intervention, researchers developed a script modeled after Freedom from Hunger’s financial literacy module. Partner staff conducted a single financial literacy session with respondents in small groups of about 16 people that focused on the benefits of savings, the long-term costs of repeated borrowing from moneylenders, the value of planning in advance and saving for large expenses, and the advantages of borrowing from formal lenders (like microfinance institutions or banks) at lower interest rates.

    A set of follow-up surveys were administered after 1 month, 2 months and 3 months and an endline survey was administered between 19 and 21 months after the baseline survey.  The baseline survey was administered in early July 2007 and the endline survey was administered between February and April 2009.

    Results:

    Results forthcoming. A follow-up study is being conducted to replicate the results, expand the sample, and assess the impact of adding a savings component to the debt forgiveness intervention. This component consists of offering a savings account with no starting fees and initial deposits subsidized by IPA.

    See here for a similar study in Chennai, India.

    Savings Account Labeling for Susu Customers in Ghana

    IPA is working with Mumuadu Rural Bank (MRB) to study the response to and impact of a new account labeling savings product. Working with Susu customers and Susu agents, the study compares the success of this new product with the current Susu savings product. The new savings product has only a psychological difference: it allows the labeling of funds within an account so that deposits can be directed to a specific goal, such as health, education or business savings.
     
     
    Policy Issue:
    Saving is hard for most people, rich or poor, educated or not. Setting aside even small sums of money on a regular basis requires a conscious trade-off between buying something now in favor of achieving long-term goals, and even the most prosperous struggle to translate this intention into sustained savings. Saving may be especially difficult for poor individuals, as daily needs and family obligations may distract attention from meeting savings goals.
     
    Poor individuals not only have less income, but often face additional barriers to savings. They tend to be the least educated about their financial options, have the least access to secure financial institutions and are the least able to afford financial mistakes. Due to a variety of challenges, savings rates are quite low across the developing world and individuals often go into debt to maintain family well-being.
     
    Context of the Evaluation:
    Ghana's Eastern Region has a vibrant microfinance sector populated by a wide range of formal and informal institutions, and uniquely characterized by a prevalence of "Susu" collectors: traditional savings collectors who walk a daily path through town to collect Susu, "small small moneys", from their customers. Typically, Susu collectors return the funds to their customers at the end of the month in exchange for one day’s worth of collections.
     
    As banks moved into rural areas, they have formalized Susu collection, paying their agents on commission and not charging their customers a direct fee for the service. Competition between banks is highly visible in the urban marketplaces where Susu agents, clothed in the bright batiks of their respective institutions, fight for the patronage of the same group customers.
     
    Description of Intervention:
    Researchers collaborated with Mumuadu Rural Bank (MRB) in the Eastern Region of Ghana to test the impact of a new type of savings account aiming to help clients save by focusing attention on savings goals. The evaluation seeks to understand if a purely psychological savings product, which encourages customers to earmark account funds for a specific financial goal, increases savings rates.
     
    Study participants were active savings customers of Susu agents at Mumuadu Rural Bank in five urban and rural communities across Eastern Region in Ghana. Among them, half were randomly selected to receive an offer of the labeled savings account, while the remaining customers continued to access existing savings services from the bank. The new labeled account shared all the characteristics of the regular Susu account with the addition that customers could “label” funds for particular expenditures, such as buying a house or paying children’s school fees. After labeling the account, customers stated how much they planned to save over the next six-month period. The bank provided each customer with a free passbook that had the personal savings goal written on the front as a reminder.
     
    Mumuadu Rural Bank staff were responsible for maintaining the accounts once they had been opened and Susu agents continued their normal rounds, collecting funds for the labeled account alongside the regular Susu savings accounts. Researchers tracked the take-up of the new product and savings activity over six-months among all participating customers.
     
    Preliminary Results:
    Preliminary results found that customers with a labeled Susu savings account show a 31.2 percent increase in total deposits after nine months of account operations as compared to Susu customers without the labeled account. This increase is statistically significant across the five study branches, though the effect size varied in each community.
     
    Over the study period, withdrawals by customers with the labeled account were not significantly higher than customers without the labeled account, indicating that these funds provided a stable source of additional capital for Mumuadu Rural Bank. While customers with labeled accounts showed greater savings rates, there was no difference in their expenditure patterns from regular Susu customers.
     
    Additional data is currently being collected and analyzed to determine if these impacts are sustained and if there are identifiable trends in the timing of deposits and withdrawals.

    Interest Rate Sensitivity Among Village Banking Clients in Mexico

     
    See the full results in an executive summary here and the full paper here (PDFs).
     
    Policy Issue: 

    Microcredit is the most visible innovation in anti-poverty policy in the last half-century, and in three decades it has grown dramatically. Now with more than 150 million borrowers, microcredit has undoubtedly been successful in bringing formal financial services to the poor. This practice has sparked a debate surrounding the question of “fair interest rates,” particularly given the extreme poverty of many microfinance clients. The arguments in defense of higher rates range from the belief that they are necessary in order to cover the high costs of lending, to access is more important than price and as more institutions enter the market, rates will drop. But these arguments remain untested, and the question of a “fair rate” remains unanswered.  The debate has intensified as investors look to the potential profitability of microfinance.  In 2007, Compartamos Banco, the largest microfinance institution in Latin America, held a successful IPO.  While the bank’s leadership defended the decision as a way to raise capital and provide credit to even more clients and investors including non-profit Acción International reaped the benefits, critics accused the bank of profiting at the expense of the poor.   

    Context of the Evaluation: 

    In 1990, Compartamos Banco began offering credit to women in Southern Mexico in an effort to promote economic development through spurring the growth of micro-businesses. Today, the organization has branches in every state in the Mexican Republic, and has over a million borrowers.  The bank requires all borrowers to have an existing business or plans to start one with the loan proceeds.  There are many microfinance providers in Mexico, and Compartamos loans are neither the cheapest nor most expensive.  

    This study was undertaken in Compartamos branches throughout the country, representing a diverse population living in urban, periurban, and rural locations. The target population, comprised mostly of small-scale merchants who sell handicrafts or food products, also includes owners of more established businesses such as hair salons or restaurants, and people involved in agricultural activities. 

    Details of the Intervention: 

    Researchers sought to observe Compartamos borrowers’ reactions to varying interest rates, in order to determine the impact of loan cost on take-up and borrower behavior.  The study focused on the bank’s most popular product, a group liability loan offered exclusively to woman called Crédito Mujer. In order to borrow, clients must be women, 18 years of age or older and either currently be engaged in an income generating activity or plan to start one once given the loan.  

    As part of the implementation of a new pricing model, Compartamos lowered the interest rates on the Crédito Mujer product for almost all clients.  At treatment branches, they lowered the rates further.  Under normal operations, each branch offers three rates – bronze, silver, or gold – which are assigned to borrowing groups based on the Compartamos pricing model.  Compartamos lowered the interest rates offered at treatment branches so that borrowers at those branches received a flat monthly rate that was .5% less than the same borrowers would have received at comparison branches  For example, a "bronze" borrowing group at a treatment branch received a rate that was .5% less than a "bronze" borrowing group at a comparison branch. 

    Results and Policy Lessons: 

    The results show that branches offering the lower interest rate scenario had more clients, more new clients and larger loan portfolios. The change in cost of borrowing, however, did not attract a different borrower profile.  The new borrowers at treatment branches were not poorer or less educated than existing clients.  The effect of lower interest rates on the financial sustainability of an MFI is also a crucial question.  Attracting more clients may at first glance appear a wholly positive outcome, but its effect on profitability is not obvious.  While adding several group members to an existing borrowing group increases income without increasing costs (because the same loan officer can service these loans in the same meeting), adding new groups may require hiring more personnel or even opening an expansion branch office.  Still, though these new clients resulted in higher costs in some cases, the overall effect on net profits was positive.

    These findings suggest that MFIs that choose to lower rates can both attract and retain more clients, who in turn borrow greater amounts. This has implications for MFIs that are looking to improve their outreach, and can result in more people gaining access to credit and making use of it. And, achieving these goals can also be profitable, in contrast to the arguments put forth by some defenders of high interest rates. 

     

    Interest Rates and Consumer Credit in South Africa

    How sensitive are borrowers to higher interest rates? We worked with a South African lender to randomize both the interest rate offered to clients by a direct mail solicitation, and the maturity of an example loan shown on the offer letter.

    Policy Issue:

    In 2001, more than one billion people were living in extreme poverty, subsisting on less than $1 a day.1 Microcredit can help to alleviate poverty by expanding access to credit, providing the capital necessary to invest in higher education, smooth consumption or start a business. But providing small loans to risky clients in poor settings often yields small profits for lenders, and many microfinance institutions (MFIs) rely on subsidies to stay afloat. Policymakers often call on MFIs to increase interest rates in order to increase profits and eliminate their reliance on subsidies. This strategy makes sense if the poor are not sensitive to higher interest rates; microlenders could increase profitability and achieve sustainability without reducing the poor’s access to credit. Yet existing research offers little evidence on interest rate sensitivities in target markets, and little guidance on how MFIs can derive optimal rates.

    Context of the Evaluation: 

    Cash loan borrowers are prevalent in South Africa. Estimates of the proportion of working-age population currently borrowing in the cash loan market range from below 5% to around 10% and the borrowed funds account for about 11% of aggregate annual income. The for-profit South African lender who collaborated for this study is one bank who provides cash loans in this high-risk consumer loan market. Clients typically use loans for a range of consumption smoothing and investment purposes, including food, clothing, transport, education, housing, and paying off other debt. Cash loan sizes tend to be small relative to the fixed costs of underwriting and monitoring them, but substantial relative to a typical borrower’s income. For example, the lender’s median loan size of approximately US$150 is 32% of its median borrower’s gross monthly income. This lender typically offers “medium-maturity,” 4-month loans, with a 7.75 to 11.75% interest rate per month. Repeat borrowers have default rates of about 15%, and first-time borrowers default twice as often.

    Details of the Intervention:

    Researchers test the assumption that borrowers are not sensitive to higher interest rates by working with this South African lender to randomize both the interest rate offered to past clients on a direct mail solicitation, and the maturity of an example loan shown on the offer letter.

    First the lender randomized the interest rate offered in “pre-qualified,” limited-time offers that were mailed to approximately 58,000 former clients with good repayment histories. Most of the offers were at relatively low rates. Clients eligible for maturities longer than four months also received a randomized example of either a four-, six- or twelve-month loan. Clients who wished to borrow at the offer rate then went to a branch to apply, through the standard bank procedure.

    These clients were from 86 predominantly urban branches and had borrowed from the lender within the past 24 months. They were in good standing, and did not currently have a loan from the lender as of thirty days prior to the mailer. Each mailer contained a deadline, ranging from two to six weeks, by which the client had to respond in order to be eligible for the offer rate. At that time, loan applications were taken and assessed as per the lender’s standard underwriting, and 3,887 individuals were approved for a loan.

    Results and Policy Lessons:

    Price Elasticities: Results reveal demand curves with respect to price that were gently downward sloping throughout a wide range of rates below the lender’s standard ones. But demand sensitivity roses sharply at prices above the Lender’s standard rates. A price decrease from the maximum 11.75% to the minimum 3.25% rate only increased take-up by 2.6 percentage points. However, high rates reduced the number of applicants significantly; clients randomly assigned a higher-than-standard offer were 36% less likely to apply than their lower-rate counterparts. Higher rates also reduced repayment. Thus, an interest rate increase would be unprofitable for this lender. It would produce both a reduction in demand and increased default rates, which would not be compensated by the increase in interest revenue from higher rates.

    Maturity Elasticities: The example maturity date on the loan letter powerfully predicted the actual maturity date chosen by the borrower. For each additional month of maturity suggested, the actual maturity date chosen was pushed out by 0.11 months. Researchers also found that each month of additional time to maturity increased loan demand by 15.7%. Most notably, the maturity effect was large relative to price sensitivity. Loan size did not respond to price in the maturity-suggestion sample, but was very responsive to loan maturity. On average, a one month maturity increase had approximately the same effect as a 436 basis point interest rate decrease.

    Taken together, this evidence suggests a practical implication that some MFIs should consider using varied maturity dates rather than price to balance profitability and targeting goals.

    1United Nation Secretary General Millennium Project, “Fast Facts – The Faces of Poverty,”http://www.unmillenniumproject.org/documents/UNMP-FastFacts-E.pdf. (Accessed September 18, 2009)

    Determinants of Microcredit Delinquency in the Philippines

    This project studies the characteristics of microfinance clients who are more likely to default with the aim of helping microfinance institutions make better selection decisions. With group-lending, lenders rely on the collective information of the group to identify and screen out less trustworthy borrowers.  With individual-liability lending programs however, client selection is entirely based on credit investigation which captures observable characteristics of individuals and the subjective intuition of credit officers. In partnership with the Rural Bank of Mabitac, we implement two surveys which aim to predict the behavior of prospective clients.

    Details of the Intervention:

    In the first survey, clients are interviewed by bank staff at the time of loan disbursement for a certain amount of monetary compensation (randomly selected from 3 different payoffs). However, when the survey is completed, clients receive compensation greater than they were told. We record whether the client returns the excess amount of money, which serves as a trustworthiness indicator.

    For the second survey, clients are given another short survey before leaving the bank and asked to either complete it on the spot or text back the responses by a pre-specified date in order to receive monetary compensation. To measure planning capability, we observe who mails back the survey.

    See here for a related project in Peru

    Psychological Responses to Microfinance Loan Recovery Strategies in Peru

    Microfinance clients are usually too poor to offer any property as collateral, so micro-lenders use alternative methods to encourage repayment. The most common methods are: (1) threatening to not offer loans in the future to clients who default and (2) using peer pressure mechanisms to ensure that borrowers repay. 

    We have partnered with PRISMA to identify ways to implement these methods more effectively. PRISMA has recently deployed a new strategy in its individual loan program for loan recovery that involves sending written notifications to defaulters. This strategy makes use of both the promise that good payers can receive additional loans from PRISMA in the future and the pressure that loan recipients face from their loan guarantors.

    Details of the Intervention:

    In the study, clients are randomly assigned to two groups. Two thirds of the clients receive written notifications if they fall in default (treatment group), while the rest of the clients do not receive any additional written notifications (control group). Within the treatment group, clients receive letters with either "gain" or "loss" frames, telling the client either that rectifying his credit standing will allow him access to credit in the future or telling him that his continued default will keep him from accessing loans in the future and threatening legal action. Additionally, in some cases both the sponsor and the client receive a letter, while in other cases only the client does.

    Results:

    The study followed PRISMA´s loan clients from March 2006 to January 2008. We found that letters significantly reduce default rates and are most effective when messages with a loss frame are sent to both clients and their guarantors.

    Small Consumer Loans for the Working Poor in South Africa

    Expanding access to business credit is a goal shared by microfinance practitioners, policymakers, and donors alike. However, there is less of a consensus when it comes to expanding access to consumer credit. Even as microfinance institutions increasingly move beyond entrepreneurial credit and offer consumer loans, practitioners and policymakers continue to voice their concern for “unproductive” lending. This study seeks to address these concerns by examining the impact of a consumer credit supply expansion.

    We found significant and positive effects on job retention, income, the quality and quantity of food consumption, control over household decision-making, and mental outlook for these borrowers. We only find negative effects on other aspects of mental health, principally stress.

     
    Policy Issue: 

    An important means of exiting poverty is access to productive resources, yet many poor people lack the capital necessary to invest in higher education, smooth consumption, or start a business. Expanding access to credit is a common means to enable participation in the economy, and there is a common assumption that expanding access to productive credit makes entrepreneurs and small business owners better off. There is less consensus however, on whether expanding access to credit to support consumption helps borrowers, particularly when loans are being extended at high interest rates to higher-risk customers. 

     

    Context of the Evaluation: 

    Poverty in South Africa is widespread; approximately 57 percent of individuals were living below the poverty line in 2001.  Numerous impoverished areas could potentially benefit from increased access to credit to help smooth household consumption. However, the poor typically lack the credit rating and/or collateral needed to borrow from traditional institutions such as commercial banks.  Moneylenders dominate the informal lending market and typically charge 30-100 percent interest per month.

    The cooperating Lender has operated for over 20 years as one of the largest, most profitable microlenders in South Africa. It offers small loans at high interest over short periods of time, frequently to the working poor who have no collateral and must make payments on a fixed schedule. 

     

    Details of the Intervention: 

    This evaluation examined the direct impact of small consumer loans on profitability, credit access, investment, and measures of well-being such as household consumption and physical and mental health. The sample consisted of 787 rejected loan applicants deemed potentially creditworthy by the Lender. Applicants were eligible if they had been rejected under the Lender’s normal underwriting criteria but not found to be egregiously uncreditworthy by a loan officer. The motivation for increasing credit supply for a pool of marginal applicants is twofold. First, it focuses on those who stand to benefit most from expanding access to credit, namely the unbanked poor. Second, it provides the Lender with information about the expected profitability of changing its selection process to examine marginally creditworthy individuals more closely.

    A random portion of the eligible applicants were then assigned a “second look” by lender staff who were encouraged but not required to approve a randomly selected portion of these applicants for loans. Ultimately branches made loans available to 53 percent of the previously rejected applicants who had been randomly assigned to be re-examined. Accepted applicants were offered an interest rate, loan size, and maturity per the Lender’s standard underwriting criteria. Nearly all received the standard contract for first-time borrowers: a 4-month maturity at 200 percent APR.

    Applicants in the treatment and comparison groups were surveyed six to twelve months after applying for a loan to examine behavior and outcomes that might be affected by access to credit, including mental health outcomes. 

     

    Results and Policy Lessons: 

    Impact for Borrowers: Expanding access to credit is found to significantly increase certain elements of well-being of borrowers. Economic self-sufficiency (employment and income) was higher for treated applicants than for those in the comparison group 6 to 12 months after treatment. Twenty-six percent of treated households report that the quality of food consumed by the household improved over the last 12 months. A subjective measure of “control and outlook”— comprised of factors such as intra-household bargaining power, community status, and overall optimism— is also higher for treated applicants. 

    Long-Term Impact on Creditworthiness: Over a 13 to 27 month horizon, study results indicate a positive impact from having a credit score: having an ordinal score due to their credit history increased the probability of future loan approval in the sample by 19 percent, though there was no impact on the score itself. 

    Impact on Mental Health: Receiving greater access to credit had mixed effects on the mental health of study participants, and results indicated that the mental health impacts of taking up a small individual loan may differ by gender. While the program had no significant effects on the mental health of women, men experienced increased symptoms of perceived stress and decreased symptoms of depression. The fact that even “good” major life events, such as starting a new job, can be stressful at times may explain why men in the treatment group experienced increases in perceived stress as they took up the loans and engaged in new economic activities. The positive impacts that increased credit access had on other areas of life (described above) may explain why symptoms of depression were reduced among men despite the increase in perceived stress.  

    Profitability: Offering loans to marginal applicants, formerly rejected by the Lender’s usual screening process, is also found to be profitable for the Lender, although it is still substantially less profitable than offering loans to more creditworthy applicants. 

    1 Southern African Regional Poverty Network (SARPN), “Fact Sheet: Poverty in South Africa,” http://www.sarpn.org.za/documents/d0000990/

     

    Selected Media Coverage:
    Microlending: It's No Cure-All - Bloomberg Businessweek

    Ultra Poor Graduation Pilot in Peru

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? This 24-month program provides beneficiaries with a holistic set of services including: livelihood trainings, productive asset transfers, consumption support, savings plans, and healthcare. By investing in this multifaceted approach, the program strives to eliminate the need for long-term safety net services. Spanning seven countries on three continents, the Ultra Poor Graduation program is being piloted around the globe. IPA is conducting randomized evaluations in IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana to understand the impact of this innovative model.

    Policy Issue: 

    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Ultra Poor Graduation Pilots attempt to apply a model, developed by BRAC in Bangladesh, which recognizes that the ultra poor need the "breathing space" that is provided by temporary consumption support, but that public funds may be better used to build households’ capacities to maintain a sustainable livelihood. The idea is that this initial assistance, lasting two years, will place households securely on the first rung of the development ladder, which they can then climb with the help of appropriate development strategies. The model incorporates a comprehensive package of services: a productive asset (such as chickens or goats), consumption support, livelihood trainings, healthcare, and financial services.Ideally this wide set of support services will help households to weather any shocks they may face along during their climb out of ultra poverty.

    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts.

    Context of the Evaluation: 

    The study takes place in rural communities of the Canas and Acomayo provinces in the Department of Cusco, Peru.  To assist ultra poor households with young children in the region, Juntos, a government-run conditional cash transfer program, provides families with a monthly stipend. Arariwa and Plan, the project partners, are implementing the Graduation Model in concert with the Juntos program.

    Details of the Intervention:

    The project team will use a Participatory Wealth Ranking (PWR) to target the ultra poor in the chosen provinces. As overlap is expected between the Ultra Poor Graduation project beneficiaries and Juntos beneficiaries, the project will provide a nine-month cash stipend equivalent to US$35 to those not already receiving it from Juntos.

    This program will then build on the base of the Juntos program by providing all beneficiary households with a productive asset, which over two years, they will be trained to manage. During this time period, beneficiaries will be monitored with weekly visits intended to contribute to the holistic development of the family's economic potential. A microfinance promoter will also encourage beneficiaries to save in group mechanisms. At the end of the two year period, Arariwa will offer microcredit products to the beneficiary families that demonstrate characteristics of reliable clients.

    In total, 80 communities will participate in the study. Three groups will be defined within these communities:

    (A) Treatment households: an average of 20 treatment households will be selected in each of 40 treatment communities.
    (B) Neighbors: an average of 20 comparison households will be selected from each of the same 40 treatment communities, for comparison against their neighbors who received the treatment.
    (C) Comparison households: an average of 20 comparison households will be selected in each of 40 comparison communities.

    The impact of the program can be assessed by comparing groups A and B or by comparing groups A and C. The two comparisons will give different answers if spillover effects are present.

    Results:

    Results forthcoming.

    For additional information on the Ultra Poor Graduation Pilots, click here.

    Providing Business Mentoring to Micro-, Small- and Medium-sized Enterprises (SMEs) in Mexico

    Many public and private programs exist with the goal of helping MSMEs succeed and become more productive and competitive. However, there is little rigorous evidence of the impact of these programs. IPA is collaborating with the Institute for the Competitiveness and Productivity of Puebla (IPPC), an independent state government agency, to evaluate their MSME mentoring program.

    Policy Issue: 

    Microfinance has provided many businesses with access to investment capital, but few microenterprises make the jump to a small or medium size operation, and begin providing jobs for other laborers.  While much of the discussion surrounding access to finance has centered on providing services to microenterprises, SMEs are often seen as the “missing middle” in developing economies.  They are likely too large to be interested in typical microfinance loans, but may be too small to access other sources of capital. SMEs also face competition from larger enterprises, and may lack the management capacity to take advantage of market opportunities.  Addressing the factors that constrain SME growth could have important effects on long-run economic growth and employment.  Many public and private programs already exist with the goal of helping SMEs succeed and become more productive and competitive but little is known about the impact of such mentoring programs on employment generation, firm productivity, and profitability.

    Context of the Evaluation: 

    This study takes place in the state of Puebla, Mexico, which is made up of urban Puebla City and other semi-urban and semi-rural surrounding areas to the east of Mexico City. While Puebla is home to some larger scale industry, a great majority of the economic entities there can be categorized as small and medium enterprises, engaging in small scale manufacturing or the provision of services.

    Details of the Intervention: 

    Researchers collaborated with the Institute for the Competitiveness and Productivity of Puebla (IPPC), a state agency that works with small and medium-sized enterprises to provide training and mentoring services, to identify beneficiaries of the program. The study included 450 owners of small and medium-sized businesses in the Puebla area who showed interest in obtaining mentoring services. Of the 450 sample firms, 150 were randomly selected to receive consulting and mentoring services offered through the IPPC, as well as a subsidy intended to support business operations. Mentors worked with the firms, consulting on a variety of topics relevant to business development.  Though the interactions between mentors and firms was unscripted and varied based on the needs of individual businesses, mentors provided guidance and support with respect to goal planning, business strategy, human resources solutions, and market analysis, in addition to discussing other strategies for how to increase profitability.

    Results: 

    Results forthcoming.

    Cosignatory Requirement as a Barrier for Women Accessing Credit in Peru

    Microfinance institutions have long targeted women as recipients due to the belief that women more reliably pay back their loans and the increased access to funds serves to improve women's decision-making power in the household. However, some institutions implement a co-signature requirement in order for women to take out a microfinance loan. This may be acting as a barrier for women to access credit.

    IPA has partnered with Microfinanzas PRISMA, an MFI in Peru, to identify the implications of the cosignatory requirement. The study is set up in four agencies in the Peruvian Highlands: Huancayo, Huaraz, Juliaca and Tarma. Through a geographic randomization of districts, the study divides all new communal banks in these areas into two groups: 1. The control group, in which the cosignatory requirement remains the same, and 2. The treatment group, in which the cosignatory requirement is removed. The study will use a baseline and follow-up survey to analyze whether the removal of the signature is allowing more people to join the banks and if the default rate is increasing. Other questions from the surveys will be within the realm of household dynamics and bargaining.

    Demand for Hospital Insurance in the Philippines

    We partner with Green Bank to assess the demand for hospital insurance among microfinance clients.  Green Bank offered the insurance to clients at randomly assigned premiums.  By observing the take-up rates at different prices, we can measure the price sensitivity.   We also collect an extensive data on demographics and risk characteristics of the individuals in the sample, which allows for an examination of adverse selection in the insurance market (risky individuals are less price sensitive than risk-adverse individuals).

    The impact of information asymmetries on insurance markets is important in theory but ambiguous in practice.  Generations of studies have failed to produce a consensus on the presence, absence, or magnitude of adverse selection and moral hazard in most markets.   While an increasing number of microfinance institutions offer insurance products to their clients as an add-on, there are few empirical studies on the impact of expanding access to health or hospitalization insurance in developing country contexts.

    The sample of our study includes 2,036 existing clients under the Green Bank's individual-lending program (TREES) in 10 branches of Northern Mindanao and Caraga regions. 

    Motivating Take Up of Formal Savings

    Policy Issue:

    Savings are crucial for managing irregular and unpredictable cash flows in order to meet daily needs, finance lumpy expenditures, and deal with emergencies. For poor households, informal tools like credit from moneylenders are often less efficient than savings mechanisms as they require high interest rates to finance predictable and recurring expenses.  Evidence suggests that these households often have excess financial capital after covering subsistence expenses that could be used for savings. Access to and utilization of financial products that help the poor save funds for the future may have substantial welfare consequences.

    The recognition of this need has led to the creation of greater financial access throughout the developing world. Banks, for instance, have increased their reach over the past decade in Sub-Saharan Africa, offering savings accounts with minimal fees and opening requirements. Take-up of formal savings accounts among the poor, however, remains low. Why do poor individuals fail to take advantage of the lower-risk, lower-cost vehicle for saving that bank accounts offer? This study evaluates the relative importance of individual beliefs, psychological factors, and transactional barriers to opening accounts. 

    Context of the Evaluation:

    Tamale, located in the Northern Region of Ghana, is the third largest city in the country. It has a quickly growing economy and has recently experienced a financial services boom: approximately three banks had opened new branches within the three-year period preceding this study. These banks have also made efforts to design accounts with minimal requirements and fees to be accessible to the poor.  The take-up of these products among poorer demographics, however, has been low. During the study, Zenith Bank, which opened its branch in Tamale in 2009, offered savings accounts with no requirement for an opening balance and no fees. Innovations for Poverty Action conducted this study in collaboration with Zenith Bank to provide access to formal saving accounts to individuals who face specific expenditure opportunities that might otherwise be financed with credit. This study aims to determine which of several treatments is most effective in encouraging individuals to open a formal savings account.

    Details of the Intervention:

    The sample in this study includes 1,831 market vendors who had businesses in the central market of Tamale. These vendors were mostly female and illiterate and owned businesses that sold a wide variety of products including rice, tailored clothing, household items, and produce. This demographic was ideal for the study because: (1) Market vendors earned a steady source of revenue from their businesses and thus had funds they could potentially save; (2) These vendors often relied on informal credit to finance major expenditures, such as school fees, business inventory, and rent; and (3) The market was close to several local banks, including Zenith Bank, the partner for this study. 

    A baseline survey was administered to the market vendors to collect data on businesses, common expenditures, savings and loan behavior, and financial attitudes. Afterward, representatives of Zenith Bank came to the market to offer savings accounts to those who had received the baseline survey.  All savings accounts included weekly reminders to save via text message.  Participants received three types of treatments randomly assigned before the account-offering:

    • Framing Condition: Individuals were randomly assigned into one of three groups. Those in the Comparison Group received no treatment.  Those in the Information Group were provided with specific information from previous studies about how much more individuals save when they receive reminders to save.  Those in the Emotion Group were asked to tell a story that generates positive and hopeful emotional feelings.
    • Cost Condition:Individuals were randomly assigned to one of two groups. Those in the Zero Cost Group were encouraged to open an account and could do so without ever visiting the bank.  Those in the Transaction Costs Group were encouraged to open an account but had to visit the bank to do so.
    • Savings Tools:Individuals were randomly assigned to one of three groups. Those in the Comparison Group received no tools with their account. Those in the Financial Plan Group received a customized simple savings plan to finance a specific expenditure.

    The primary study outcomes were a) willingness to open a formal bank account with Zenith band and b) savings deposit behavior after opening accounts.

    Results:

    The strongest treatment effect came from removing all transaction costs for opening a bank account.  Individuals were more than ten times more likely to open an account when they could open accounts directly at their place of business.  Convenience seems to be a primary motivating factor in decision-making about interacting with formal banking.

    Specific information did not increase the likelihood of opening an account or making savings deposits.  If anything, specific information about the benefits of saving with regular reminders decreased the willingness to open an account unless that information was highly positive.  Emotional framing also had no statistically significant effect on account opening. 

    While many individuals opened accounts, relatively few individuals continued making deposits over a long-run horizon.  Six months after the study the majority of account holders were not making regular deposits (no individuals in the high transaction cost group continued to make deposits while 2.5% of individuals who could open accounts in the field continued to make deposits).  For this reason, we see no impact of specific savings tools on the level of savings.

    Using Internal Risk Models to determine changes in Committee Behaviors (MIR)

    Policy Issue:

    Since microfinance banks often provide credit without much collateral, these institutions must minimize the risk of client default. These banks face high operational costs employing loan officers to visit clients regularly, sometimes in remote areas.  Finding a reliable and accurate mechanism for identifying clients with low default risk is critical for maintaining a sustainable bank.  However, traditional loan application models that use quantitative data like client repayment history, salary, and assets, may overlook potentially creditworthy applicants at the bottom of the pyramid who may be taking formal loans for the first time.  This evaluation assesses the effectiveness of a new credit risk model, incorporating qualitative data, in predicting repayment and studies its influence on loan committees’ application decisions.

    For additional information on current SME Initiative projects, click here.

    Context of the Evaluation:

    Bancamía is a Colombian microfinance bank that has developed a credit risk model to streamline its loan application process. This risk model incorporates the bank’s historic quantitative data with new qualitative data, like loan officer perceptions, to automatically approve creditworthy clients. Bancamía’s unique system of standardizing qualitative indicators to be used in the model’s algorithm was created to target clients who might otherwise be rejected by a more traditional model. The goal of this statistical modeling system is to improve identification of the best and worst clients, while decentralizing the loan committee process and reducing costs.

    Description of the Intervention:

    This pilot will assess how the score produced by a credit risk model influences loan committees’ decisions to accept or reject applicants, as well as how accurate the model predicts loan performance of approved clients. Bancamía’s credit risk model is designed to produce a score and application decision by calculating the probability of default based on quantitative and qualitative characteristics collected by loan officers.

    Branch directors and loan officers at the eight participating bank branches were invited to a short training workshop before the implementation of the pilot. The training presentations covered topics such as: explanation and importance of a credit risk model, development of the Bancamía tool, and objectives of researching the accuracy of the credit risk model in predicting client performance.

    After the training, credit committees, consisting of a branch director, loan officer who collected applicant information, and one or two additional loan officer witnesses, met to review and discuss loan applications. During the meetings, IPA research staff used a mechanism that randomly assigned each of the applications to an information treatment: score from the model presented before the discussion about the application, score from the model presented after a preliminary decision on the application had been made, and a comparison group (no information). Research staff was responsible for providing the credit risk score information at the assigned time and recording final and intermediate (second treatment group) application decision with details of approved and requested loan amounts.  After each application decision, both branch directors and loan officers (some of whom collected the original client data) on the committee completed forms describing their perceptions of the loan decision. Over a period of six months, about 1700 applications were reviewed, with about 550 reviews in each information treatment group. The loan performance of approved clients will be collected over a 10-16 month period and will be used to analyze the impact of the different information treatments. Loan portfolio data will also be collected from eight other comparison branches of Bancamía. Results from this pilot will inform a full scale randomized evaluation.

    Results and Policy Lessons:

    Results forthcoming.

     

    Identifying Gazelles among Micro and Small Enterprises in Ghana

    This project uses a business plan competition to judge the growth potential of micro business owners, and then evaluates if business training for entrepreneurs can improve the managerial capacity of owners with different levels of growth potential. 

    Policy Issue:

    Entrepreneurship and small businesses are widely promoted as vehicles for economic growth. However, little rigorous research has been done to support this premise or answer the critical question of what factors constrain small and medium enterprises (SMEs). Managerial capital or training may be one factor limiting the efficiency and growth of firms.  This evaluation measures the impact of business training on targeted businesses to determine whether it has the intended multiplier effects for economic welfare by leading to job creation, faster firm growth and stronger supplier or customer networks.

    For additional information on current SME Initiative projects, click here.

    Context of the Evaluation:

    This project targets self-employed small business owners in urban Accra-Tema and Kumasi  with modest levels of formal schooling and substantial experience running businesses.  Rather than focusing on a few large businesses, the project aims to identify a greater number of self-employed entrepreneurs, each with the potential to create a small number of new jobs. These individuals are not likely to be operating cutting-edge businesses but are great in number and provide products and services that are fundamental to the functioning of the local economy.

    To implement the business training, the researchers partnered with CDC Consult Limited, an Accra-based consulting company, and the National Board for Small-Scale Industries (NBSSI).

    Description of Intervention:

    A sample was identified through the publication of a business plan competition by radio, newspaper, and door-to-door marketing in neighborhoods containing large numbers of small businesses (as determined from census data).  To participate in the competition, applicants submitted a form gathering basic information to ensure compliance with eligibility criteria. Eligible entrepreneurs had to be between the ages of 20 and 55 years and be owners of a business that had been in operation for at least one year with two to 20 employees.

    Three hundred thirty five applicants were invited to participate in a three day program, offered by CDC Consulting Limited, designed to guide them in writing a basic business plan. The 141 entrepreneurs who completed the training were asked to submit a business plan and then were invited to present it to a panel of four successful entrepreneurs.  The panelists reviewed the business plans and interviewed each entrepreneur, rating each candidate.  Based on the panel ranking, each entrepreneur was assigned a probability of being provided with further, more extensive group training and individualized consulting. Half of the ranked entrepreneurs were chosen to receive more intensive follow-on training. The selection was random with probabilities increasing with the panel ranking.  This second round of training by NBSSI consisted of a six-day group course based on the International Labor Organization‘s (ILO) “Improve Your Business” model. CDC Consult Limited provided individual consulting advice after this course.

    A baseline survey was conducted before the initial three-day business plan training course. The baseline gathered information on the history of the business and the owner and enterprise-level data on assets, sales and revenues, as well as current employees, including apprentices and unpaid family workers. The survey also included  measurements of risk aversion, numeracy, logical skills, personality diagnostics, and other measures from the entrepreneurial psychology literature. These measures allow us to identify the characteristics of the entrepreneurs rated most highly by the panel members. After the completion of the group training and individualized consulting, a follow-up survey was conducted to track changes in the business. At least one further follow-up survey was conducted in 2012.

    Results and Policy Lessons:

    Results forthcoming.

     

    The Impact of Secured Transactions Reform on Access to Capital for Small and Medium Enterprises in Colombia

    Policy Issue: 
    Small and medium enterprises (SMEs) are thought to be an important source of innovation and employment in developing countries due to their flexibility in responding to new market opportunities and their potential for growth. However, entrepreneurs face a number of barriers to expanding their businesses and employing more workers, including limited access to credit and other financial services. For many firms, especially small and medium enterprises, collateral requirements are often an obstacle for getting access to finance. Banks usually require potential borrowers to provide collateral such as land or real estate, and will not accept collateral in the form of movable assets such as vehicles, machinery, or inventory, which SMEs are more likely to own. This mismatch prevents entrepreneurs from applying for and receiving formal loans. Banks may be unwilling to accept movable assets as collateral if there is no legal framework to govern and enforce this type of lending or if they lack knowledge on how to conduct movable asset-based lending. It is possible that regulatory reform providing such legal framework will encourage banks to adopt movable asset-based lending, helping SMEs access much-needed credit to expand and grow. Additional research is needed to understand how such programs should be designed and to what extent such regulatory reform actually expands access to credit for individual firms.
     
    Context of the Evaluation: 
    While Colombia has made a lot of progress in recent years in increasing access to finance for SMEs, entrepreneurs still report that access to finance is among the largest constraints to operating their businesses.1 According to the 2010 World Bank Enterprise Surveys, over 41 percent of firms in Colombia identified access to finance as a major constraint to operating their businesses, which is roughly ten percentage points higher than the average for the Latin America and Caribbean region. At the same time, prior to 2013, Colombia had no legal framework to govern the use of moveable assets as collateral, which restricted the ability of SMEs to take out loans secured with movable collateral. 
     
    The Colombian government, with support from the International Finance Corporation (IFC), an international development organization that focuses exclusively on the private sector, is introducing a new Secured Transactions Reform, which will provide a legal framework for the use and enforcement of movable collateral. The hope is that, by reducing the risk that banks face in accepting movable property as collateral, the reform will allow SMEs to use vehicles, industrial equipment, inventory, and other movable assets as collateral for their loans.
     
    Details of the Intervention: 
    In order to understand whether the Secured Transactions Reform has an impact on firm-level outcomes such as sales and employment, researchers will assign a randomly selected group of firms to receive extra encouragement to apply for loans under the new regulation. Out of a sample of 1000 SMEs across three Colombian metropolitan areas (Bogotá, Cali, and Medellín), 500 firms will be randomly selected to receive additional information and encouragement to apply for a loan secured with movable collateral. 
     
    The remaining 500 firms will serve as the comparison group. 
     
    Results and Policy Lessons: 
    Project ongoing. Results forthcoming. 
     

    1Enterprise Surveys, “Colombia (2010),” The World Bank. http://www.enterprisesurveys.org/Data/ExploreEconomies/2010/colombia

    The Impact of Computer-generated Credit Scores on Lending in Colombia

    Small and medium enterprises are seen as promising engines of growth in developing countries but often fail to live up to their potential because of barriers to growth such as limited access to credit. Researchers used a randomized evaluation to measure the impact of introducing computer-generated credit scores on lending to micro and small enterprises in Colombia. The program significantly increased productivity in the loan approval process and improved allocation of credit without affecting average loan amounts and default rates.    

    For additional information on current SME Initiative projects, click here.

    Policy Issues:

    Small and medium enterprises (SMEs) are thought to be an important source of innovation and employment in developing countries due to their flexibility in responding to new market opportunities and their potential for growth. However, entrepreneurs face a number of barriers to expanding their businesses and employing more workers, including constrained access to credit.

    Whereas assessing the credit-worthiness of prospective borrowers has become relatively cheap and easy in developed countries through the use of credit scoring, in developing countries this process can be cumbersome in the absence of reliable information about the  credit or financial history of potential bank clients. The high costs associated with assessing the riskiness of loan applicants can outweigh the financial returns of lending, making banks reluctant or unable to make loans to SMEs. Credit scoring has been used successfully in the United States and other developed countries to reduce the cost of identifying creditworthy applicants, but there is little evidence on whether computer-based credit scoring might work in developing country contexts.

     
    Context:

    Researchers partnered with BancaMia, a for-profit bank that lends to small and medium businesses in Colombia. Prior to this study, BancaMia made all of its lending decisions based on information collected by loan officers. Applications incorporating the collected information were reviewed by a credit committee, who could approve or reject them. In difficult cases, the committee could also refer the application to upper-level managers or postpone their decision until more information was collected. The loan approval process under this system was under the discretion of the committee and was very expensive due to the high number of referrals and rounds of information collection. In an effort to improve its loan approval process, BancaMia developed its own credit scoring software, which produces a credit score based on verifiable client information.

    Details of the Intervention:

    Researchers, in collaboration with BancaMia, used a randomized evaluation to measure the impact of the credit scoring software on the loan approval process and loan outcomes.  

    Out of  1421 loan applications that were scored through the new software, 1086 scores were randomly chosen to be revealed to the committee.  Scores were revealed either at the beginning of the application review process or after the committee had finished an initial review and made an interim decision about whether or not to offer a loan. Although the committee in the latter case did not know the applicant’s exact score, they did know that a score could become available once they reached a decision.

    Researchers collected information about various aspects of the loan approval process (e.g., the average time spent evaluating an application, the number of approvals and rejections issued etc.) as well as loan performance and default rates.

    Results:

    Impact on Credit Committee Effort and Output:

    Revealing the computer-generated credit scores at the beginning of the application review process  increased both the probability of the committee making a decision and the amount of effort put into the review. Seeing the score in advance raised the probability of the committee reaching a decision by 4.6 percentage points from a base of 89 percent. This change was driven by the reduction in the number of applications referred to bank managers and  the number of cases for which the commitee requested more information to be collected for a second round evaluation. In addition, the committee spent more time evaluating loan applications, especially the difficult cases (e.g., applicants that requested larger loans).

    The committee also became more productive when it knew that a score would become available after the initial evaluation. The anticipation of seeing a score increased the probability of the committee making a decision to approve or reject an application by 3.9 percentage points. This improvement in committee productivity even in the absence of a credit score suggests that the committee might already have had the necessary information to make decisions on difficult applications, but lacked the incentives to use this information efficiently.

    Impact on Loan Allocation and Outcomes:

    Although providing computer-generated scores to the committee did not affect loan outcomes such as the average size of loans issued or default rates among borrowers, it did improve credit allocation. Computer-generated credit scores reduced uncertainty about borrowers’ creditworthiness, allowing banks to extend larger loans to less risky borrowers and smaller loans to riskier borrowers. As a result, there was no change in average loan size issued, but the bank was better able to match its lending to borrower characteristics.

    Considered together, these results show that the credit scoring program had significant impact on the bank’s productivity. Specifically, summarizing the credit worthiness of prospective borrowers into a single, easy to understand number increased the quantity of difficult cases that the credit committee resolved. The score also nudged committee members to put in more effort on difficult applications. This could potentially reduce the workload of bank managers and reduce the cost of administering loans for the bank. The increase in productivity without providing new information to the credit committee also implies that banks may need to better incentivize their employees who hold useful information.

    Related Paper Citations:

    Paravisini, Daniel, and Antoinette Schoar. "The Incentive Effect of IT: Randomized Evidence from Credit Committees." NBER Working Paper No. 19303, August 2013.

    Supply Chain Financing for Dairy Farmers

    Policy Issue:

    Farming entails long cycles of production which require up-front investment in animals, equipment, seeds, fertilizers, and other inputs. However, small farmers may have problems securing access to credit if they are located in remote areas that are not served by traditional financial institutions. Many small farmers manage their businesses informally and frequently do not have records or financial information that banks require for lending. Some microfinance institutions have tried to expand their usual urban activities to rural clients, but the costs of doing business in rural areas are still high and limit their scope. However, farmers often have stable relationships with agriculture processing companies and traders who purchase their crops, and these relationships may provide an opportunity to facilitate loan distribution and repayment.

    For additional information on current SME Initiative projects, click here.

    Context of the Evaluation:

    In Colombia, less than 8% of rural households and enterprises are thought to have access to formal loans[1]. Nevertheless, there are about 400,000 families engaged in small and medium agribusiness for the production of milk in rural Colombia.[2] Milk production requires daily contact between the producer and the buyer, with payment occurring frequently. Buyers tend to attract the best dairy producers by providing access to inputs for production, or other services, or rewarding quality with higher prices.

    Description of Intervention:

    Bancamía, a bank specializing in microfinance, partnered with Alquería, a Colombian dairy company, to offer an individual loan product to small dairy farmers. Four hundred thirty five small dairy farmers who sell milk to Alquería via three intermediaries were randomly assigned to a treatment group, receiving a loan product offering, or a comparison group, receiving no product offering.

    Bancamía offered the farmers in the treatment group a micro-loan with  a unique repayment process. Each month when the loan installments were due, farmers did not have to travel to the bank office to make the payments. Instead, the Alquería dairy deducted the value of the monthly installment from the farmer’s milk transfer payment and paid the bank directly. This scheme reduced risk for the bank as well as transportation, planning and transaction costs for the farmers. Loans ranged from about one to five million COP (about 560-2,800 USD) and were granted over a one to three year period.

    To promote the credit program, meetings were held at the offices of three of the Alquería buying intermediaries to introduce farmers to the program, the benefits of the product, the rules and obligations, and the loan application and repayment process.  At the end of the meetings, milk farmers in the treatment group were provided with bank contact information and the opportunity to file a credit application.  Both those who participated in the meetings and selected participants who could not attend the promotional meeting received a phone call reminder about the program.  Before, during, and after the program, surveys were administered to collect socioeconomic information, household wellbeing, and loan data.

    Results and Policy Lessons:

    Low levels of loan product take-up led to a discontinuation of the evaluation.  Two main issues affected the implementation.  Firstly, two Alquería intermediaries offered their own loan products, very similar to the product offered by Bancamía, which lowered the demand. Secondly, the beginning of the rainy season was unexpectedly devastating that year, causing major flooding, damage to farmland, and death of livestock.  While the evaluation was discontinued, Bancamía, Alquería, and the intermediaries have continued to service the 33 clients who applied and received loans.



    [1]Colombia Rural Finance: Access Issues, Challenges and Opportunities. Rep. no. 27269-CO. World Bank, Nov. 2003. Web. 16 Mar. 2010

    [2]Rivera, José Félix Lafaurie, “TLC…la batalla no ha terminado.” Carta Fedegan N. 117.

    Evaluation of Female Supervisor Training Programs in the Bangladesh Apparel Sector

    Increasing evidence suggests that poverty reduction in developing countries is best pursued by creating stable employment opportunities in medium and large firms. Where do employment opportunities in these firms come from? The macro-economic literature argues that, ultimately, employment generation comes from increases in productivity at the aggregate level. The issue of productivity has therefore gained centre-stage in micro studies of industrial development.

    This project—one of the first randomized control trials of a vocational training program for production workers in medium large factories—is designed to analyze whether training programs have the potential to address the “skills gap” that is an impediment to increased productivity in many developing economies. The context of the proposed study is the ready-made garment (RMG) sector in Bangladesh - an industry that employs about three millions low skilled workers, mostly women, and that has historically played a crucial role in the early phases of the industrialization process.  This project evaluates the GIZ Female Supervisor Training Program, which selects and trains female workers to become line supervisors and middle managers.  The main hypothesis to be tested is whether providing skills to workers and supervisors improves productivity and other outcomes (e.g. quality defects, lead time and waste) at the production-line level.  Research questions include: 1) What is the impact of training and skills on the income, livelihoods and working conditions of production floor workers, particularly young women? 2) What is the impact of training and skills on productivity, organizational, labor and managerial practices as well as labor relations and conditions at both the factor and production line level? and 3) What are the mechanisms through which training and skills affect productivity?  Does promoting a better gender balance across layers in the hierarchy increase coordination and communication on the production line?

    Mobile Application as a Tool for Improving Record Keeping and Accounting Practices of Micro Retailers

    Many subsistence entrepreneurs in developing countries do not maintain adequate business records which may limit their ability to streamline business operations and increase profits. This exploratory study was designed to explore take up and role of a new mobile application in helping small shopkeepers in Colombia to keep records, create business reports and manage other business tasks. Results show that while the application wasn’t widely adopted by the study participants, it was particularly useful for some of the shopkeepers who had good record keeping practices before they were introduced to the application.

    Note: This research project is a pilot study designed to provide insights for a potential scale up to a full randomized controlled trial.

    For additional information on current SME Initiative projects, click here.

    Policy Issues:

    Many entrepreneurs in developing countries who rely on their small businesses to meet basic consumption needs do not maintain records of business expenses or sales.  Without a system for managing finances, these small businesses may miss opportunities to increase profits and trim expenses. Providing tools to these micro entrepreneurs to help them manage their finances may be a way to improve their business outcomes and household consumption levels.

    Context:

    Colombia has an estimated 400,000 micro and small stores or "tiendas”, which account for 52% of food and retail sales [[1],[2]]. While tienda entrepreneurs sell hundreds of different products and manage relationships with wholesalers, most of them continue to use minimal business administration tools, for example, writing down sales and purchases in notebooks, or don’t use any record keeping at all.

    To test if a more formal and engaging record keeping system could improve shopkeepers’ business records management, IPA partnered with Frogtek, a firm that builds business tools for entrepreneurs in emerging markets. Frogtek developed Tiendatek, a smart phone application that allows shopkeepers systematize their business by managing their accounting, inventories, sales, payments to suppliers, expenses and earnings. All data generated by the shopkeeper is uploaded and stored on a mobile phone and a Frogtek web server. The Tiendatek application creates reports on sales, purchases, credit, inventory, and break-even points based on the data uploaded by a shopkeeper.

    Tiendatek relies on mobile phone technology, which is widespread and popular in Colombia. The country has among the highest rates of participation in the communication and technology markets, with 92.3 cell phone subscriptions per 100 people and 45.5% of the population using internet [[3]]. Thus, the application is easily accessible for micro and small retailers.

    Details of the Intervention:

    This exploratory study was designed with the goal of understanding take up of Tiendatek application and characteristics of shopkeepers who end up adopting the application. In the case of sufficient take up the study was also designed to explore whether and how the application helped small shopkeepers to better manage their businesses. The study targeted shopkeepers with sales between 1,000 and 2,000 USD a month. Frogtek staff interviewed shopkeepers, assessed their interest, delivered a mobile phone with Tiendatek application installed and provided training in one or two visits. Shopkeepers also received technical assistance from Frogtek staff for 6 months after delivery of the phone. In total, 58 shopkeepers received the phone, training and technical assistance.

    Fifty-one shopkeepers were surveyed approximately ten to twenty days after receiving a new phone. A follow up survey was completed eight to ten months after the initial phone delivery with 47 shopkeepers. In addition, all data generated by shopkeepers and uploaded to a Frogtek web server was used as supplemental data for the study.

    Results:

    Tiendatek received positive feedback from shopkeepers who participated in the study, with 96 percent of them indicating that they would recommend it to their colleagues. However, most shopkeepers did not use the application fully; they did not register all business transactions through the application which in turn limited their ability to take advantage of features such as profits and inventory reports. Moreover, of the 40 shopkeepers who answered the question in the follow up survey, only 10 were still using it 10 months after receiving it.

    While the application wasn’t widely adopted by the study participants, it was more popular with those shopkeepers who were more diligent in their record keeping and accounting practices initially. Out of 32 shopkeepers who reported having some system of recordkeeping in the baseline survey, four adopted Tiendatek, while among the 15 who did not have a formal recordkeeping system initially, six begun using notebooks and none started using Tiendatek. Moreover, shopkeepers who had good record keeping and business practices before they received the phone, for example, keeping written records and making an inventory of products, were more likely to use Tiendatek more frequently and for a longer period of time. 


    [1]Diaz, Alejandro, Jorge Lacayo, and Luis Salcedo. 2007. "Selling to ‘mom-and-pop’ stores in emerging markets" The McKinsey Quarterly

    [2]De Jacobs, Alicia. “Colombia Retail Food Sector” USDA Foreign Agricultural Services Global Agricultural Information Network Report, October 2010.

     

    Making the Jump to Employer: What does it take?

    A large fraction of the labor force in many developing countries is self-employed, but few of these self-employed individuals ever make the jump to hiring paid employees. A cross-cutting intervention will evaluate the impact of three policies aimed at helping small firm owners to make that jump.

    The first is business training. The second is a wage subsidy for the first six months of hiring a new worker. The third is a matched savings program to encourage small business owners to accumulate sufficient capital to make the necessary investments needed to make an additional worker profitable.

    We randomly provide these three programs to microenterprises, also interacting the treatments so that we can see, for example, whether business training has more impact if also coupled with savings, or whether wage subsidies work better for the self-employed who have receiving training on how to grow their businesses.

    Returns to Consulting for Women Entrepreneurs

    This study of the impact of entrepreneurship training and mentoring in Uganda evaluates a program which aims to help women entrepreneurs develop the skills they need to run thriving businesses. In addition to testing the overall impact of the program on participating entrepreneurs and the businesses with whom they compete or collaborate, the study will demonstrate the relative cost-effectiveness of intensive, personalized training versus a less intensive, standardized approach. The program will be advertised to female business owners in urban Central Uganda. As the training is expected to be oversubscribed, entrepreneurs who meet basic eligibility criteria will be randomly assigned to receive high-intensity personalized training, low-intensity standardized training, or no training (the comparison group). The randomized design allows systematic differences in outcomes to be attributed to differences between the treatment and control groups, and thus allow researchers to learn more about the impact of business skills training on profits, business size, and other outcomes for female entrepreneurs.

    For additional information on current SME Initiative projects, click here.

    Policy Issue:

    Small and medium enterprises (SMEs) are often viewed as potential engines for innovation, employment, and social mobility, and promoted as vehicles for economic growth.  In many developing countries, SMEs make up a particularly large part of the economy, yet data suggest that very few grow into larger businesses. If SMEs have such growth potential, what prevents them from expanding?

    Human capital constraints may be key, especially if having adequate managerial skills in place is a prerequisite for accessing other resources, such as financial services. Many “business development services” and “entrepreneurship training” programs target SMEs in developing countries, but there is almost no systematic evidence on the effectiveness of such programs.  This project evaluates a training and mentoring program in Uganda aimed at helping female entrepreneurs develop the skills they need to run thriving businesses. The objective of the evaluation is to measure the impact of an increase in “managerial human capital” on business outcomes for entrepreneurs who receive training, as well as the spillover impact of such an intervention on competing and collaborating businesses. It also compares the relative cost-effectiveness of skill transfer through a more personalized, time- and resource-intensive training approach, versus a standardized, less intensive one.

    Context of the Intervention:

    TechnoServe, an international non-profit business development organization, implements a business training program called Women Mean Business (WMB) in four cities in Central Uganda—Kampala, Entebbe, Jinja and Mukono.   Since 2008, almost 600 women have received business skills training through the WMB program.  A market survey of SMEs in these four cities, conducted by IPA, revealed that approximately 54% of all businesses interviewed were owned or managed by women.  However, owners of small businesses – and especially female entrepreneurs – may lack management skills and information about how to access financial services and other resources, limiting their ability to improve and grow their businesses.  For example, although women own nearly 40% of businesses with registered premises, they obtain only 9% of all credit disbursed.[1]The WMB program aims to provide female entrepreneurs with tools and training to better manage and grow their businesses. 

    Details of the Intervention:

    Eligible entrepreneurs will be randomly assigned to one of three groups: In Depth training, Light Touch training, or a comparison group.  Program activities for both tracks will take place over the course of a year, and will be implemented by TechnoServe staff or outside consultants and mentors trained and supervised by TechnoServe.

    In the first year of the program, Light Touch track participants attend classroom training sessions on topics such as financial management, sales/marketing, customer relations and human resource management.  Each topic will be covered in a two-day training session, with one session each month.  Participants will also be placed in sector working groups (e.g. manufacturing, retail, services), which will meet for additional, targeted training lessons and field activities.  In the second year of the program, refresher training sessions will be held to provide more clarity on the topics and address any specific issues faced by the participating businesses.  Finally, Light Touch participants will receive individual visits from a TechnoServe counselor to discuss any business-specific challenges they face.

    Women in the In Depth track will receive all of the services offered to the Light Touch group, and in addition, will be matched with student coaches selected from local business schools.  These coaches will work with the women for eight weeks in the first year of the program to develop a five year business plan.  In the second year, the women will be matched one-on-one with mentors, who they will work with over three months to implement the business plan and adopt the lessons from the various training activities. 

    Before the start of the WMB program, a baseline survey will gather information on each business's operations, products and sales, employment, and finances, as well as background information on the owner/manager.  Eight to twelve rolling follow-ups surveys will be conducted over the course of two years to gather data on business performance during and after the one-year WMB training program.  A final endline survey will be conducted two years after the baseline survey and one year after the WMB program ends. 

    Results and Policy Lessons:

    Results forthcoming.



    [1] Ellis, Amanda, Claire Manuel, and C. Mark Blackden, “ Gender and Economic Growth in Uganda: Unleashing the Power of Women,” Directions in Development 2006. 

    The Impact of Enhanced Business Training for High-Potential Entrepreneurs in Colombia

    Small and medium enterprises (SMEs) are thought to be important drivers of growth in developing economies, but entrepreneurs in these countries face many barriers, including access to business training, finance, and business networks. In Bogotá, Colombia, Fundación Bavaria’s “Destapa Futuro” (Open the Future) program identifies promising enterprises and provides them with a suite of financial, technical, business and training resources. In this round of the program,  Fundacion Bavaria and its partners competitively selected 1,000 entrepreneurs for a month-long virtual training which culminated in a business plan competition. Based on their business plans, 454 entrepreneurs were chosen to participate in an evaluation. Half were randomly selected to receive additional classroom training, and will be compared to those that didn’t.  Researchers will measure the impact of the program on SME profits, sales, and business creation rates.
     
    For additional information on current SME Initiative projects, click here.
     
    Policy Issue:
    Small and medium enterprises (SMEs) are thought to be an important source of innovation and employment in developing countries, due to their flexibility in responding to new market opportunities and their potential for growth. However, entrepreneurs face a number of barriers to expanding their businesses and employing more workers, including things like constrained access to credit, lack of management skills, and unfavorable government regulation. Business training, capital, and mentorship are possible tools that could help SMEs overcome these barriers, but rigorous evaluations of business training programs have found mixed results. Additional research is needed to understand how training programs should be designed and delivered, and how they might work in combination with additional inputs such as seed funding, in-kind donations, or mentorship.
     
    Context of the Evaluation:
    Fundación Bavaria works to foster entrepreneurship in Colombia through an intensive, year-long program called “Destapa Futuro” (Open the Future). The program uses a competitive process to identify entrepreneurs whose businesses have the potential for high growth and provides them with training, capital, technical advice, and the opportunity to network with investors. Since 2005, Bavaria has spent close to $10 million on this program. A prior project evaluated the 5th round of Destapa Futuro in 2010-2012.
     
    During the sixth round of Destapa Futuro in 2012-2013, Bavaria introduced several changes that were intended to make the program more financially sustainable while providing better support to entrepreneurs. First, they began partnering with Ventures Colombia, an NGO that promotes entrepreneurship in Colombia. Second, a new training curriculum was introduced, which taught entrepreneurs to think holistically about their business models and prepared them to make presentations to potential investors. Third, Bavaria switched from granting cash prizes to granting loans through a large Colombian bank for a selected group of qualified entrepreneurs and smaller cash prizes for the rest.
     
    Details of the Intervention:
    Entrepreneurs were invited to submit online applications to take part in the Destapa Futuro program. Out of 5,000 applications, a group of approximately 1,000 entrepreneurs who passed Bavaria’s initial selection process participated in a virtual training course based on the Business Model Canvas approach, which is designed to help entrepreneurs visualize and document various aspects of their business operations. They also received four virtual business training sessions on strategy, marketing, financial, and legal strategies. At the end of the month-long course, participants were asked to submit their business plans to the Ventures team for evaluation. All the business models submitted by the end of the training were evaluated by Ventures staff, and the top 73 entrepreneurs from this pool were selected to receive an in-person business training program. Because their participation in the training program was not randomly assigned, they are not part of the study sample.
     
    Of the remaining business plan submissions, 454 were selected to participate in the evaluation. Of these 454 entrepreneurs, half were randomly allocated to a treatment group, which received in-class training and mentorship. The in-class training lasted two to three days and covered the same topics as the virtual training, but in more depth. The remaining 227 entrepreneurs served as the comparison group and received no new training or mentorship.
     
    Researchers will measure the impact of the training, mentoring, and networking program on SME profits, sales, and business creation rates.
     
    Results and Policy Lessons:
    Results forthcoming.
    Antoinette Schoar

    Identifying Information Asymmetries in a Consumer Credit Market in South Africa

    Policy Issue: 
    Access to credit may enable the poor to start or expand a business, increase investments in health and education, and cope with risks, such as medical emergencies or droughts. However, in the presence of strong competing demands for limited resources, the poor may be more likely to default on a loan and as higher-risk borrowers, may find it difficult to obtain a loan, even when they are willing to pay high interest rates. This problem is often exacerbated by the presence of information asymmetries, or differences in information available to the lender and borrower. In credit markets, borrowers usually have better information than the lender. Borrowers have better information about themselves, the prospects of the investment activities for which the funds are borrowed, the risks associated, and their likelihood of default. If lenders do not have full, accurate information about a borrower, they may be more hesitant to offer credit, particularly to poor borrowers who have a higher initial risk of default.
     
    There are two types of information asymmetries. The first, which is often called “hidden information,” supposes that only borrowers who know beforehand that they will not be able to repay the loan will accept the high interest rates that accompany high-risk loans. The second type, commonly referred to as “hidden action,” supposes that borrowers given high interest rates have greater incentives to default since it becomes more costly to repay the loan. If lenders know which of these effects is more responsible for loan defaults among high-risk borrowers, they may be better able to design policies that increase the likelihood of repayment, which would allow them to extend access to credit to those who are generally considered to be too high of a risk.
     
    Context of the Evaluation: 
    The partner lending institution was one of the largest and most profitable micro-lenders in South Africa, with a network of more than 100 branches across the country offering small, high-interest, short-term credit with fixed monthly repayment schedules to the working poor. The lender’s median loan size was R1000 (US$150), which was about one-third of the average monthly income of its borrowers. The partner typically offered four-month loans with an interest rate between 7.75 and 11.75 percent per month depending on observable risk, with 75 percent of clients in the high-risk (11.75 percent) category. Risk was determined through a combination of a centralized credit scoring system and loan officer discretion. Half of new loan applicants were denied for a variety of reasons including unconfirmed employment, suspicion of fraud, poor credit rating, and excessive debt burden. Of those who were approved, many did not repay their loans; about 30 percent of first-time borrowers and 15 percent of repeat borrowers defaulted.
     
    Details of the Intervention: 
    Researchers sought to determine the presence and relative importance of “hidden information” and “hidden action” effects to explain the high rate of default amongst high-risk borrowers in South Africa. In the summer of 2003, the partner lender mailed a brochure to 57,533 former clients with a good repayment history offering a randomly-assigned interest rate, which was conditional on their previous designation as low, medium, or high-risk borrowers—high-risk borrowers were offered high rates, low-risk borrowers low rates. In all, 5028 clients accepted the offer, of which 4348 were approved for a loan.
     
    While meeting with loan officers to determine the conditions of their loan, 41 percent of borrowers were randomly selected to receive an offer for a new interest rate (the contract rate) that was lower than the original offer rate they received in the brochure.
    After the loan contracts were finalized, a random 47 percent of the borrowers who had received the lower contract rate were informed that they would receive that same low rate on all future loans for the next year as long as they repaid the initial loan on time. The guaranteed future rate was designed to give borrowers a greater incentive to repay their initial loan.
    By randomizing the interest rate along three dimensions—(i) the initial offer rate featured in the mailer, (ii) the contract rate that was revealed only after the borrower agreed to the initial offer rate, and (iii) the future rate that extended preferential pricing on future loans to borrowers who remained in good standing—the researchers essentially created five different groups whose repayment rates could be compared to determine whether hidden information or hidden action effects have a larger impact on loan repayment.
    ·         Group 1: High offer rate, high contract rate, no low future rate
    ·         Group 2: High offer rate, low contract rate, guaranteed low future rate
    ·         Group 3: High offer rate, low contract rate, no low future rate
    ·         Group 4: Low offer rate, low contract rate, guaranteed low future rate
    ·         Group 5: Low offer rate, low contract rate, no low future rate
     
    Results and Policy Lessons: 
    Hidden Information: To identify any hidden information effect, within the sample that received the low contract rate, the repayment behavior of clients who received a higher initial offer rate was compared to that of clients who received a low initial offer rate. The hidden information effect would occur if the higher initial offer rate attracted those with a (unobservable) lower probability of repaying the loan. However, the results indicate that the initial offer rate had no effect on the rate of default; those who received the high offer rate were no more likely to default than those who received the low offer rate, which suggests that borrowers did not accept the high interest rate because they knew they would not be able to repay.
     
    Hidden Action: To detect any effect of hidden action, within the sample that accepted the high initial offer rate, researchers compared the repayment behavior of clients that were offered the high contract rate with that of clients that were offered the low contract rate. If clients that received the high contract rate were more likely to default because it was more costly to repay the loan that would indicate hidden action effects. Conversely, the results indicate that borrowers who were offered the higher contract rate were no more likely to default.
     
    Comparing the repayment behavior of groups that received the same initial offer rate and contract rate, but different repayment incentives, can also identify hidden action effects. The results indicate that borrowers who were guaranteed a low future rate if they repaid their initial loan were 13 to 21 percent less likely to default on their loan than the average borrower, and the larger the discount on future loans, the less likely borrowers were to default. This suggests that high-risk borrowers may normally deem it too costly to repay their loans, even when given a lower interest rate, but they may be more motivated to repay when offered an additional incentive.
     
    Related Papers Citations: 
    Karlan, Dean, and Jonathan Zinman. 2009. “Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Experiment.” Econometrica 77 (6): 1993-2008.

     

    Text Message Loan Repayment Reminders for Micro-Borrowers in the Philippines

    Policy Issue: 
    The recent and rapid growth of the microfinance industry in the developing world can be attributed, in large part, to the achievement of impressively high loan repayment rates among microborrowers. However, although final default rates are low amongst microfinance borrowers, late repayment is a much larger issue. While microborrowers have surprised skeptics with their ability to repay loans, microfinance institutions (MFIs) and commercial banks lending to the poor still struggle with relatively high transaction costs and low rates of return. All types of MFIs, from strictly for-profit to mission-oriented, would benefit from inexpensive mechanisms for boosting timely repayment rates and lowering administrative costs per borrower. One such solution may be automated loan repayment reminders sent via text (or SMS) on mobile phones. This study tests the effectiveness of one such intervention in improving repayment and reducing default.
     
    Context of the Evaluation: 
    Known as the text message capital of the world, the Philippines witnesses the transmission of over 1 billion text messages every day and thus offers a prime setting for testing the effectiveness of text message reminders on improving client repayment rates.
    Researchers, in partnership with Microenterprise Access to Banking (MABS) and two rural banks in the Philippines, designed a study to test the effectiveness of text message reminders as a tool for boosting repayment among micro-borrowers. Both banks are for-profit institutions that operate individual-liability microfinance lending programs. All new clients at select branches of both banks who had provided cell phone numbers to the bank and who availed of these loans during the study period were automatically enrolled in the study. MABS, a national initiative established to expand financial services, provides technical assistance and training to local banks.
     
    Details of the Intervention: 
    Researchers randomly assigned approximately 1,259 new borrowers who had just received their first loans from their respective banks into a comparison group or one of 12 treatment groups (with various combinations of timing, framing, and personalized messages). Beyond assessing the overall impact of text reminders, the study was designed to explore the importance of timing, framing and personalization of the text message reminders. Regarding timing, researchers explore whether messages received two days before the due date, one day before the due date, or on the due date itself  prove to be the more useful for reminding borrowers to pay. Secondly, the framing, or psychology, of the message sent was varied between emphasizing either the benefit of compliance or the cost of non-compliance to motivate repayment. Finally the importance of personalizing the text message was assessed by comparing messages with the account officer’s name with those containing the client’s name.
     
    Over the course of 16 months between January 2009 and April 2010, cell phone numbers and payment due dates were submitted by the three partner banks on a weekly basis to an automated text message application that sent the assigned text message to borrowers on the appropriate date. All loans required payments on a weekly basis, and the average loan term at the Rural Bank of Mabitac was three months, while the average loan term at Green Bank was six months. 
    Following the enrollment of clients into the study, researchers analyzed bank data through June 2010 to examine differences in repayment rates, instances of default, and late payments across the 12 treatment groups. Researchers also analyzed the cost of the text message system to the banks, taking into account loan officer time, cost of the software development, and administrative costs.
     
    Related Papers Citations: 
    Karlan, Dean, Melanie Morten, and Jonathan Zinman. "A Personal Touch: Text Messaging for Loan Repayment." Working Paper, August 2013.

     

    Credit Market Consequences of Improved Personal Identification: Field Experimental Evidence from Malawi

    Policy Issue: 
    Identity theft is a common crime the world over. In developing countries, the damage caused by identity theft and identity fraud goes far beyond the individual victim, however, and ultimately creates a direct impediment to progress, particularly in credit markets. Biometric technology can help to reduce these problems. A biometric is a measurement of physical or behavioral characteristics used to verify or analyze identity. Common biometrics include a person’s fingerprints, face, iris, or retina patterns; speech; or handwritten signature. These are effective personal identifiers because they are unique and intrinsic to each person, so, unlike conventional identification methods (such as passport numbers or government‐issued identification cards), they cannot be forgotten, lost, or stolen.
    Biometric technology can improve access to credit and insurance markets, especially in countries that do not have a unique identification system to prevent identity fraud—the use of someone else’s identity or a fictitious one to gain access to services otherwise unavailable. In the case of credit, biometric technology can make the idea of future credit denial more than an empty threat by making it easier for financial institutions to withhold new loans from past defaulters and reward responsible past borrowers with increased credit.
     
    Context of the Evaluation: 
    With 80 percent of its population residing in rural areas, Malawi’s economy is focused on agriculture.1 In these rural areas where there is limited access to credit, farmers, often have difficultly investing in agricultural inputs such as fertilizer that can dramatically increase harvest size.  
     
    To fill this gap in demand for credit, Malawi Rural Finance Corporation (MRFC), a government-owned microfinance institution, provides a loan product designed for farmers purchasing “starter kits” from Cheetah Paprika Limited (CP). CP is a privately owned agri‐business company that offers extension services and a package of seeds, pesticides, and fungicides at subsidized rates in exchange for farmers’ commitment to sell the paprika crop to CP at harvest time. The MRFC loans, roughly 17,000 Malawi Kwacha (approximately US$120), come in the form of vouchers, allowing borrowers to collect inputs from pre-approved suppliers who directly bill MRFC. Expected yield for farmers using two bags of fertilizer, the maximum quantity covered by the loan, on one acre of land is between 400‐600kg, compared to 200kg with no inputs.
     
    Details of the Intervention: 
    Smallholder farmers organized in groups of 15‐20 members applied for agricultural input loans to grow paprika and were randomly allocated to either a treatment or comparison group. The study sample covered four districts of the country and consisted of 249 clubs with approximately 3,500 farmers. In keeping with standard MRFC practices, farmers were expected to raise a 15 percent deposit, and were charged interest of 33 percent per year (or 30 percent for repeat borrowers).
     
    After the baseline survey was administered to individual farmers gathering information about demographics, income, assets, risk preferences, and borrowing activities, a training session was held for all clubs on the importance of credit history in ensuring future access to credit. Then, in treatment clubs only, fingerprints were collected as part of the loan application and an explanation was given that this would be used to determine their identity on any future loan applications. Farmers in treatment clubs were given a demonstration of how a computer could identify an individual with a fingerprint scan. In the absence of fingerprinting, identification of farmers relied on the personal knowledge of loan officers.
     
    MRFC loan officers, informed of which groups were fingerprinted, proceeded with normal loan application screening and approval. An endline survey was administered after the harvested crops were sold to CP.
     
    Results and Policy Lessons: 
    The study shows that within the subgroup of farmers who had the highest ex ante default risk, based on risk taking and default behavior, fingerprinting led to increases in repayment rates of about 40 percent. By contrast, fingerprinting had no impact on repayment for farmers with low ex ante default risk. These higher repayment rates are due to fingerprinted borrowers requesting smaller loans amounts to ensure they would be able to repay them and devoting more land and inputs to paprika thus diverting fewer resources to other crops compared to their non‐fingerprinted counterparts.
     
    This study demonstrates the benefits of using biometric technology for lending institutions to identify borrowers and enforce loan repayment.
    Cost Effectiveness: A rough cost‐benefit analysis of the pilot experiment suggests that the benefits from improved repayment greatly outweigh the costs of biometric equipment and fingerprint collection, which accounts for basic training and the time for credit officers to collect biometric data. The benefit‐cost ratio is 2.27.
    1 CIA World Factbook, "Malawi." Available from https://www.cia.gov/library/publications/the-world-factbook/geos/mi.html
     
    Related Papers Citations: 
    Gine, Xavier, Jessica Goldberg, and Dean Yang. 2012. "Credit Market Consequences of Improved Personal Identification: Field Experimental Evidence from Malawi." American Economic Review: 102(6): 2923-2954.  

     

    Dean Yang

    Challenges in Banking Poor in Rural Kenya

    Policy Issue: 
    Access to basic banking services in Sub-Saharan Africa remains limited, and lags far behind other parts of the developing world. Such limited access could potentially have important repercussions on people’s lives. If lack of access to a formal bank account makes it more difficult for people to save, they will be unlikely to have enough saved up to cope with unexpected emergencies such as household illness. When such shocks occur, rather than withdraw money or take a loan from the bank, people might have to take much costlier actions, such as cutting back on food consumption or removing their children from school. Lack of banking access may also make it difficult for people to save up large sums or obtain credit for start-up costs for a business, agricultural inputs, or even preventative health products like anti-malarial bednets. Over the past decade, there as has been a significant push to understand these impacts more fully and to explore strategies to expand access. Comparatively little attention has been paid to the demand side—why people may choose to stay out of the formal banking system.
     
    Context of the Evaluation: 
    In western Kenya, large bank branches are located primarily in major towns, often leaving rural villages with very few options. Villages in the study sample have two options: a “Village Bank”, owned by share-holding villagers and affiliated with a microfinance organization, and a partial-service branch (essentially a sales and information office with an ATM) for a major commercial bank. Both banks have substantial minimum balance requirements and withdrawal fees, and the Village Bank also has an account opening fee. The Village Bank does not pay interest on deposits, and neither does the Commercial Bank, at least for the poor (interest is only paid if the account balance exceeds 20,000 Ksh, or about US$210).
    While both the Village Bank and the Commercial Bank offer credit products, the terms for borrowing vary quite a bit across the two institutions. The Village Bank requires the formation of a group of at least 5 people who approve the purpose and amount of each other’s loans, and who serve as mutual guarantors. To take out a loan, borrowers must purchase a share (valued at 300 Ksh each, or US$3.20) in the bank, and are then eligible to borrow up to four times the value of shares owned at an interest rates between 1.25 and 1.5 percent per month. The Commercial Bank grants microloans to existing businesses for individuals who have had an account at the Commercial Bank or with another Commercial Bank for at least 3 months. Two guarantors and full collateral are required for each loan, which must be repaid within 6 months, at an interest a rate of 1.5 percent per month. 
     
    Details of the Intervention: 
    To better understand the demand for formal financial services, researchers conducted a randomized evaluation in two phases. In the first phase, 55 percent of the total sample of 989 households was randomly offered a voucher for a free savings account at either of the two local banks. Researchers paid the account opening fees, provided the minimum balance, and arranged for the banks to simplify the account opening procedures for study participants, but did not waive the withdrawal fees. The vouchers were delivered to people in their homes, at which time field officers explained how the bank and the account worked, and how to redeem the voucher.
     
    Nine months later, among those who had not received the savings intervention, half were randomly selected to receive information about local credit opportunities. Trained staff visited these individuals at home and delivered a detailed script explaining the rules and procedures for obtaining a loan from either of the two local institutions. Among those who had received the savings intervention previously, half were selected to receive the same financial information script as well as a voucher redeemable for one free share at the Village Bank, thereby removing one of the most significant barriers to getting a loan. 
     
    A background survey collected information on demographic characteristics of the household, sources of income, as well as access to financial services, knowledge and perceptions of available financial services, and saving practices more generally. Nine months after the start of the savings intervention, a survey was administered to a randomly selected half of the sample, asking respondents open-ended questions about their current savings practices, perceived barriers to saving, and perceptions of the various saving mechanisms available to them. For those who had received an account voucher but had not redeemed it, the survey also asked why they had not opened an account. The survey also included a number of questions about familiarity with and interest in local credit options.
     
    Results and Policy Lessons: 
    At baseline, knowledge of banking options was very limited—only 60 percent of adults knew of the bank branches in the area and almost no one knew the fee schedule for account opening or the conditions for applying for a loan.
     
    Savings intervention: While overall take-up of the savings account was 62 percent, only 28 percent of those who opened an account made two or more deposits in the 12 months after account opening. These results suggest that entry costs—be it the cost of acquiring information, the opening fees, or the administrative hassle—are only part of the explanation of the low banking rates observed in the sample. Qualitative surveys with respondents indicate that the most common concerns with available savings mechanisms were risk of embezzlement, unreliable services, and transaction fees.
     
    Credit intervention: Though the vast majority of respondents took the vouchers when offered, only 40 percent redeemed them and only 3 percent had even started the process of applying for a loan 6 months later. Evidence from qualitative surveys on barriers to borrowing suggests that the fear of losing one’s collateral if one cannot repay the loan is the primary deterrent. 
     
    Overall, the results suggest that simply expanding existing services is not likely to massively increase formal banking use among the majority of the poor unless quality can be ensured, fees can be made affordable, and trust issues are addressed. 
     
    Related Papers Citations: 
    Dupas, Pascaline, Sarah Green, Anthony Keats, and Jonathan Robinson. "Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province." NBER Working Paper #17851, Cambridge, February 2012.

     

    Pascaline Dupas

    Financial Literacy, Access to Finance and the Effect of Being Banked in Indonesia

    Policy Issue: 
    Savings and investment are widely thought to be important factors in a country’s economic growth. However, the determinants of demand for financial services are not well understood, particularly in low-income countries where a large proportion of the population still uses informal financial services such as moneylenders or savings groups. There are two plausible theories that may explain this limited demand for formal financial services in low-income countries. First, because these services involve high fixed costs and are therefore expensive to provide, low-income individuals may not be find the services provide sufficient value compared to the user cost. Alternatively, limited financial literacy – knowledge or understanding of financial services and products – may serve as a barrier to demand for financial services: if individuals are not familiar or comfortable with financial products, they are unlikely to try to use them. While these two ideas are not mutually exclusive, they have significantly different implications for the development of financial markets around the world, and suggest very different actions for those wishing to expand financial services use.
     
    Context of the Evaluation: 
    In Indonesia, financial literacy is believed to be one of the most important barriers to accessing credit. This may in part be explained by low levels of education: measured as a share of GDP, education expenditures in Indonesia are the lowest in the world. However, and in contrast to many developing countries where access to credit is sparse, the Indonesian banking system has a wide geographical reach. Moreover, Indonesian banks have traditionally offered savings accounts with low minimum deposits designed to serve the needs of low-income customers. The minimum deposit to open a savings account is the nation’s largest bank, Bank Rakyat Indonesia (BRI), is only US$0.53, and interest is paid on balances greater than US$1.06. This is significant, considering that the per-capita income in Indonesia is approximately US$1,918. Yet only 41 percent of the total population and 32 percent of rural Indonesia households have a formal savings account.
     
    Details of the Intervention: 
    In order to measure household financial literacy and its impact on demand for financial services, researchers conducted a household survey in Indonesia between July and December 2007. Around 3,300 households across 112 villages in Indonesia were randomly selected to participate in the survey, which covered financial literacy as well as other household characteristics that might be important determinants of financial behavior, including cognitive ability, educational status, risk aversion, asset ownership, and demographics. The survey results were supplemented by data from a comparable 2006 survey of 1,500 households in India.
     
    After completing the financial literacy survey, each of the unbanked households in Indonesia was invited to participate in a follow-up field experiment, designed to directly test the relative importance of financial literacy and prices in determining demand for banking services. If a respondent agreed to participate, he or she was subsequently randomly assigned a financial incentive level, ranging from US$3-$14, to open a savings account with Bank Rakyat Indonesia. Half of the respondents were then randomly chosen to attend a two-hour financial training session to be held in the village on a weekend within the month. Researchers worked with Microfinance Innovation Center for Resources and Alternatives (MICRA), an organization that provides consulting and training programs to banks and microfinance organizations in Indonesia, to develop a targeted training curriculum and a two-day training program for all trainers.
    Household surveys were complemented by administrative data from Bank Rakyat Indonesia to measure the impact of incentives and the financial education program on savings account take-up.
     
    Results and Policy Lessons: 
    The survey results from both India and Indonesia suggest that, while financial literacy is low, especially in India, it is an important predictor of household financial behavior and well-being. Moreover, the demand for financial education seems to be quite high: 69 percent of those invited to participate in the financial education program choose to attend the course.
     
    However, the experimental results indicate that the financial education program was not an effective tool for promoting the use of bank accounts. The program had no effect on the probability of opening a formal savings account, except for households with no schooling, for whom training increased the probability of opening an account by 12.3 percentage points.
     
    Modest financial subsidies, in contrast, had large effects, significantly increasing the share of households that opened a formal savings account within the subsequent two months. An increase in the incentive from US$3 to US$14 increased the share of households that open a formal savings account from 3.5 percent to 12.7 percent, an almost three-fold increase. Follow-up analysis conducted two years after the intervention also showed that households that received the highest incentive were significantly more likely to still have used their bank accounts in the past year compared to those who received the lowest incentive.
     
    Overall, the results suggest that take-up of formal financial services may be more easily achieved through measures designed to reduce the price of financial services, rather than through large-scale financial literacy education. 
     
    Related Papers Citations: 
    Cole, Shawn, Thomas Sampson, and Bilal Zia. 2011. "Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?" The Journal of Finance 66(6): 1844-67.

     

    Shawn Cole

    Train the Trainer: Promoting Savings by Training Banking Business Correspondent Agents in Adhra Pradesh

    Policy Issue: 
    Formal banking has expanded dramatically in developing countries in the past few decades. Five hundred to eight hundred million previously unbanked individuals now have access to financial services thanks to the government-supported expansion of traditional banks, or innovations such as mobile banking or business correspondents. However, evidence shows that levels of financial literacy are low in both developing and developed countries, making it difficult for many customers to understand and use the range of financial products and services available to them. Many organizations have offered financial education classes in an attempt to address this need, but researchers have found that these courses are often expensive, poorly attended, and unreliable in terms of quality. Attendees in turn gain a limited amount of financial knowledge and the classes have little long run impact on financial behavior.
     
    While improving customers’ financial capabilities may help them save more and make the most of the financial services available to them, innovations are needed to overcome the high cost and low long-term impact of traditional training interventions. These interventions could leverage technology and characteristics unique to local contexts to reach the most underserved and marginalized segments of society. In this project, researchers look at two such innovations: training banking agents to provide financial information to customers and using mobile phones as a medium for communicating financial information.
     
    Context of the Evaluation: 
    Andhra Pradesh, a state in southeastern India, has a highly developed network of business correspondent agents (BCAs). BCAs, who are all women in the context of this evaluation, are not employed by banks but act as intermediaries connecting low-income, last-mile customers with banking services. Customers can open accounts, receive government electronic benefits transfers, make deposits, withdraw money, and in some cases purchase other financial products such as insurance policies or pensions. Customers generally live in rural or semi-urban areas far from formal bank branches, and work in agriculture, construction, or fishing. As many of these individuals access banking services solely through BCAs, the agents are often their primary source of information about financial products and practices.
     
    Details of the Intervention: 
    This intervention is conducted in partnership with FINO Fintech Foundation, one of the largest providers of business correspondent services in India, and involves different ways to encourage customers to save actively.
    The evaluation has two main arms. First, researchers are studying a BCA-level intervention and testing the effect of training and incentivizing BCAs on the savings and financial capability of the customers they serve. They are comparing the effect of disseminating information through BCAs to simply incentivizing BCAs to encourage their customers to save. The 1,250 BCAs from three districts in the state were randomly assigned to five different treatment groups, which will allow the researchers to disentangle the effects of three program components:
    ·         Training session, no mobile platform, no incentive program (250 BCAs)
    ·         Training session, mobile platform, no incentive program (250 BCAs)
    ·         Training session, no mobile platform, incentive program (250 BCAs)
    ·         Training session, mobile platform, incentive program (250 BCAs)
    ·         Comparison group with no training (250 BCAs)
     
    All BCAs who were not in the comparison group attended a general training session, where BCAs learned about a new type of savings account made available to their customers. In addition, some BCAs learned how to use a new mobile platform, which allows them to browse information about financial products and ask questions in a forum. Finally, some were enrolled in an incentive program, which entered top-performing BCAs in terms of savings achievements in a lottery for prizes.
    In the second arm of this evaluation, researchers conducted a customer-level intervention with 1,000 individuals. Half of these customers were invited to use a financial helpline similar to the mobile platform used by the BCAs. This arm of the intervention will allow the researchers to compare the effect of providing information through a trained BCA with allowing customers to directly access information about financial services.
     
    Results and Policy Lessons: 
    Results forthcoming.
     
    Shawn Cole

    The Impact of Smartcard Electronic Transfers on Public Distribution

    Advances in payments technology have the potential to improve the efficiency of slow and corrupt public welfare programs. Researchers tested how Smartcards, which coupled electronic transfers with biometric authentication, affected the functioning of two government welfare schemes in India. They found that even though the new Smartcard system was not fully implemented, it resulted in a faster and less corrupt payments process without adversely affecting program access. Investing in Smartcards was cost-effective, and beneficiaries overwhelmingly approved the new payment system.
     
    Policy Issue 
     
    State-sponsored welfare programs are often constrained by corruption and inefficiency. The problem is of particular concern in India, where by some measures, only 15 percent of spending on social programs actually reaches the intended beneficiaries. Such corruption strains state finances and reduces the potential impact of government programs. Transferring benefits through payment systems that use biometric authentication to verify recipients’ identities may help address these challenges. Secure electronic transfers may reduce financial leakages, transaction costs, and time spent accessing payments. However, reducing one form of corruption may simply displace it into other areas, and switching to electronic payments may also limit participation if beneficiaries do not register for biometric cards, if they lose their cards, or if technical challenges prevent them from receiving payments.  
     
    Evaluation Context
     
    In India, there is widespread interest in using new payments technologies to improve the performance of public welfare programs and increase financial inclusion. In 2009, the national government launched an ambitious initiative, called Aadhaar, to give all 1.2 billion residents unique, biometric IDs, and then make payments to beneficiaries of social programs via bank accounts linked to these IDs.
     
    Some state governments have developed their own electronic transfer systems alongside the national identification project. In 2006 , the Government of Andhra Pradesh, in southeast India, started an initiative to shift towards using "Smartcards" to transfer government benefits to the poor. While the government intends to eventually use Smartcards for a wide range of programs, it piloted their use with two large social welfare schemes: the Mahatma Gandhi National Rural Employment Scheme (NREGS)—which guarantees rural households 100 days of paid employment per year—and Social Security Pensions (SSP)—which makes monthly payments to elderly, widowed, and disabled individuals. In 2010, facing several logistical challenges, the government decided to restart the program in eight districts where the Smartcards had yet to be rolled out. These eight districts, which are spread throughout the state, have a combined rural population of about 19 million people. 
     
    Description of the Intervention 
     
    Researchers used a randomized evaluation to assess the impact of Smartcards on leakages in NREGS and SSP, and the welfare of program beneficiaries. Researchers partnered with the Government of Andhra Pradesh to randomize the roll out of the program in the eight districts that had not yet received Smartcards in three waves over two years. The Smartcard program was introduced in 113 mandals (sub-districts) in the first wave, 195 mandals in the second wave, and the remaining 45 mandals in the third wave. The analysis compared the first wave to receive the program with the third wave of mandals, where Smartcards were not introduced until after the final survey.
     
    The program introduced two major changes to the existing payment system: it required beneficiaries to biometrically authenticate their identity before collecting payments, and it delivered payments through a Customer Service Provider (CSP) in each village, rather than at a more distant post office. When beneficiaries enrolled in the Smartcard program, their fingerprints and a photograph were taken, and they were issued a bank account and a Smartcard, which contained a chip storing the biometric and bank account information.
     
    In order to collect a payment, beneficiaries visited the local CSP, who was usually a secondary school-educated woman from a traditionally disadvantaged caste who resided in the village. The CSP kept a small device which could read the beneficiary’s fingerprint and match it with the details stored in the Smartcard. If the match was successful, the CSP disbursed cash and the authentication device printed a receipt.
     
    Results
     
    Researchers found that the Smartcard program reduced the time it took beneficiaries to receive payments, reduced leakages, and increased beneficiary satisfaction, even though it was not fully implemented. 
     
    Take-up: After two years, about 81 percent of villages in the first wave of the program rollout had installed the Smartcard-based payment system for NREGS and 86 percent had adopted it for SSP. In villages where the new payments system was available, about 65 percent of payments were made to beneficiaries with Smartcards, meaning that just over 50 percent of all payments in treatment areas were made using the new system.
     
    Payment time: In areas assigned to adopt the Smartcard payment system, the amount of time NREGS beneficiaries spent collecting payment fell by 21 minutes (a 19 percent reduction from 112 minutes). The system also reduced the lag between working on an NREGS project and collecting payment by about seven days (a 21 percent reduction from 34 days). There was no significant effect on the amount of time SSP beneficiaries waited to collect their payments, but unlike NREGS payments, these payments were delivered at the village-level prior to the adoption of Smartcards. 
     
    Leakages: NREGS recipients in areas assigned to receive the Smartcard system reported weekly earnings that were Rs. 35 higher (a 24 percent increase from Rs. 146). However, there were no major impacts on the amount the government spent on the NREGS program, suggesting a reduction in leakages. There was no significant impact on earnings for SSP beneficiaries, as these benefits were fixed, but there was a 1.8 percentage point reduction in the incidence of bribes demanded for disbursing payment (a 47 percent reduction from 3.8 percent). 
     
    Beneficiary satisfaction: In surveys, 84 percent of NREGS beneficiaries and 91 percent of SSP beneficiaries preferred Smartcards to the status quo. However, many recipients feared losing their Smartcards (53 percent of NREGS beneficiaries and 62 percent of SSP beneficiaries) or reported having problems with the authentication device (49 percent of NREGS beneficiaries and 59 percent of SSP beneficiaries).
     
    Cost effectiveness: Researchers estimated the value of the time beneficiaries spent collecting payments and found that the value of time savings to beneficiaries (US$4.44 million) was approximately the same as the cost of the new system (US$4.25 million) for NREGS. Although the cost savings were less substantial for SSP (US$320,000, with system costs of US$1.85 million), these calculations suggest that the times savings to beneficiaries alone can sometimes justify the costs of implementing improved payments technologies. On top of these pure efficiency gains, there was an estimated $38.7 million reduction in annual leakage.
     

    Access to Work: Facilitating Migration in the Philippines

    In 2009 well over a million Filipino citizens worked overseas, collectively sending home billions of US dollars in remittances. The majority of overseas workers come from urban areas. This project explores some of the barriers to migration for rural inhabitants, such as lack of information, credit constraints, and the complex Philippines passport process.

    Financial Education Delivered through Radio and Videos among Low-Income Households in Cuzco, Peru

    Policy Issue:

    Microcredit is often offered in conjunction with client education services, to provide training for clients through the existing infrastructure. Karlan and Valdivia (2008) found that business training for microfinance clients improved business knowledge, practices and revenues for beneficiaries and increased repayment and client retention rates for the institution. Financial literacy is another educational topic that may be effective in improving economic conditions of clients and financial conditions for lenders.  By offering financial trainings with credit, microfinance institutions may help clients to better manage their loan repayment and avoid overindebtedness.  Microfinance institutions may minimize educational costs and improve outreach of the model by using information and communication technologies (ICTs) such as radio and television.

    Context of Evaluation:

    Arariwa is a NGO based in Cusco, Peru which serves much of Southern Peru.  Arariwa offers livelihood trainings, technical skill development, and microfinance products to clients in these areas. To offer microfinance, Arariwa establishes communal banks that participate in group savings, loans, and educational programs. In an effort to improve client success, Arariwa is utilizing its existing infrastructure to provide financial education.

    Description of Intervention:

    A total of 666 communal banks were randomly assigned to a treatment group, which received a financial education module, or a comparison group which received education on other topics such as health and self-esteem. 

    The financial literacy program consisted of nine monthly training sessions that used both video and radio components to convey lessons.  The sessions, provided during monthly bank meetings, were based off a curriculum adapted from Freedom from Hunger’s (FFH) training modules, and also used short videos (5-7 minutes in length), activities, and moments of reflection to reinforce key concepts.  .  Training sessions lasted 45-minutes  and covered the following topics: creating financial goals and savings plans, investing in business, calculating loan payments, and avoiding default.  After meetings, participants were asked to listen to a 25-minute radio program to reinforce the training content and to complete a set of homework questions. The radio program was broadcast four times a month and presented testimonies from successful Arariwa clients.

    Results and Policy Lessons:

    Low implementation levels led a discontinuation of the evaluation. After 11 months, only one percent of the communal banks in the treatment group had completed the full training program. Problems faced by the implementer included: little preparation of credit officers to assume facilitation, low attendance levels at training sessions, and delinquency crises requiring credit officers to focus most of the meeting on collecting repayments. ICTs used as complements to the training presented very limited take-up and usage. The video component was often difficult to broadcast during meetings due to challenges in obtaining TV sets and DVD players in rural communities and as a result the median bank only trained with the DVD one time.  Less than seven percent of the members in the treatment group listened regularly to the radio program, despite a set of incentives connected to the program.

    The Impact of Business Training and Capital for High Potential Entrepreneurs in Colombia

    Small and medium enterprises (SMEs) are thought to be important drivers of growth in developing economies, but entrepreneurs in these countries face many barriers, including poor access to training, finance, and business networks. In Colombia, Fundación Bavaria’s “Destapa Futuro” (Open the Future) program identifies promising enterprises and provides them with a suite of financial, technical, business, and training resources. Researchers found that the trainings did not affect key business outcomes, such as sales and profits, but helped entrepreneurs to expand their business networks. 
     
    For additional information on current SME Initiative projects, click here.
     
    Policy Issue:
    Small and medium enterprises (SMEs) are thought to be important sources of innovation and employment in developing countries, due to their flexibility in responding to new market opportunities and their potential for growth. However, entrepreneurs face a number of barriers to expanding their businesses and employing more workers, including constrained access to credit, lack of management skills, and unfavorable government regulation. Business training, capital, and mentorship are possible tools that could help SMEs overcome these barriers, but existing evaluations of business training programs and capital injections for enterpreneurs have found mixed results. Additional research is needed to understand how training programs should be designed and delivered in order to best help entrepreneurs develop their operations and foster economic growth.
     
    Context of Evaluation:
    Fundación Bavaria, a foundation started by one of the largest beverage companies in Colombia, works to foster entrepreneurship in Colombia through an intensive, year-long program called “Destapa Futuro” (Open the Future). The program uses a competitive process to identify entrepreneurs with promising business plans or small start-ups and provides them with business training, capital, technical advice, and the opportunity to network with investors. Since 2005, Bavaria has spent close to $10 million on the program, trained thousands of entrepreneurs, and financially assisted more than 200 businesses. 
     
    Destapa Futuro targets relatively experienced and educated entrepreneurs. The average participant was 36 years old, had 16 years of education, and had four years of experience as an entrepreneur. Seventy-three percent were male. During the fifth round of Destapa Futuro in 2010-2011, these participants received business training from two organziations that support entrepreneurs, the Centro de Formación Empresarial (CFE) and Endeavor Colombia. 
     
    Description of Intervention:
    Researchers evaluated Destapa Futuro’s impact on business outcomes, the difference between the two organization’s different training strategies, and the relative impact of receiving prizes in cash or in kind. In order to participate in the program, entrepreneurs completed an online application, which included questions on business characteristics, leadership potential, experience in business administration, and potential social impact. From the database of 8400 applications 475 candidates, half of them with business plans and the other half with existing start-ups, were selected and ranked. 
     
    This pool of 475 entrepreneurs was divided into three groups:
    • The top 25 entrepreneurs all received the Endeavor training. Because their participation in the training program was not randomly assigned, they were not part of the study sample.
    • The following 100 entrepreneurs were randomly assigned to receive training from either Endeavor or CFE.
    • The remaining 350 entrepreneurs were randomly assigned to either the CFE training group or the comparison group, which did not receive any training.
    Both the Endeavor and CFE trainings included modules on financial management, marketing and business plan development. Endeavor offered an in-person training,delivered in two two-day sessions. All classes had a maximum of 20 entrepreneurs per trainer. In addition to lectures, each entrepreneur participated in several one-on-one discussions with program coordinators, trainers and mentors. CFE used a combination of online learning and in-person classes.  In the online component, which consisted of four modules over one month, participants were assigned to groups of 18-21 students. They completed online modules with homework assignments, participated in online forums, and collaborated via email and phone. The entrepreneurs who completed homework and participated in forums were eligible for the in-classroom training, which consisted of four days of classes with the same tutor assigned during the online training. 
     
    After the CFE and Endeavor trainings were completed, the 100 entrepreneurs with the best business plans and course performance were selected to receive an additional coaching session in preparation for the business plan presentation that would determine the prize winners. The coaching session provided contestants with feedback on content and style of their presentations. After the presentations, the best 60 entrepreneurs were awarded a prize to fund their bussines.
     
    In order to test how having the flexibility to choose how to spend the prize money affected business outcomes, half of the winners were randomly assigned to receive cash, and the other half received an in-kind prize. Cash prizes ranged from about 5,600 USD to 56,000 USD (10-100 million COP). Fundacion Bavaria determined the nature of the in-kind prizes based on the entrepreneur’s requests and available resources, and they included business equipment, marketing and advertising materials and other business investments.  Forty winners were also randomly selected to receive mentorships with Bavaria executives, who listened to business plan prsentations, gave advice, and suggested potential contacts.
     
    Results and Policy Lessons:
    Impact on business outcomes: Enterpreneurs who participated in the CFE training did not have higher sales, costs, profits or number of employees than the entrepeneurs who did not receive any training.  Entrepreneurs in the CFE training were just as likely to start a company as entrepereneurs who did not receive training. Similarly,  entrepreneurs who participated in the Endeavor training did not have significantly different business outcomes compared to those who participated in the CFE training.
     
    One of the goals of the Destapa Futuro program was to help entrepreneurs expand their business networks by meeting fellow entrepreneurs, trainers and mentors. Entrepreneurs in the CFE training who did not have existing start-ups were more likely to secure a contact with a partner, ally or investor than entrepreneurs who did not participate in the training. The Endeavor training was more beneficial for network expansion for enterpreneurs with existing start-ups, while the CFE training was more beneficial for enterpreneurs with business plans only.
     
    In-kind versus cash prizes: Compared to recipients of cash, winners of in-kind prizes did not have significantly different sales, profits or costs. The type of prize also did not influence investment choices of entrepreneurs, with the majority investing their winnings into machinery and equipment. Since the type of prize did not affect outcomes of entrepreneurs, and it was logistically easier and faster to disburse cash prizes, in this context cash may be a preferred option.
     
    In the sixth round of Destapa Futuro, Bavaria Foundation modified the program to be more financially sustainable while providing more personalized support to entrepreneurs.

    Voluntary Financial Education in Mexico: Evidence on Limitations and Effects

    Policy Issue:
    As access to financial services expands around the world, there is also a growing concern that many consumers may not have sufficient information and financial acumen to use these new financial products responsibly. In response to these concerns, many governments, employers, non-profit organizations and even commercial banks have started to provide financial literacy courses with the aim of improving financial education. Despite financial education programs becoming increasingly popular amongst policy-makers and financial providers, they remain broadly unpopular amongst customers, and the evidence on the benefits from these programs has been inconclusive. Are there economic or behavioral constraints which prevent more individuals from participating in such programs? Moreover, are there any benefits to these individuals from participating in financial education programs? 
     
    Context of the Evaluation:
    In Mexico, a survey found 62 percent of respondents lack a basic financial education and were unaware of their rights and responsibilities with respect to financial institutions, and according to the 2012 Visa Financial Literacy Barometer, Mexico ranks in the lowest third of the 28 countries on questions relating to having a household budget or savings set aside for an emergency. 
     
    Details of the Intervention:
    The financial literacy course evaluated is currently being offered in Mexico City, and has trained over 300,000 individuals over the past several years. The program is offered free to adults, with the goal of helping them manage their finances responsibly. The program, which lasts a half day, consists of videos shown on a computer terminal, with an instructor to facilitate discussion and interactive exercises among groups, has modules covering saving, retirement, credit cards, and responsible use of credit. At the end of the course, students are given a short test and a CD containing the tools used in the exercises. 
     
    Participants were recruited online, via mail, and in person surveys on busy street locations and in line at the partner financial institution (see results section for details), for a total sample of 3,503 people, with 1,751 randomly selected to be offered the course and 1,752 in a comparison group. To test ways to encourage participation, those offered the course were randomly divided into one of five groups, and offered either a 1,000 Pesos ($72) Walmart gift card for completing the training, a 500 Pesos ($36) gift card for completing the training, a 500 Pesos ($36) gift card they would receive a month after completing the training, a free taxi ride to and from the course, a video CD with positive testimonials about the course from previous attendees, or a comparison group who received nothing additional. The baseline survey showed nearly 65 percent of the sample had made a savings deposit in the last month, and about 40 percent had a credit card. Of those with credit cards only half had made the minimum payment in all previous months, and about 20 percent had made a late payment within the past six months.
     
    Results and Policy Lessons:
    Take-up: For those offered the course, the monetary incentive of $36 increased the take-up rate from about 18 percent to 27 percent while the $72 incentive increased take-up further to 33 percent, although the difference between the two monetary groups is not statistically significant. The impact is exactly the same when $36 is offered immediately at the completion of training, or one month after training. This suggests that concerns that benefits from the course accrue only in the future while the effort of attending the course is made upfront are not the main barriers to participation in training. In contrast to the monetary incentives, the transportation assistance and the testimonials did not significantly increase attendance.
     
    Financial Knowledge: Measured across an index of eight questions about financial knowledge questions, the group offered the course scored slightly higher, with an average of 34 percent of the questions answered correctly compared 31 percent in the comparison group.
     
    Savings Behaviors and Outcomes: There was no significant difference between the group offered the course and comparison group in reported rates of four behaviors (checking financial institution transactions regularly, keeping track of expenses, making a budget, having a savings goal). Individuals who were offered the course were slightly more likely to say that they had cut expenses in the past 3 months. This change is reflected in a small increase in their savings, but the increase appears to be short-lived. There were no significant differences between the group offered the course and comparison group across a range of measures of credit card and loan use. These findings suggest that overall interest in financial literacy courses is low, but that at least in this instance, there were few benefits to those who participated in the program.
     

    Train the Trainer: Promoting Savings by Training Banking Business Correspondent Agents in Andhra Pradesh

    Hundreds of millions of previously unbanked individuals in the developing world now have access to formal financial services, but low levels of financial literacy and limited access to qualified advice make it difficult for people to make the most of these financial services. In India, many people access banks through business correspondent agents, who are locally-based third party intermediaries who have direct and constant contact with end users, and therefore may be able to increase financial capability more than traditional financial literacy training programs. In this ongoing evaluation, researchers are testing the relative effect on knowledge and savings behaviors of training customers through these agents and giving customers financial information directly, using for this purpose an innovative mobile-based information platform.

    Policy Issues: 
    Formal banking has expanded dramatically in developing countries in the past few decades. Five hundred to eight hundred million previously unbanked individuals now have access to financial services thanks to the government-supported expansion of traditional banks, or innovations such as mobile banking or business correspondents. However, evidence shows that levels of financial literacy are low in both developing and developed countries, making it difficult for many customers to understand and use the range of financial products and services available to them. Many organizations have offered financial education classes in an attempt to address this need, but researchers have found that these courses are often expensive, poorly attended, and unreliable in terms of quality. Attendees in turn gain a limited amount of financial knowledge and the classes have little long run impact on financial behavior.
     
    While improving customers’ financial capabilities may help them save more and make the most of the financial services available to them, innovations are needed to overcome the high cost and low long-term impact of traditional training interventions. These interventions could leverage technology and characteristics unique to local contexts to reach the most underserved and marginalized segments of society. In this project, researchers look at two such innovations: Training banking agents to provide financial information to customers, and using mobile phones as a medium for communicating financial information. 
     
    Context:
    Andhra Pradesh, a state in southeastern India, has a highly developed network of business correspondent agents (BCAs). BCAs, who are all women in the context of this evaluation, are not employed by banks but act as intermediaries connecting low-income, last-mile customers with banking services. Customers can open accounts, receive government electronic benefits transfers, make deposits, withdraw money, and in some cases purchase other financial products such as insurance policies or pensions. Customers generally live in rural or semi-urban areas far from formal bank branches, and work in agriculture, construction, or fishing. As many of these individuals access banking services solely through BCAs, the agents are often their primary source of information about financial products and practices.
     
    Description of Intervention:
    This intervention is conducted in partnership with FINO Fintech Foundation, one of the largest providers of business correspondent services in India, and involves different ways to encourage customers to save actively.
     
    The evaluation has two main arms. First, researchers are studying a BCA-level intervention and testing the effect of training and incentivizing BCAs on the savings and financial capability of the customers they serve. They are comparing the effect of disseminating information through BCAs to simply incentivizing BCAs to encourage their customers to save. The 1,250 BCAs from three districts in the state were randomly assigned to five different treatment groups, which will allow the researchers to disentangle the effects of three program components:
    • Training session, no mobile platform, no incentive program (250 BCAs)
    • Training session, mobile platform, no incentive program (250 BCAs)
    • Training session, no mobile platform, incentive program (250 BCAs)
    • Training session, mobile platform, incentive program (250 BCAs)
    • Comparison group with no training (250 BCAs)
    All BCAs who were not in the comparison group attended a general training session, where BCAs learned about a new type of savings account made available to their customers. In addition, some BCAs learned how to use a new mobile platform, which allows them to browse information about financial products and ask questions in a forum. Finally, some were enrolled in an incentive program, which entered top-performing BCAs in terms of savings achievements in a lottery for prizes. 
     
    In the second arm of this evaluation, researchers conducted a customer-level intervention with 1,000 individuals. Half of these customers were invited to use a financial helpline similar to the mobile platform used by the BCAs. This arm of the intervention will allow the researchers to compare the effect of providing information through a trained BCA with allowing customers to directly access information about financial services.
     
    Results: 
    Results forthcoming.

    Financial Inclusion for the Rural Poor Using Agent Networks

    Researchers are evaluating whether lowering the cost of accessing savings accounts through local point-of-sale enabled agents and providing financial literacy training impacts the saving and consumption patterns of cash transfer beneficiaries in rural Peru.

    Policy Issues:
    In developing countries, poor households often do not have access to formal financial products or utilize bank accounts to save for the future. Without a safe and secure way to save, many people rely on riskier and more expensive methods of managing their assets. Increasingly, government-to-person cash transfer programs are addressing this issue by providing beneficiaries with formal savings accounts through which they disburse the cash transfers. In Peru, evidence from one such program suggests that very few beneficiaries use their accounts to save, preferring instead to withdraw the entire cash transfer immediately after it is made. Beneficiaries may prefer to withdraw their funds all at once due to the time and cost required to travel to a bank branch or ATM to access their account, especially in rural areas where there is limited banking infrastructure. Would reducing the cost of accessing formal bank accounts lead beneficiaries to use their accounts to save more of their cash transfers or change their spending patterns? This evaluation explores how the introduction of branchless banking affects the costs of accessing cash transfers and how beneficiaries respond to reduced transaction costs. 
     
    Context:
    The Peruvian Ministry of Development and Social Inclusion operates a conditional cash transfer program called JUNTOS. The program provides a bi-monthly transfer of PEN 200 (Peruvian Soles), approximately US$70, to 660,000 impoverished female heads of households who are either pregnant or have children under 19 years of age. The transfers are conditional on households providing access to education, nutrition, and health services for their children. The state bank, Banco de la Nación, opens a savings account for all JUNTOS beneficiaries. While 67 percent of users collect payments through these accounts (as opposed to delivery via armored transport), only 18 percent of users have a bank branch in their district. As a result, most users must collect their payments from a branch in a neighboring district. Preliminary analysis of government data suggests that, on average across all districts, users must commute over five hours and spend 10 percent of their payment on transportation to receive their transfer. Facing such steep costs, most users limit the number of trips they make to a bank branch and withdraw their payments all at once when they do make the trip. Transportation costs are often raised on payment days and markets with an abundance of temptation goods are typically organized around bank branches, leading to a large amount of the transfer to be spent on the day of payment. This pattern of infrequent and relatively large withdrawals may make it difficult for many beneficiaries to use their JUNTOS accounts to save, even if they wish to do so. In an initial survey, 31 percent of JUNTOS beneficiaries report having some type of monetary savings, but only one percent of beneficiaries do so through their JUNTOS account. 
     
    Description of Intervention:
    Researchers are conducting a randomized evaluation to explore the impact of allowing JUNTOS beneficiaries to collect their payments though branchless banking agents. In the branchless banking system, local bank agents, typically shopkeepers, serve as deposit and withdrawal points for account holders to access their funds with debit cards. The agent based network will allow the national bank to increase the number of withdrawal points for JUNTOS users, reducing transportation costs and potentially giving users a greater degree of access to their accounts. If this is the case, users may begin to use their account to save more of their JUNTOS payments, making smaller and more frequent withdrawals. 
     
    In order to evaluate the effect of branchless banking, a sample of 60 sub-regional districts, each with approximately 300 JUNTOS beneficiaries, will be randomly assigned to one of three groups. In the first group, branchless banking agents will be established in each district, allowing beneficiaries to access and withdraw funds from their JUNTOS accounts. In the second group, branchless banking agents will be introduced and users will also receive basic financial literacy education and training on accessing their accounts through branchless banking agents. The third group will serve as a comparison group, where branchless banking agents will be introduced only after the twelve-month evaluation period. One year after banking agents are introduced, the researchers will collect information on savings and consumption behavior from household surveys. The study will also incorporate administrative account usage data from Banco de la Nación and the JUNTOS program to examine how beneficiaries use their accounts when they can access them through branchless banking agents.
     
    Results:
    Results forthcoming.

    Effect of Income Timing and Structure on Consumption and Savings Behavior in Malawi

    With limited resources and many demands on their resources, it is especially important for poor households in developing countries to allocate their money deliberately across various expenditures. Researchers are investigating how paying workers in Malawi either in weekly installments or as a monthly lump sum affects their spending on temptation goods, and how the timing of wage payments, relative to potentially tempting consumption opportunities, changes the impact of either payment structure.

    Policy Issue:
    For most people saving is hard. This is true in particular for poor households in developing countries who need to care for their families with limited resources and who may not have access to secure and convenient savings instruments.  The poor may therefore at times be more at risk of misallocating their income towards non-essential expenditures that they themselves might later regret in a moment of reflection. This may limit their ability to take advantage of potentially profitable opportunities for investment or to buy desired durable goods. Aggregating small, more frequent income payments into a larger, less frequent lump sum payment may help the poor save up for larger sums. Preliminary results suggest that many people in Malawi prefer to receive their pay in larger lump sums in order to plan for large investments such as in education. However, converting regular income payments into a larger, deferred sum may also lead to increased consumption of temptation goods consistent with people feeling the money ‘burning a hole in their pocket.’ There is little research on which factors allow lump sums to help the poor reach savings goals in some cases, while in other cases lead them to give in to temptation, but the specific timing of when the lump sum is dispersed may play a role. This study explores how the timing of wage payments changes how recipients benefit from lump sums versus small income installments. 
     
    Context of the Evaluation:
    In 2008, over 1.15 million, or more than half of, Malawian adults did not have access to any type of financial service, formal or informal. Of those who had access to some financial service, only 19 percent  used a formal bank. The key reasons people reported for keeping their money in bank accounts were to keep their money safe either from theft (62 percent) or to prevent themselves from spending it (33 percent).1 Without access to formal financial services, the majority of people saved their money in the form of cash and subsequently may have been more susceptible to poor spending decisions since their cash was easily accessible. This may have also made it more difficult to say no to neighbors’ or relatives’ requests for a loan. 
     
    Description of the Intervention:
    The researchers will explore whether paying workers either on a weekly basis or in one lump sum affects their spending on temptation goods, and how the timing of wage payments changes the impact of both payment structures. Researchers will partner with the Mulanje Mountain Conservation Trust (MMCT)—a nonprofit organization responsible for the maintenance and conservation of one of Malawi’s national parks—to temporarily hire a pool of workers as part of a sustainability & livelihoods program. Three hundred fifty workers will be hired over the course of three months. Each worker will be randomly assigned to one of two payment schedule groups: the weekly arm or the lump sum arm. Each group will receive the same total amount in wages, but those in the weekly arm will receive their wages on a weekly basis while those in the lump sum arm will receive their wages all at once at the end of the five-week study period. In addition to the randomization in weekly and lump sum arm, individuals will also be randomly assigned to receive their pay either on a tempting date or a non-temping date, thus creating four treatment groups in total. 
     
    The tempting dates will be the major market days in the local area since markets offer the opportunity to overspend. The non-tempting dates will be the day immediately prior to the market day. The non-tempting dates were deliberately timed near the tempting dates to keep them as comparable as possible. The day before, rather than the day after, was chosen to ensure that the delay between the non-tempting date and any future savings opportunity is longer than that for the tempting date. This rules out the possibility that the tempting date could depress savings simply because people have to wait slightly longer before the savings opportunity arises. All payments, on both tempting dates and non-tempting dates, will be issued at the same location: an office located at the site of the market. In order to isolate the effect on spending of having a larger sum of money on the day of the market from the effect of solely being present at the market to receive the payment, all workers will be paid a small incentive to show up at the office on market days even if they are assigned to receive their pay-check on a non-market day, when there is less opportunity to spend on temptation goods. 
     
    A baseline and endline survey will collect information on savings and consumption behavior, focusing on spending on "temptation goods." Respondents will be surveyed shortly after each payday, and asked to report spending over the previous few days so that the impact of receiving the money can be isolated. 
     
    Results:
    Project ongoing; results forthcoming.
     
    1 FinScope Malawi. 2008. “Demand Side Study of Financial Inclusion in Malawi.”
     
    Dean Yang

    Incentives to Save in Ghana

    Researchers are evaluating whether incentives to save are effective at increasing savings levels and whether these higher savings levels persist after the incentives are removed. 

    Policy Issues:
    Savings are an essential tool to help manage irregular income streams, cope with emergencies, and make productive investments. Research shows many of the world’s poor express a desire to save and have the funds to do so, but still struggle to build their savings.12 In some cases, this discrepancy may be due to a lack of access to safe and secure ways to save. However, evidence suggests that many find it difficult to put their savings plans into action even where formal savings options are readily available.3 One way to help individuals meet their savings goals may be to encourage them to develop a habit of saving. If individuals become accustomed to making regular contributions to their savings, they may be more likely to meet their long-term savings goals. Researchers are evaluating whether direct monetary incentives can increase savings rates and instill a habit of saving among small-scale vendors in Ghana.
     
    Context:
    The Aboabo market is located in Tamale, the third largest city in Ghana. The market is composed of more than 2,000 vendors, the majority of whom trade staple goods, such as maize, rice, and vegetables. The Aboabo vendors have access to a wide variety of formal savings products offered by a number of banks, microfinance institutions, and mobile money agents located near the market. Despite the variety of options for people to save, many of the market vendors in Aboabo do not utilize these services. A preliminary survey of mobile money usage conducted for the study indicated that only 57 percent of vendors had heard of the service and only 9 percent had used it, even though 94 percent of vendors owned a mobile phone compatible with the service. 
     
    Description of Intervention:
    Researchers are working with Millicom Ghana Ltd., operators of the Tigo Cash mobile money platform, to evaluate whether providing cash incentives through a mobile money platform can help market vendors develop a lasting habit of savings. 
     
    Prior to the start of the study, Millicom Ghana will hold an intensive marketing and enrollment drive for Tigo Cash among the vendors in Aboabo. Six hundred of the vendors who register with Tigo Cash will be selected to participate in the evaluation. Half will be randomly assigned to receive a cash incentive that will be deposited directly into their mobile money accounts for every week in which they increase their savings balance over the previous week, over the course of three months. Of this group of three hundred vendors, half will receive a small weekly incentive of GHS 0.5 (Ghanaian Cedis) for every GHS 1 they save, up to a maximum of GHS 2 (approximately US$1). The other half will receive a larger weekly incentive of GHS 1 for every additional GHS 1 they save, up to a maximum of GHS 4 (approximately US$2). The remaining 300 vendors will serve as the comparison group, and will not receive weekly incentives. However, they will receive an unannounced cash transfer when the three-month incentive phase ends to help ensure that any difference between the incentive group and the comparison group is a result of habit formation and not the additional income provided by the incentive payments. 
     
    In addition to varying the incentive amount, the timing of payments will be randomly varied across participants who receive the weekly incentives. Varying the timing of payments will help determine the number and continuity of payments needed to establish a habit of saving. The group receiving incentives to save will be randomly assigned to one of three sub-groups:
    • Continuous weekly incentives starting once the baseline survey is complete for a total of 12 weeks of incentive payments. 
    • Continuous weekly incentives starting four weeks after the baseline survey is complete for a total of 8 weeks of incentive payments. 
    • Weekly incentives starting four weeks after the baseline survey is complete, where the incentive payment will not occur on four randomly selected weeks for a total of 8 weeks of incentive payments. 
     
    The researchers will collect information on self-reported savings, consumption, and habit formation from both participants who received the incentives and the comparison group through a series of three household surveys. The first survey will be conducted immediately before the incentive payments begin; the second three months later, immediately after the incentive payments end; and the final survey another three months after that (six months after the first survey). This information will help determine if the incentives prompted people to increase their savings or develop a habit of saving compared to those who did not receive incentive payments. This data will be supplemented by administrative data from Tigo Cash and weekly self-reported habit formation questionnaires completed by a randomly assigned sub-set of all participants. 
     
    Results:
    Project ongoing, results forthcoming.
     
    1 Collins, D., Morduch, J., Ruthrford, S., & Ruthven, O. (2009) Portfolios of the Poor: How the World’s Poor Live on $2 a Day. Princeton, NJ: Princeton University Press.
    2 Duflo, E., Kremer, M., Robinson, J. (2010). Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya. American Economic Review 101 (6): 2350-2390
    3 Baumeister, R.F., Heatherton, T.F., & Tice, D.M. (1994). Losing Control: How and Why  People Fail at Self-Regulation. San Diego, CA: Academic Press.
     

    Powering Small Retailers: the Adoption of Solar Energy under Different Pricing Schemes in Kenya

    The majority of people living in Sub-Saharan Africa do not have access to electricity. Traditional power companies often find it too costly to bring electricity to rural and suburban areas, but in recent years, the cost of alternative energy sources like solar power has fallen dramatically. Providing small businesses with access to reliable electricity through off-grid solar power systems could potentially help small retailers earn more by keeping their businesses open longer and introducing new services. This randomized evaluation tests how price and payment method affect the adoption of off-grid solar power among small retailers near Nairobi and if access to electricity can improve their businesses’ performance.

    Policy Issues: 
    Nearly 70 percent of people living in Sub-Saharan Africa lack access to electricity. Most traditional power companies find it too costly to extend the electric grid to many rural and suburban areas. Without access to power, households and small businesses typically use kerosene-powered lanterns or candles to provide light at night. Access to electricity could potentially help small retail businesses earn more revenue by extending their hours of operation or offering other services to customers, such as mobile phone charging facilities. 
     
    Many have proposed solar power as a way to bring safe and reliable electricity to small businesses and households that cannot access the electric grid. Yet for small retail businesses the cost of off-grid solar power systems may still be prohibitive. How do price and different payment methods affect the adoption and use of off-grid solar power systems among small retailers and how does access to electricity affect their business performance? 
     
    Context:
    The small businesses participating in this study typically sell food, drink, clothing, or other household goods. Access to electricity could potentially allow them to increase their evening operating hours, offer mobile phone charging services in their stores, and save on their own mobile phone charging costs. 
     
    Angaza Design is a company that markets off-grid solar power systems to consumers and businesses in East Africa. Their main product is an LED light unit with integrated mobile phone charging and a detachable 3-watt solar panel to charge the unit’s battery. While the total cost of this solar power system is often too high for small retailers to purchase all at once, Angaza Design allows people to purchase the solar unit for a small down payment and then use a mobile money platform to pay for energy output in affordable increments by “topping up” device credit, just like they currently purchase mobile phone airtime. The device can be disconnected if payments are not made. Regular payments are applied towards paying off the full cost of the device, after which it is automatically “unlocked” and can be used without purchasing additional device credits.
     
    Description of Intervention: 
    Researchers are conducting a randomized evaluation in partnership with Angaza Design and SunnyMoney to estimate the impact of different pricing schemes, payment schedules, and enforcement methods on the adoption of off-grid solar power and the impact of access to electricity on small retail businesses’ revenue and profits. From a sample of 1,849 small retail businesses operating in the outskirts of Nairobi, researchers randomly assigned some businesses to receive one of four different offers to purchase the Angaza Design solar power system and some businesses to serve as the comparison group. Those offered the solar power system received marketing visits in which the salesperson read a script describing the features of the solar power system, the payment process, and penalties for late payments. The salesperson then gave the customer a voucher needed to purchase the solar power system from a sales agent, under one of four different payment schemes: 
    • Offer 1 provides the customer with a pay-as-you-go solar power device at 15 Kenyan shillings (KSH) per hour (about US$0.17) of electricity used. Customers are sent one text message per week to remind them to purchase more solar power time. 
    • Offer 2 instead allows the customer to make weekly payments of 130 KSH (about US$1.70) for unlimited use of the solar power system. The customers are sent a reminder to pay the day before their next payment is due. If a payment is missed, the solar power system automatically shuts off until the payment and a 50 KSH (US$0.56) penalty are paid.  
    • Offer 3 is identical to Offer 2 except that while customers are told about the 50 KSH penalties for non-payment during the initial marketing visit, after they receive the solar power system they are told it will not be applied. If customers fail to make a payment, the solar power system will not work until the retailer pays the weekly installment, but no penalty is charged. 
    • Offer 4 is identical to Offer 2 except that after customers receive the solar power system, they are told that neither the late payment penalty nor the shutoff will be applied if they fail to pay their weekly bill. Under this condition, there are no penalties for failing to pay and the device continues to work.
    Results: 
    Results forthcoming. 
     

    Smoothing the Cost of Education: Primary School Saving in Uganda

    Policy Issue:

    The importance of education is a common refrain in the international development discourse and has inspired campaigns such as the second Millennium Development Goal: to achieve universal primary education. Decreasing primary school dropout rates is one strategy that has been employed to improve education systems. Children drop out for a number of reasons, but financial concerns are often a determining factor. Even when governments finance a significant part of primary education, providing teachers, curriculum and buildings, there are still many costs associated with attending school. Providing scholastic materials such uniforms, pens, pencils and exercise books may pose a significant challenge for poor families. Furthermore, these families may lack access to formal savings services, which may enable them to set aside money for education and keep it secure. This evaluation assesses the impact of a school-based savings program that aims both to encourage savings for school expenses and to promote financial education.

    Context of the Evaluation:

    Uganda’s primary school enrolment rates have increased spectacularly as a result of its policy of Universal Primary Education, which has eliminated most, though not all costs of attending school.  Enrolment has gone from 3.1 million children in 1996 to more than 8.29 million in 2009.  Retaining pupils, however, seems to be a more trying concern, though 94% of Ugandan children enroll in primary school, as few as 32% complete the final class P7[1]. While the government covers costs of teachers and schools, more than 40% of Ugandans find additional school expenses, like uniforms and supplies, unaffordable.

    Description of the Intervention:

    IPA has partnered with the Private Education Development Network (PEDN) and FINCA, Uganda to implement a savings program in Ugandan government primary schools.  The goals of the “Super Savers Program” are to 1: enable pupils and their families to save money for education 2: incentivize and financially enable pupils to remain in school and 3: engender a culture of savings amongst participating pupils.

    During the 2009 scholastic year, IPA, PEDN and FINCA piloted the program in eight government primary schools.  The positive response to the pilot motivated researchers to scale the program and conduct a randomize evaluation of its impact. 

    At the end of 2009, the baseline data was collected in 136 schools in Jinja, Iganga, Mayuge and Luuka Districts after which schools were randomly assigned to a treatment or comparison group. There were 39 schools in each of the two treatment groups and 58 schools in the comparison group.  Throughout the 2010 and 2011 scholastic years (February to November), the program was implemented in the treatment schools. 

    On a weekly basis a Super Savers Program Officer visited each school to assist teachers and pupils with the savings exercise.  Pupils’ savings were kept at the school in a safety lock box.  At the end of each term, the Super Savers Team and partner organization FINCA, Uganda collected the savings from schools and deposited the money into each school’s bank account. The Super Savers Team also conducted a parent sensitization program for the treatment schools, in which meetings were held at each school to present, discuss and teach parents about the program.

    At the beginning of each of the year’s three school terms, FINCA and the Super Savers team returned to all schools to distribute savings to individual pupils. In the first treatment group, pupils received their savings in cash and were able to determine how they would like to spend or save the funds.  In the second treatment group, pupils received their savings in the form a voucher, or coupon for the exact amount a child had saved.  The voucher had to be used to make some educationally related purchase, such as school lunch, exam fees, a uniform, sanitary supplies for girls or to continue saving.  On the day of the savings payout, the Super Savers Team organized a small fair at each school to enable pupils to make these purchases in both cash and voucher treatment groups.

    Comparing outcomes within these two treatment groups, in relation to the comparison group, will help to determine if the intervention is effective in reducing drop-out rates and increasing savings levels, scholastic payments and other education outcomes.

    The Super Savers Team is now preparing for the 2012 scholastic year, which will be used to determine the sustainability of the program and schools’ abilities to implement on their own, with little support from the team.  This will be used to determine the program’s ability to be scaled and its long-term potential.

    Results and Policy Lessons:

    Results forthcoming.


    [1] According to administrative data: http://www.unicef.org/infobycountry/uganda_statistics.html#77

    Redesigning Microsavings – Evidence from a Regular Saver Product in the Philippines

    Microloans are often taken out to pay for everyday expenses or as recurring business capital, when the same goal could be accomplished through regular savings, without interest fees. This study tested whether the commitment features of a loan, specifically the regular payment schedule and penalties for default associated with a loan could also be applied to a savings account. In the Philippines’ Gingoog City and Camiguin Island, households were offered a new savings account which required committing to a regular deposit schedule with a financial penalty for missing payments. Savings rates and other outcomes were compared to those with a traditional commitment savings account and a comparison group.
     
    Policy Issue:
    Evidence suggests that microloans and informal loans are often taken out for consumption (such as school fees or wedding expenses) or for recurring business expenditures, rather than as a one-off investment (for example, to finance a land purchase or to start a business).1,2 If these loans are not being used to generate new income, it is unclear why individuals are willing to pay substantial loan interest charges rather than choosing to save in advance for these foreseeable expenses. 
     
    Traditional commitment savings accounts3,4 allow users to restrict withdrawals until a pre-set savings goal is reached. Restricting withdrawals of past savings without requirement or incentives for the user to make future deposits may pose a challenge for savers who have trouble sticking to a regular deposit schedule. A natural extension of traditional commitment products to savings accounts would mimic the terms of a loan - such as frequency of payments and penalties for noncompliance - and provide people with a way to self-enforce their savings plan without incurring the cost of interest. 
     
    Context of the Evaluation:
    IPA partner 1st Valley Bank is a rural bank that offers microcredit, agricultural insurance, salary loans and other financial services. The study takes place in 22 low- to middle-income barangays (small administrative units) of Gingoog City, as well as in 9 barangays on Camiguin Island. The target population is low- to middle-income households between one and two jeepney (local public transportation) rides from the bank branch, who report having an upcoming expenditure (school fees, house repairs, appliance purchase, business expense, wedding, etc.).
     
    Description of the Intervention:
    This study is designed to ascertain whether a commitment savings product with fixed installments – a product which looks like a loan except for the timing of the lump sum disbursement and the interest charges – has any effect on individuals’ savings levels, loan take-up and welfare, and compare this to the effect of a commitment savings product. 
     
    The product studied, called a Regular Saver Account, lets clients commit to make a fixed savings deposit every week, until they have reached their specified goal date and amount. This is presented to habitual borrowers as an alternative way to reach the lump sum needed for an expenditure they have specified. The commitment takes the form of an “early termination fee”: If clients fall more than two deposits behind their specified deposit schedule, their contract is considered “in default”, and the account is closed. They receive back their savings, minus the “early termination fee.” The amount of this fee is chosen by the client himself upon signing the contract, and framed as a charity donation.
     
    Households that passed the screening criteria (having an upcoming lump-sum expenditure, willingness to see a financial advisor) were visited by a financial advisor and received a personal savings plan (limited to 3-6 months), and a free standard savings account. In addition, they were randomly assigned to one of three groups: a first group that was offered the Regular Saver (RS) product, a second group that was offered a traditional commitment savings product with withdrawal restrictions (WR), and a third group that served as a control and was not offered any additional products. 
     
    A comprehensive baseline survey was conducted before the financial advisor visit. The survey identified individuals’ time preferences and financial networks, and measured risk aversion, self-control, and financial literacy. A similar endline survey was conducted six months later which included questions regarding outstanding loans, total savings, total expenditures, and satisfaction with the savings product for those who were offered any of the two commitment accounts. Additional administrative data on savings was obtained from the bank.
     
    Results:
    The study finds that demand for commitment is high, even in a low-income population with little previous bank exposure: Take-up rates were 27 percent for the Regular Saver (RS) product and 42 percent for the Withdrawal-restriction (WR) product, in spite of the fact that all individuals were given a free standard savings account immediately before they were offered the commitment products. Offering the RS product was highly effective at increasing savings: On average, those offered the RS product increased their bank savings by 585 pesos (U.S. $14 or 27 percent of median weekly household income) relative to the control group. The group offered the WR account saved on average 148 pesos (U.S. $3.50 or 7 percent) more than the control group. Among those who actually adopted the products; the RS clients saved 1,928 pesos and the WR clients saved 324 pesos more than the control group. In addition, those who were offered the RS product were more likely to buy the expenditure specified in their savings plan without borrowing for it.
     
    This average effect obscures significant heterogeneity: 55 percent of RS clients defaulted on their savings contract, incurring their self-chosen penalty (between $3.50 and $7). Among WR clients, 79 percent made no further deposits after their opening balance, losing access to the money for those who had chosen an amount-based withdrawal restriction (45 percent). 
     
    In summary, despite large positive average treatment effects, many savers appear to overestimate their ability to stick to their commitments, even with self-imposed penalty features. The study thus highlights a possible risk of interventions which involve commitment.
     
     
     
    [1] Mullainathan S, Ananth B, Karlan D. (2007). Microentrepreneurs and Their Money: Three Anomalies. Financial Access Initiative.
    [2] Karlan, D., and Zinman, J. (2012). List Randomization for Sensitive Behavior: An Application for Measuring Use of Loan Proceeds, Journal of Development Economics , 98, 1 (Symposium on Measurement and Survey Design), 71-75
    [3] Brune, Lasse, Xavier Giné, Jessica Goldberg, and Dean Yang. (2011). "Commitments to save: a field experiment in rural Malawi." World Bank Policy Research Working Paper Series.
    [4] Ashraf, N., Karlan, D., and Yin, W. (2006). "Tying Odysseus to the mast: Evidence from a commitment savings product in the Philippines." The Quarterly Journal of Economics 121:2, 635-672.
    Anett Hofmann

    Reminder Messaging and Peer Support for Debt Reduction in the United States

    There are growing concerns that American households tend to borrow too much and save too little, making it hard to meet basic needs, build assets, prepare for retirement, and pay for emergency expenses. Large debt burdens may compromise individuals and families’ ability to create a safety net or make investments for the future. In an ongoing study, researchers are evaluating the effect of peer support and text message reminders on financial outcomes of individuals enrolled in a debt management program in the United States.
     
    Policy Issue: 
    There are growing concerns that American households tend to borrow too much and save too little. This imbalance can have strong implications for households’ ability to meet basic needs, build assets, prepare for retirement, and weather negative shocks such as emergency expenses or unexpected unemployment. Families with large debt burdens may continue to borrow and thus compromise their ability to create a safety net or make investments in the future. Many see Debt Management Plans (DMPs) as a promising tool for debt reduction, yet creating a DMP and sticking to the program requires ongoing work and effort. Descriptive evidence suggests that limited attention, apprehension about giving up credit cards, a perceived lack of support, and the five-year time period of plans may hinder clients from completing them. To promote DMP use and completion, text message reminders and peer support programs may help individuals follow through on DMP commitments. However, little evidence exists on the effectiveness of such programs and whether they help people reduce their debt.
     
    Context of the Evaluation: 
    Low-income individuals in the United States often rely heavily on expensive financial services such as payday loans, auto title loans, pawn shop loans, and bank overdrafts. Individuals frequently turn to expensive debt obligations because their riskiness disqualifies them from traditional, lower-priced alternatives.
     
    Clarifi is a non-profit organization that provides low-cost access to various financial products, services, and resources. Debt Management Plans (DMPs) are one of Clarifi’s financial planning tools that aim to help clients manage and repay their debt with the help of experienced credit counselors. The retention rate of clients who join Clarifi’s DMP programs is 80 percent, meaning that 20 percent of DMP enrollees leave the program within the first year.
     
    Details of the Intervention: 
    Working with Clarifi and its Debt Management Plan clients, researchers are evaluating the effect of various messaging and peer support programs on the financial outcomes of participants. The evaluation involves 1,000 of Clarifi’s clients in southeastern Pennsylvania, southern New Jersey, New York state.
     
    As part of Clarifi’s general program, all clients in the study participated in educational workshops and outreach, as well as debt repayment counseling prior to enrollment in a DMP. At the time of enrollment into DMPs, researchers randomly selected individuals to receive peer support, reminder messages, or both. Those in the peer support group were able to select up to five peer supporters (friends of family) to monitor their progress on a DMP. Peer supporters received information on the client’s progress, including notification when the client missed a scheduled debt payment. 
     
    To test the impact of regular text message reminders, individuals from each group (peer support or no peer support) were then randomly divided into a comparison group (no messaging) or one of three message reminder types: tasks, plans, or goals. These messages are designed to counter specific types of limited attention.
     
    Results and Policy Lessons: 
    Project ongoing, results forthcoming.

    Unconditional Cash Transfers in Kenya

    While cash transfers have long been a subject of interest as a tool to fight poverty, the overall impact of large transfers of cash, given without conditions, to poor households has yet to be measured. This study evaluated a cash transfer program administered by the NGO GiveDirectly, which gave an average of USD 513 to poor families in rural Kenya. The transfers led to significant increases in income, assets, psychological well-being and female empowerment. Variations in the format and size of the transfers led to differences in outcomes.
     
    Detailed results can be found in the policy brief, available here and at the researcher's site, here.
     
    Policy Issue:
    Programs designed to alleviate poverty often focus on delivering goods or services (e.g. productive assets, training, bed nets, etc.) or capital conditional on certain behaviors to poor households. While these types of programs may be effective in achieving specific goals, they do not provide poor households with the choice and flexibility of allocating resources to meet the needs they find most pressing. An alternative approach to delivering support in-kind is to simply give money to poor households. However, this approach is sometimes received with skepticism, as there is no guarantee that money will be spent to achieve the specific impacts that donors desire. This evaluation studied what happened when poor families were given cash without any stipulations.
     
    Context of the Evaluation:
    This study took place in Kenya, a country at the forefront of the mobile money revolution. Since the launch of M-PESA, a mobile-phone based transfer service, in 2007, Kenya has become the country with most extensive retail payment network[1]. GiveDirectly is a non-profit organization that leverages the low costs of mobile money to deliver cash transfers to poor households, reducing the cost of delivery to only 10 percent of each donated dollar. Beneficiaries receive donated money on SIM cards and can visit a local M-PESA agent to exchange the mobile credit for cash. Residents in the area of Rarieda, where the study took place, generally live on an average of approximately 1 US dollar per day, and 64 percent of those surveyed said they did not have enough food in their house for the next day.
     
    Description of the Intervention:
    Households were eligible for the unconditional cash transfer program if they had roofs constructed from non-solid materials (mud, grass, etc). Study villages in the Rarieda district of Kenya were randomly assigned to a treatment or pure comparison group. GiveDirectly identified 1,000 eligible households in treatment villages. Within treatment villages, 500 eligible households were then randomly assigned to receive unconditional cash transfers. These households were compared to 500 control households in the same villages, which did not receive transfers. In addition, the 500 control households were compared with 500 households in pure comparison villages to identify any spillover effects of the intervention. Study households in treatment villages received a baseline survey before randomization, while pure control households where surveyed only at endline.
     
    Transfers were randomly assigned to go to women or men, and further randomized to be in the form of a single lump sum transfer of 25,200 KSH (about USD 287), or monthly transfers for nine months with the same total value. A third treatment arm was selected to receive a large sum, with 137 households each given an additional KES 70,000 (about 798 USD) in seven monthly installments of KES 10,000 each. 
     
    Money was transferred to beneficiaries using Safaricom’s M-PESA mobile payment system—sending money from the GiveDirectly account to the recipients’ SIM cards. Recipients were required to register with M-PESA, and received a text message when the funds were transferred. They could then visit a local M-PESA agent to transfer mobile credit to the agent’s phone in exchange for cash. Most households in the sample were within a 30-45 minute walking distance to an M-PESA agent. Households were given SIM cards to allow them to redeem money, and the opportunity to purchase a mobile phone if they did not have one, with the cost deducted from their transfer. 
     
    A follow-up survey one year after the first transfers collected data on income sources, investment, consumption, food security, school enrollment of children, and mental and physical health. These surveys were complemented by the collection of salivary cortisol levels to measure the impact of unconditional cash transfers on stress.
     
    Results and Policy Lessons:
    Assets and income: Assets and holdings for those who received transfers were 58 percent (USD 279, in purchasing power parity, or PPP) higher, primarily in home improvements (such as metal roofs, which are far less costly to maintain), and livestock holdings. The transfers increased income for recipients by 33 percent (USD 15 PPP), coming from sources such as livestock and non-agricultural businesses. There is little evidence that cash transfers change the primary source of income for recipients, but they do increase expenditures in non-agricultural enterprises by 10 USD PPP per month, with revenues 11 USD PPP higher. 
     
    Consumption: Monthly consumption for recipients of the transfers was 23 percent higher (USD 36 PPP), spread across nearly all categories measured: food, medical and educational expenses, home improvements, and social expenses such as weddings and funerals. The exceptions were temptation goods: there was no increased spending on alcohol or tobacco. The largest increase was in food consumption, which was 19 percent (USD 20 PPP) higher.
     
    Food security: Food security index scores were .25 standard deviations (SD) lower for transfer recipients. Specifically, they were 30 percent less likely to have gone to bed hungry in the preceding week, 20 percent more likely to have enough food in the house for the next day, and the number of days children went without food was 42 percent lower.
     
    Health and education: Spending on health education increased for transfer recipients, but from relatively low levels. There were no observed increases in health or education outcomes.
     
    Psychological and neurobiological measures: Overall there was a .20 SD increase in psychological well-being index, stemming from a .18 SD increase in happiness scores, a .15 SD increase in life satisfaction, a .14 SD reduction in stress, and a .99 SD reduction on a depression questionnaire. Levels of cortisol, a stress hormone as measured in saliva samples did not differ across the groups overall, but large transfers and transfers to women lowered levels for both men and women significantly. 
     
    Female empowerment: Positive spillover effects for female empowerment were observed, with an increase of .23 SD on an index of several measures not only for the treatment households, but for all households in the village, suggesting that the transfers can improve the standing of women in general.
     
    Types of transfers: With the exception of well-being outcomes mentioned above, there were no differences observed comparing transfers made to women versus men in the household. Monthly transfers were associated with a .26 SD increase in food security relative to lump sum payments, while lump sum payments were associated with higher asset values. Large transfers led to approximately twice the value of assets as small transfers, as well as higher scores on psychological well-being and female empowerment measures.
     
    More information can be found in the full policy brief, available here and at the researcher's site, here.
     
     

    [1] Klein, Michael, and Colin Mayer. May 2011. “Mobile Banking and Financial Inclusion: The regulatory lessonsWorld Bank Policy Research Working Paper 5664.

    Using Behavioral Economics to Help Households Reduce Debt

    Researchers designed and piloted a program called Borrow Less Tomorrow (BoLT) that took a behavioral approach to debt reduction, combining an accelerated loan repayment schedule with peer support and reminders. Results from a sample of free tax-preparation clients in Tulsa, United States suggest a strong demand for debt reduction: 41 percent of those offered BoLT used it to make a plan to accelerate debt repayment. The results also offer suggestive evidence that the BoLT package reduced credit card debt.
     
    Policy Issue: 
    A mounting body of evidence suggests that behavioral factors, such as lack of self-control and an inability to remain focused on achieving a financial goal, impede individuals’ ability to accumulate wealth. Most financial products and policy instruments developed to overcome these behavioral issues focus on asset accumulation, such as retirement planning. For many households, however, debt reduction offers a more efficient path than asset accumulation to achieving greater wealth. Nevertheless, the availability of behaviorally-oriented financial interventions to reduce debt is far more limited, and additional research is needed to understand how such debt reduction programs should be structured and how they affect individuals’ financial health. This study is the first known evaluation to apply behavioral economics to debt reduction services.  
     
    Context of the Evaluation: 
    This study took place in 2010 in Tulsa, Oklahoma, a city located in the southern United States. Researchers partnered with the Community Action Project of Tulsa (CAP), an anti-poverty agency that provides a range of social services—including early childhood education, first-time homebuyer’s assistance, and free tax preparation—to low- and moderate-income individuals. The 465 participants of this study comprise individuals who sought tax preparation services from CAP under its Volunteer Income Tax Assistance program. 
     
    The majority of participants in the sample were low-income, with 75 percent reporting a total annual household income of less than US$30,000, which is equivalent to the bottom 31 percent of the national income distribution1. The average individual credit card and auto loan debt of the sample was US$2,447 and US$5,546, respectively, which was low relative to U.S. averages. The mean age of the sample was 44 years and 74 percent was female.
     
    Details of the Intervention: 
    In 2010, researchers developed and piloted a program called Borrow Less Tomorrow (BoLT) to help CAP clients reduce their debt. During tax season (January-April), researchers and CAP staff asked tax preparation clients if they would be willing to complete a financial and behavioral survey in exchange for a US$5 gift card to a local gas station. Among the group that completed the survey, a total of 465 individuals were eligible to participate in the study because they had a positive balance on auto or credit card debt and had expressed interest in reducing their debt. All participants also granted permission for researchers to pull their credit reports on a regular basis to monitor debt payments and financial status. 
     
    Researchers randomly assigned 238 individuals to be offered BoLT (the treatment group), and 227 individuals to not be offered BoLT (the comparison group). For those offered BoLT, the research team explained the program components to the participant and worked to identify a single, suitable debt on which to focus effort (e.g. a debt with a substantial balance and a high interest rate).
     
    BoLT comprised three separate interventions:
    • Planning/Goal Setting: The surveyor used a simple repayment schedule calculator to show the participant how small increases in monthly payments could help dramatically reduce the time and cost to pay off their debt. The participant and surveyor would then establish a realistic repayment plan. In addition to an overall acceleration in repayment, participants were also offered the option to escalate payments every month. For example, a participant could commit to paying US$25 in month 1, US$35 in month 2, and so on to pay off debt at an even lower cost and faster pace.
    • Peer Support: For those participants who agreed on an accelerated repayment plan, surveyors offered the participant the option of selecting one or more peers to be notified if she fell off-track with her repayment commitment. The peer could then offer encouragement (but not financial support) to help the participant regain momentum and reach her repayment goal.
    • Reminder Notices: As a tool to focus participants’ attention on their debt reduction goals, those who agreed on an accelerated repayment plan were also offered the option of receiving a monthly reminder by email or phone to stay on track with their commitments.
    Results and Policy Lessons: 
    Demand for debt reduction support: Overall, researchers found strong demand for behaviorally-motivated debt reduction support. Among those randomly assigned to receive the offer to participate in BoLT, 41 percent signed up for an accelerated repayment plan. Of those who signed up for the plan, 41 percent signed up to escalate payments every month. Conditional on take-up of BoLT, 27 percent accepted the offer to receive peer support and 81 percent accepted the offer to receive monthly reminder notices. Households living in extreme poverty (i.e. incomes less than US$10,000 per year) were less likely to sign up for BoLT, but there is no evidence that take up differed by whether a participant demonstrated more or less self-control or attention paid to her finances.
     
    BoLT Performance: By monitoring credit reports, researchers found that 51 percent of BoLT participants were on-schedule with their repayment plan after 12 months in the program. The study demonstrated weak evidence that those who were offered the opportunity to participate in BoLT achieved a lower overall level of debt after one year than the comparison group, which did not receive the BoLT offer. However, many of the estimated differences in debt reduction between the treatment and comparison groups were not statistically significant. The researchers found no evidence of a difference in credit scores, payment delinquencies, or credit line use between the treatment and comparison groups.
     
    While noting that these pilot results should be considered with caution due to limited sample size and the use of just a single program design, the researchers found strong demand for debt reduction products and services, but only suggestive evidence that this product led to improved financial well-being for participants. They posit that debt reduction products and services could be used by businesses and financial advisors to enable employees and clients to achieve their financial goals. 
     
    [1] U.S. Census Bureau. http://www.census.gov/hhes/www/cpstables/032011/hhinc/hinc01_000.htm Accessed 1 July 2013.
     

    Changing Behavior to Improve Household Financial Management in Malawi

    For many people investments to improve the quality of their lives require saving significant amounts first. Human nature, however, can make saving for long-term goals difficult. In Chitkale, Malawi, researchers are working with NBS Bank Malawi, using random assignment to test the effectiveness of three different interventions aiming to help study participants save: labeling of savings accounts for specific purposes, financial training and motivation, and the use of direct deposits into savings accounts. Researchers will compare the groups that took part in the different study arms to the ones that did not in order to evaluate their effects on savings behavior.
     
    Policy Issue:
    In contexts where access to credit is limited, people often have to rely on accumulating savings in order to make investments to improve the quality of their lives. Households must save a significant portion of their incomes over a long period of time in order to accumulate enough money to start a small business, purchase seeds for their fields, pay school fees, or pay for emergency healthcare. Human nature, however, can make saving for long-term goals difficult. Money that is saved without a designated purpose is often spent on unnecessary luxury goods. People who have struggled to meet their goals in the past may not believe they are capable of achieving future savings goals. Furthermore, when people hold their savings as cash instead of in a bank account, they may be tempted to spend it prematurely or lend it to friends and family members. A range of interventions, such as labeling savings accounts, attending financial literacy classes that increase aspirations, or having earnings deposited directly to a bank account rather than receiving them in cash, may allow people to overcome some of the behavioral barriers to saving.
     
    Context of the Evaluation:
    This study takes place within a five to six kilometer radius (3.1 to 3.7 miles) of the town of Chitakale, a major trading center in Mulanje district. The district has as literacy rate of 62.3 percent, which is slightly lower than Malawi as a whole, but significantly higher than more isolated rural districts. In 2011, median per capita consumption in the district was MK 37,543 (USD $115) per year, and only 3.1 percent of households took out a loan that year. The target population for this study lives on the outskirts of the town. Most earn an income from small businesses, but many still rely on agriculture for their own food production and to generate extra cash.  
     
    NBS Bank Malawi, the partner bank in this study, operates thirteen branches throughout Malawi, including one in Chitakale.
     
    Details of the Intervention:
    Researchers are testing the effectiveness of three different interventions for overcoming common behavioral barriers to saving. 
     
    Labeling savings accounts: The first intervention seeks to determine if labeling a bank account with a specific goal for which the money is intended to be spent, such as “school fees,” can help people to achieve their saving goals. The researchers randomly selected 500 people to receive subsidized bank accounts that were labeled with a personal saving goal. A comparison group of an additional 500 people were offered subsidized accounts that were not labeled with any specific saving goal.
     
    Financial training and motivation: The second intervention tests whether financial training and motivation courses raise people’s aspirations and inspire them to set and achieve savings goals. The researchers randomly divided the same group of 1000 people who were offered bank accounts into three equal groups. The first group received a 90 minute basic financial literacy training course, the second received basic financial training and an additional “aspiration module” that attempted to motivate them to achieve their savings goals, and the third group served as a comparison and did not receive any financial training or motivation.
     
    Direct deposits: The third intervention tests if depositing earnings directly to a bank account instead of receiving them in cash can reduce unplanned spending and increase savings. Three hundred of the 1000 people who were offered bank accounts were randomly selected to receive grants distributed in three installments. Half of those receiving the grants had them deposited directly to their savings accounts, while the other half received the grants in cash.
     
    Researchers will collect information on aspiration levels, financial knowledge, consumption, savings, and agricultural inputs and outputs to determine if the interventions affected the savings behavior of participants.
     
    Results and Policy Lessons:
    Project ongoing; results forthcoming.

    Ultra Poor Graduation Pilot in Pakistan

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? This 24-month program provides beneficiaries with a holistic set of services including: livelihood trainings, productive asset transfers, consumption support, savings plans, and healthcare. By investing in this multifaceted approach, the program strives to eliminate the need for long-term safety net services. Spanning seven countries on three continents, the Ultra Poor Graduation program is being piloted around the globe. IPA is conducting randomized evaluations in IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana to understand the impact of this innovative model.

    Policy Issue: 

    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Ultra Poor Graduation Pilots attempt to apply a model, developed by BRAC in Bangladesh, which recognizes that the ultra poor need the "breathing space" that is provided by temporary consumption support, but that public funds may be better used to build households’ capacities to maintain a sustainable livelihood. The idea is that this initial assistance, lasting two years, will place households securely on the first rung of the development ladder, which they can then climb with the help of appropriate development strategies. The model incorporates a comprehensive package of services: a productive asset (such as chickens or goats), consumption support, livelihood trainings, healthcare, and financial services.Ideally this wide set of support services will help households to weather any shocks they may face along during their climb out of ultra poverty.

    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts.

    Context of the Evaluation:

    Poverty in Pakistan is a growing concern—almost one third of the county’s 170 million inhabitants live in poverty, an increase of almost 13% since the1990s,[i] and there are currently 3.2 million people displaced by wars[ii]. Pakistan is home to a large feudal landholding system, where numerous poor tenants are indebted to landowners. Lacking access to formal credit, poor tenants are bonded to their impoverished condition and are often exploited for their labor.

    This study takes place in the Coastal Sindh region of Pakistan. Four NGOs, Aga Khan Planning and Building Services Pakistan (AKPBSP), Badin Rural Development Society (BRDS), Indus Earth Trust (IET), Sindh Agricultural and Forestry Workers Coordinating Organization (SAFWCO), have partnered with IPA and the Pakistan Poverty Alleviation Fund to implement the Ultra Poor Graduation Pilot to assist these vulnerable households.

    Details of the Intervention:

    Eligible households are identified using a Participatory Wealth Ranking (PWR), a method that engages villagers in creating an economic ranking of all households in a community.  After the economic status of eligible families is verified, households are randomly assigned to either a treatment or comparison group. The treatment beneficiaries receive a monthly stipend of Rs. 1000 ($12 US) for the first year to stabilize consumption.  Next, households choose an asset and begin livelihood training.  Examples of livelihood activities include embroidery, raising livestock, fishing, and carpentry.  Beneficiaries are encouraged to save money at home, in savings boxes, or with Rotating Savings and Credit Associations (ROSCAs) that pool money and periodically distribute group savings to each member.  Lady Health Visitors working with some of the partners provide health services to participating households. 

    Results:

    Forthcoming.

    For additional information on Ultra Poor Graduation Pilots, click here.

     

    [i] AusAID, Australian Government, “Pakistan

    [ii] Hani, Faez and Seri Begawan, Bandar, “3.2m Pakistanis displaced by war against Taliban need urgent aid,” The Brunei Times

    Expanding Access to Formal Savings Accounts in Malawi, Uganda, Chile, and the Philippines

    Policy Issue:

    Expanding financial services to reach the poorest of the poor helps to broaden their savings and investment options. Yet the vast majority of people in the developing world remain unbanked [1].  In the absence of formal savings products, many in the developing world depend on costly devices like "susus", agents who charge a fee to collect money for secure keeping, or illiquid devices such as rotating savings and credit associations (ROSCAs), groups that pool members’ regular contributions for lump-sum distribution. A majority of rural households store cash at home, “under the mattress” [2], where it is prone to loss, theft, and the demands of neighbors and kin.

    Early experimental evidence from Kenya suggests that small business owners can benefit from access to a savings account in a formal bank [3].  By understanding the channels through which savings accounts might impact the lives of poor households, financial institutions—and the products they offer—can be better poised to serve this vulnerable population. 

    Context of the Evaluation:

    This study is ongoing in three countries: Malawi, Uganda, Chile. We are currently exploring options to add a study site in the Philippines. The aim is to understand the causes and consequences of the lack of access to banking services in a variety of contexts.

    Malawi: Malawi’s population is largely rural, with agriculture supporting over 85 percent of the population [4].  A 2009 study found that 55 percent of Malawians do not have access to any type of financial institution, formal or informal; furthermore, only 19 percent of the overall population uses a formal bank [2].  In Malawi, the study is being conducted in the Southern Region, which has lower than average levels of bank usage and financial inclusion [2].

    Uganda:A 2006 study found that 62 percent of Ugandans do not have access to any type of financial institution and only 16 percent of the population uses a commercial bank [2]. Total savings remains low: from 1999-2009, Uganda's gross domestic savings averaged 9.3 percent, compared to 21 percent worldwide and 12 percent for the least developed countries [3]. In Uganda, the study is being conducted across several districts in the southwest of the country.

    Chile:Although Chile boasts an upper-middle-income economy, such prosperity is not universally shared.  In 2009, Region IX – the target region for the study – reported the highest incidence of poverty in the country at 27.1%, nearly double the national average [3].  And although Chile has a vibrant financial sector, an IPA-led pilot exercise in the target region revealed that 33% of the population does not use a savings account.

    Philippines:The Philippines has reached a medium level of deposit account usage, with around 50 accounts per 100 people in 2009.  (Globally, there are more savings accounts than people.) [1] While this is to be celebrated, financial inclusion for rural populations has lagged, and 37% of municipalities did not have access to banking services in that year [7].  Recently, however, the mobile money sector has developed, enabling anyone with a mobile phone to conduct basic transactions.  Mobile banking services have great potential to provide access to the rural poor in this context.

    To evaluate the impact of access to a formal savings product, the researchers have partnered with a commercial bank or credit union at each site.    

    Description of Intervention:

    In each site, IPA identified a partnering financial institution and selected rural areas in which the partnering institution is operating. A probabilistic sampling strategy was then used to enroll into the study a representative sample of unbanked households in those areas.  Upon enrollment and completion of a baseline survey, study households were randomly assigned to either a treatment or comparison group. Those assigned to the treatment group received a voucher enabling them to open an account, at no cost to themselves, with the local branch of the partner institution. They also received procedural assistance with account opening. Take-up of the account offer varied from 20% in Chile to 78% in Malawi.

    Follow-up surveys at 6-, 12- and 18-month will be used to estimate the impacts on a range of household activities, including agricultural and business practices, expenditures, household income, response to shocks, and savings and credit practices.Qualitative data will be collected to understand the mechanisms through which access to a bank account affected (or not) the study participants.

    Results and Policy Lessons:

    Results forthcoming. 

     

    1. CGAP. 2009. Financial Access 2009: Measuring Access to Financial Services around the World.  World Bank Group.

    2. FinScope Malawi funded by the UK’s Department for International Development (DFID).  Demand Side Study of Financial Inclusion in Malawi.  2008. http://www.finscope.co.za/documents/2009/Brochure_Malawi08.pdf

    3. Dupas, Pascaline and Jon Robinson.  2009.  Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya.  NBER: Working Paper 14693.

    4.  Reserve Bank of Malawi.  2008.  The Malawi Economic and It’s [sic] Banking System.   http://www.rbm.mw/documents/basu/MALAWI%20ECONOMY%20AND%20BANKING%20SECTOR.pdf

    5.  FinScope Uganda. 2007. Results of a National Survey on Access to Financial Services in Uganda. Final Report. August. http://www.fsdu.or.ug/pdfs/Finscope_Report.pdf.

    6.  World Bank. 2010. World Development Indicators 2010 [Online Database]. Washington, DC: The World Bank.

    7. Jimenez, Eduardo C. 2010. Financial Access: An Essential Condition. Presentation at the OECD-Banque du Liban Conference on Financial Education.  http://www.oecd.org/dataoecd/57/21/46256657.pdf

    Savings Accounts for Rural Micro Entrepreneurs in Kenya

    Testing the impact of formal savings accounts on savings, productive investment and expenditures among small-scale entrepreneurs in rural Western Kenya.

    Policy Issue:

    Hundreds of millions of people in developing countries earn their living through small-scale businesses with very low levels of working capital. Approximately a quarter  of households living on less than US$2 per day have at least one self employed household member. Enabling small-scale entrepreneurship has long been identified as a mechanism to alleviate poverty, and substantial attention has been paid to microcredit as a means to promote entrepreneurship. However, the impact of microcredit schemes on business outcomes, especially for the very poor, is still largely unknown, and many banks which target the poor realize low or negative profits. In this context, some have argued that the focus needs to be put on savings instead of credit, since evidence suggests that individuals should be able to save their way out of credit constraints. But this strategy demands accessible opportunities for people to save securely – an uncertain prospect for the vast majority of the poor who still lack access to formal banking services of any kind.

    Context of the Evaluation:

    In Kenya, small enterprises have been estimated to account for more than 20 percent of adult employment and 12-14 percent of national GDP, but only 2.2 percent of surveyed microentrepreneurs had a savings account with a commercial bank prior to the study. Some individuals have demonstrated a willingness to pay a premium to save securely, often receiving negative interest or tying their funds up in illiquid savings and credit associations. The fact that people take up these costly strategies suggests that the private returns to holding cash at home are even lower, possibly due to the risk of theft, appropriation by one’s spouse or other relatives, or because individuals tend to over-consume cash on hand.  In the village of Bumala, a market center along the main highway connecting Kenya to Uganda, a community-owned bank sought to increase access to formal banking by offering savings accounts to villagers. Still, two years after opening, only 0.5 percent of daily income earners had opened an account, citing lack of information about the bank and the inability to pay the account opening fee as primary reasons for low take-up.  

    Description of Intervention:

    Working in collaboration with the Bumala village bank, researchers studied the importance of savings constraints for self-employed individuals in rural Kenya. Field workers identified market vendors, bicycle taxi drivers, and self-employed artisans who did not already have a savings account, but were interested in opening one. Of the eligible individuals, 163 were randomly selected to be offered the option to open a savings account at no cost, with a minimum balance that could not be withdrawn. These accounts offered no interest and included substantial withdrawal fees. Thus, the de facto interest rate on deposits was negative. A comparison group of 156 individuals was not barred from opening an account but was offered no assistance in doing so.

    To test the prevalence and impact of savings constraints, researchers examined 279 self-reported daily logbooks kept by individuals in both the treatment and comparison groups. These logbooks included detailed information on market investments, expenditures and health shocks, making it possible to examine the impact of the savings accounts along a variety of dimensions. Field workers met with respondents twice per week to verify the logbooks were being filled out correctly, and paid respondents a small amount for each week the logbook was completed correctly. This information was supplemented with administrative data on savings from the bank itself.

    Results and Policy Lessons:

    Impact on Savings Account Take-up: Eight percent of respondents refused to even open an account, while another 39 percent opened an account but never made a deposit. Of those who did utilize the savings accounts, women made significantly larger deposits, a median of 100 Ksh,(US$1.42, equivalent to 1.6 times average daily expenditure) compared to the median deposits for men of 50 Ksh ($0.71).  This gender difference increased for those who deposited more.  Account usage was very strongly correlated with wealth, suggesting that the accounts were mostly useful for people above subsistence levels.

    Impact on Savings Behavior: Reported average bank savings were higher in the treatment group. For male market vendors, bank savings crowded out savings in animal stock and rotating savings and credit associations (ROSCAs—informal groups that require members to make regular contributions to a savings pot that is periodically given to one member).  However, females in the treatment group did not decrease other forms of savings in animal stock and ROSCAs.  There are various possible explanations for the continued use of ROSCAs by women. It is possible that ROSCAs are valuable as a source of credit and emergency insurance; that they provide a form of savings commitment through social pressure; or that changes in ROSCA participation could not be captured during the study due to the long  savings cycles (up to 18 months).

    Impact on Business Investment: Four to six months after they were offered, bank accounts had substantial positive impacts on business investment for women, with a 45 percent increase in average daily investment. This suggests women faced large negative returns on money they saved informally, and those constraints were important for the businesses they run.  While very large on average, this treatment effect is also quite heterogeneous: only 57 percent of women in the treatment group made at least one deposit within the first 6 months of opening the account, and only 43 percent made at least two deposits within that timeframe.

    Impact on Private Expenditures: Findings suggest that higher business investment in the treatment group led to higher profits, as measured through household expenditures.  The accounts had a significant positive impact on expenditures on the entire sample, with this effect most strongly concentrated for market women. About 6 months after having gained access to the account, the daily private expenditures of women in the treatment group were on average 27 to 40 percent higher than those in the comparison group. Daily expenditure on food was also significantly higher.

    Impact on Health Shocks: Evidence suggests that the accounts had some effect in making women less vulnerable to health shocks. The logbooks showed that women in the comparison group were forced to draw down their working capital in response to illness. Treatment women were less likely to reduce their business investment levels when dealing with a health shock, and were better able to smooth their labor supply during illness. In particular, women in the treatment group were more likely to be able to afford medical expenses for more serious illness episodes. 

    Responses to Degree of Control over Remittances in El Salvador

    How do migrants decide how much money to send home in remittances? Would they like to have some control over how much of the money is spent and how much is saved? This study offered a variety of special bank accounts to migrants from El Salvador living in Washington DC, offering the sender varying degrees of control over an account held in the receivers name. Migrants offered greater control sent significantly more. Those offered some control over bank accounts roughly doubled their total savings in the combined trans-national household (migrant plus remittance recipient).

    Policy Issue:

    By the year 2000, individuals living outside their country of birth had grown to nearly 3% of the world’s population, reaching a total 175 million people. The money these migrants send home, called remittances, is an important but relatively poorly understood type of international financial flow. Recent research into the economics of migration has documented several beneficial impacts of remittance flows on household well-being and investments. However, research has only just begun to look at how migrants make their remittance-sending decisions, particularly if they desire greater control over how family members back home use the remittances they receive, and whether that impacts the amounts remitted. 

    Context of the Evaluation: 

    El Salvador is highly unusual among developing countries in its number of overseas migrants relative to the national population. After the 1980 civil war, large flows of Salvadorans emigrated, and continued to do so at a remarkably steady pace. At least one in seven Salvadorans now lives outside of the country, primarily in the United States. The total income of the approximately 1 million Salvadorans living in the U.S. was roughly equal to the El Salvador’s total GDP in 2001. Concurrent with the expansion of Salvadoran communities overseas, the dollar value of remittances sent to El Salvador has grown dramatically, from $790 million in 1991 to $3.8 billion in 2008.

    Remittances appear to have significant benefits for recipients – households in El Salvador receiving more remittances have higher rates of child schooling, for example. But the lack of control migrants have over how remittance funds are used at home could be reducing the amount that they choose to send home. The fact that migrants report far higher preferences for saving, about 21% of income, relative to recipient households, who prefer to save less than 3%, supports this assumption. 

    Details of the Intervention:

    Researchers, in collaboration with Banco Agrícola, designed a field experiment that offered a way for Salvadoran migrants to directly channel some fraction of their remittances into savings accounts in El Salvador. To isolate the importance of migrant control over savings, researchers tested the demand for different products that offered migrants varying levels of control over remittance use. Baseline surveys were administered to both migrants in the U.S. and their corresponding remittance-receiving households in El Salvador.

    The sample consisted of Washington DC area migrants who first entered the U.S. in the past 15 years and sent a remittance in the last 12 months. All 898 migrants received a marketing visit, where a marketer described the uses and benefits of savings, and were encouraged to save. They were also randomly chosen to be offered one of three new accounts in El Salvador that they could remit to. The account would either be (i) opened in the name of an individual in El Salvador, granting the recipient full control, (ii) a joint account where the recipient and the remitter would have access through ATM cards, allowing monitoring, but no enforcement on the part of the migrant, or (iii) an account only in the name of the migrant, providing full ability to control funds in the account. In the case of the first two accounts, project staff arranged by phone for the El Salvador remittance recipient to meet with the bank manager of the nearest Banco Agrícola branch to complete the final account-opening procedures. To help track migrants’ remittance behavior after the marketing visit, all visited treatment migrants were given a special card (called a “VIP card”) that provided a discount for sending remittances via the partner institution’s remittance locations. A final group of migrants received the marketing visit but were not offered an account, serving as the comparison group.

    Results and Policy Lessons:

    Results indicate that a desire for control over remittance uses – in particular the fraction that is saved in formal savings accounts – was large, and had significant influence on migrants’ financial decision making. When offered an account in the name of the recipient, allowing no formal control of the remittances, migrants were 16.4 percentage points more likely than the comparison group to open accounts. When offered joint control, migrants were 21.4 percentage points more likely to open accounts than people in the comparison group, and 34 percentage points more likely when offered exclusive control.  

    While effects on savings at Banco Agrícola were substantial, there was also a substantial increase in savings outside of the partner bank, including U.S.-based banks. Researchers interpret this result as due to the financial advice offered as part of the treatments. Migrants implemented savings strategies suggested by the marketers but using savings facilities at other banks.

    This resulted in large treatment effects in savings. Compared to a base of roughly $430 in reported comparison group savings, offering joint or exclusive control of bank accounts roughly doubles total savings in the combined trans-national household (migrant plus remittance recipient).

     

    The Miracle of Microfinance? Evidence from a Randomized Evaluation

    This study was the first rigorous randomized evaluation of the "traditional" microlending model. The findings from the study suggest that access to microcredit has important effects on household expenditure patterns and the creation and expansion of businesses, but no effect on health, education, women’s decision-making, or average monthly expenditure overall, at least in the short term. It is possible that impacts on education, health, or women’s empowerment would emerge after a longer time, when the investment impacts (may) have translated into higher total expenditure for more households. However, at least in the short-term, microcredit does not appear to be a recipe for changing education, health, or women’s decision-making. 

    Policy Issue: 

    Microcredit is one of the most visible innovations in anti-poverty policy in the last half-century, and in three decades it has grown dramatically. Now with more than 150 million borrowers, microcredit has undoubtedly been successful in bringing formal financial services to the poor. Many believe it has done much more and, by putting money into the hands of poor families (and often women), it has the potential to increase investments in health and education and empower women. Skeptics, however, see microcredit organizations as extremely similar to the old fashioned money-lenders, making their profits based on the inability of the poor to resist the temptation of a new loan. They point to the large number of very small businesses created, with few maturing into larger businesses, and worry that they compete against each other. Until recently there has been very little rigorous evidence to help arbitrate between these very different viewpoints.

    Context of the Evaluation: 

    Over one third of Hyderabad's population resides in slums and other poor settlements 1, where there is extremely low access to formal financial services. At the time of the baseline survey, there were almost no microfinance institutions (MFIs) lending in the sample area, yet 69% of the households had at least one outstanding loan. Loans were taken from moneylenders (49%), family members (13%), or friends and neighbors (28%). Commercial bank loans were very rare.

    Launched in 1998, Spandana is one of the largest and fastest growing microfinance organizations in India, with 1.2 million active borrowers in 2008. Spandana offers traditional microfinance loans, in which self-formed groups of six to ten women are given loans. A “center” is comprised of 25-45 groups, and to join an individual must  (i) be female, (ii) aged 18 to 59, (iii) residing in the same area for at least one year, (iv) have valid identification and residential proof, and (v) at least 80% of women in a group must own their home.

    Details of the Intervention:

    This project investigates a randomized impact evaluation on the introduction of microcredit in a new market. Spandana selected 120 areas in Hyderabad as places in which they were interested in opening branches, based on those communities having no pre-existing microfinance presence, and having residents who were desirable potential borrowers. Sixteen communities were subsequently dropped from the sample because they were found to have large numbers of migrant workers, who are less desirable as loan candidates. Fifty-two areas were randomly selected for the opening of an MFI branch immediately, while another 52 served as the comparison communities.

    Spandana introduced their financial products into the treatment villages at the beginning of the study in 2005. Data was collected on income, consumption, borrowing, and investment practices in a random sample of eligible households in both treatment and comparison areas. The typical loan was approximately Rs. 10,000 (US$250).

    Results and Policy Lessons:

    Loan Take-Up and Use: Twenty-seven percent of eligible households took up loans from Spandana or another MFI by the time of the endline survey. Spandana does not insist that loans be used for business purposes, however 30% of Spandana borrowers reported they used their loans for starting a new business, and 22% to buy stock for existing businesses. Additionally, 30% of loans were reportedly used to repay an existing loan, 15% to buy a durable good for household use, and 15% to smooth household consumption.

    New Businesses and Business Profits: Seven percent of households in treatment areas reported operating a business which was opened in the past year, compared to 5.3% in comparison areas. Existing business owners did not see a change in profits with the new competition.

    Expenditure: Expenditure patterns were very different for different groups. Those with an existing business bought more durable goods for their home and business (i.e. they invested). Those most likely to start a new business cut back sharply on temptation goods (tobacco, eating out, etc) and invested more. Those least likely to start a business consumed more non-durable goods. A switch from temptation goods to investment in the first two groups is encouraging and may lead to higher consumption in the future, though it is too early to tell. The increased consumption of the third group may come from paying off higher interest loans, which means that the households have more money to spend. But it could also mean that the households simply spent the loans on non-investment goods, and have fallen further into debt. Again, this short-term study cannot tell. 

    Education, Health and Female Empowerment: No evidence was found to suggest that microcredit empowers women or improves health or educational outcomes. Women in treatment areas were no more likely to be make decisions about household spending, investment, savings, or education. Households in treatment areas spent no more on medical care and sanitation than do comparison households, and were no less likely to report a child being sick. Among households with school-aged children, households in treatment areas are also no more likely to have children in school- although school going rates were already high in the treatment and comparison groups.

    1 Greater Hyderabad Municipal Corporation, “Chapter V: Basic Services to the Urban Poor,” Hyderabad - City Development Plan, http://www.ghmc.gov.in/cdp/chapter%205.pdf. (Accessed September 8, 2009)

    Ultra Poor Graduation Pilot in Ethiopia

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? This 24-month program provides beneficiaries with a holistic set of services including: livelihood trainings, productive asset transfers, consumption support, savings plans, and healthcare. By investing in this multifaceted approach, the program strives to eliminate the need for long-term safety net services. Spanning seven countries on three continents, the Ultra Poor Graduation program is being piloted around the globe. IPA is conducting randomized evaluations in IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana to understand the impact of this innovative model.

    Policy Issue:

    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Ultra Poor Graduation Pilots attempt to apply a model, developed by BRAC in Bangladesh, which recognizes that the ultra poor need the "breathing space" that is provided by temporary consumption support, but that public funds may be better used to build households’ capacities to maintain a sustainable livelihood. The idea is that this initial assistance, lasting two years, will place households securely on the first rung of the development ladder, which they can then climb with the help of appropriate development strategies. The model incorporates a comprehensive package of services: a productive asset (such as chickens or goats), consumption support, livelihood trainings, healthcare, and financial services. Ideally this wide set of support services will help households to weather any shocks they may face along during their climb out of ultra poverty.

    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts.  

    Context of the Evaluation: 

    This study takes place in the Wukro district of the Tigray region of northern Ethiopia. The World Bank reports that 77% of the population lives on less than US$2 per dayand 39% of Ethiopians live at $1.25 per day[1]. Eighty-five percent of Ethiopian households are engaged in agriculture[2].  Droughts are common in Ethiopia and Tigray was the epicenter of the 1984-85 Ethiopian famine.  The famine, which attracted worldwide media coverage, resulted in relief aid for the region from Live Aid and other efforts. 

    More recently, aid efforts have begun to shift from direct food support and food-for work programs to interventions designed to increase long-term prosperity.  These interventions include credit for entrepreneurship, savings associations, and agricultural support, such as irrigation, water storage, and market linkages.  The Ultra Poor Graduation Pilot targets the lower tier of those households who are already a part of the Productive Safety Net Programme (PSNP),the Government of Ethiopia’s program to address food security issues by offering guaranteed employment for up to fifteen days a month in return for cash or food handouts designed to meet households’ basic nutritional needs. 

    Description of Intervention:

    Five hundred treatment households in ten villages in Wukro district initially receive consumption support transferred through PSNP for six months.Once households’ food consumption stabilizes, they receive individual savings accounts at DECSI, a microfinance institution operating in the region, as well as business training. Later on, participants receive a livelihood asset chosen from a preselected list of options: raising small ruminants, cattle fattening, petty trade or beekeeping, to help jump start a new economic activity. Participants are monitored throughout the process – they receive home visits to help boost confidence and build expertise, and are provided with access to social and health services.

    Results:

    Results forthcoming.

    For additional information on the Ultra Poor Graduation Pilots, click here.

     


    [1] The World Bank, “Data: Ethiopia” 

    [2] CIA, “World Factbook: Ethiopia Economy” 

    Strategic Household Savings in Kenya

    How important are differences of opinion within the household for making financial decisions? In this study married couples in rural Kenya were given the opportunity to open joint and individual bank accounts at randomly assigned interest rates. Can couples with very different preferences work together to save in the highest return account, or do these differences lead to poor financial choices?

    Policy Issue:

    Despite their low incomes, individuals in developing countries save using a wide variety of informal savings devices like illiquid rotating savings and credit associations. Researchers have widely noted the popularity of these informal devices and an attendant puzzle: these devices are often risky, complex, and costly when compared to simple alternatives, such as storing savings at home. What then, makes these costly savings practices attractive? Anecdotally, many informal savers cite the need to protect savings from misappropriation by other members of the household, particularly spouses. How important is this need in determining individual savings choices? Does it become more important as individual preferences for how much to save diverge? And how much are individuals willing to sacrifice to gain additional control over household savings levels?

    Context:

    While formal financial services in Kenya have traditionally been outside the reach of the poor, banks have recently begun to offer lower cost formal savings products marketed to a broader swathe of the population. This project was implemented in collaboration with Family Bank, a formal bank in Kenya that offers products suitable for lower income savers. Family Bank offers savers the option of both individual accounts, which can only be accessed by the account owner, and joint accounts.  When spouses jointly own an account, either member can make deposits and withdrawals at will.

    Description of Intervention:

    All married couples participating in the intervention were given the opportunity to open up to three accounts with Family Bank: an individual account for the husband, an individual account for the wife, and a joint account. Each account was randomly assigned a temporary 6-month interest rate, which ranged from zero percent (the norm for Family Bank accounts) to 10 percent. The interest rate intervention consequently created random variation in not just the absolute rate of return available to a couple, but also the relative rates of return between the three different accounts. This offered a simple way to measure efficient savings behavior: an efficient couple should always choose to save in the account with the highest rate of return.

    In addition to the interest rate intervention, half of couples who opened at least one individual account were randomly selected for an information sharing treatment. The goal of this treatment was to test whether individual accounts were used to hide information from spouses. This treatment enabled the spouse of an individual account holder to retrieve information on the balance of the individual account at the bank (provided both the spouse and the account holder consented to the information sharing treatment).

    Finally, all couples in the intervention were asked a series of questions at baseline to measure levels of patience and preferences over savings levels. These questions were used to construct a measure of preference heterogeneity in the household. Individuals were also asked about their own and their spouse’s use of a variety of savings devices – this information was used to construct a measure of how well informed spouses were about one another’s finances.

    Results:

    Responses to Experimental Interest Rates

    All couples responded robustly to the experimental interest rates. However, those couples with badly aligned savings preferences (the “poorly matched”) were more than twice as likely to save in individual accounts and 34 percent less likely to save in joint accounts. Furthermore, poorly matched couples were insensitive to relative rates of return between the three different accounts on offer. In contrast, those couples who were well matched on savings preferences responded robustly to relative rates of return. Consequently, poorly matched couples sacrificed at least 58 percent more potential interest rate earnings when compared to their well matched peers.

    Responses to the Information Sharing Intervention

    Over 40 percent of couples selected for the information sharing intervention did not consent to it, which suggests that individual accounts are used to hide resources from spouses. Furthermore, those couples who were poorly informed about each other’s finances at baseline were significantly less likely to consent. These poorly informed couples were also significantly more likely to save in individual accounts and marginally less likely to save in joint accounts. However, measures of intrahousehold information sharing and preference heterogeneity were uncorrelated with one another.

    Overall, these results suggest that when savings preferences in the household diverge, individuals strategically exploit secure savings devices to control the overall level of household savings. However, even when preferences over how much to save are well aligned, individuals may still value secure accounts if these accounts allow them to hide savings from others.

    Simone Schaner

    Evaluating Village Savings and Loan Associations in Malawi

    Microfinance institutions have increased access to financial services over the last few decades, but provision in rural areas remains a major challenge. Traditional community methods of saving, such as ROSCAs can provide an opportunity to save, but do not allow savers to earn interest on their deposits as a formal account would, or provide a means for borrowing. Savings Groups attempt to address these shortcomings by forming groups of people who can pool their savings in order to have a source of lending funds.

    Policy Issue:

    Although during the last decades microfinance institutions have provided millions of people access to financial services, provision of access in rural areas remains a major challenge. It is costly for microfinance organizations to reach the rural poor, and as a consequence the great majority of them lack any access to formal financial services.  Traditional community methods of saving, such as the rotating savings and credit associations called ROSCAs, can provide an opportunity to save, but they do not allow savers to earn interest on their deposits as a formal account would.  In addition, ROSCAs do not provide a means for borrowing at will because though each member makes a regular deposit to the common fund, only one lottery-selected member is able to keep the proceeds from each meeting.

    Village Savings and Loan Associations (VSLAs) attempt to overcome the difficulties of offering credit to the rural poor by building on a ROSCA model to create groups of people who can pool their savings in order to have a source of lending funds.  Members make savings contributions to the pool, and can also borrow from it.  As a self-sustainable and self-replicating mechanism, VSLAs have the potential to bring access to more remote areas, but the impact of these groups on access to credit, savings and assets, income, food security, consumption education, and empowerment is not yet known. Moreover, it is not known whether VSLAs will be dominated by wealthier community members, simply shifting the ways in which people borrow rather than providing financial access to new populations.

    Context of the Evaluation:

    The Village Savings and Loans program in this study is implemented in rural communities in the Mzimba, Zomba, Mchinji and Lilongwe districts in Malawi.  Community members in these four districts are predominantly engaged in agricultural activities.  With little access to formal financial institutions, these small farmers do not have the opportunity to invest in agricultural inputs like fertilizer that could increase their income.

    Description of the Intervention:

    Three hundred eighty villages were selected to participate in this study and randomly assigned to a treatment or comparison group. Half of the villages in the treatment group were introduced to the VSLA model by field officers trained by CARE and its local implementing partners.  Local village agents were subsequently selected from each village and trained to replicate the VSLA training in a second village in the treatment group.

    Field officers and local village agents present the model to villagers at public meetings. Those interested in participating are invited to form groups averaging about twenty and receive training.  These groups, comprised mostly of women, meet on a regular basis, as decided by members, to make savings contributions to a common pool.  At each meeting, members can request a loan from the group to be repaid with interest. This lending feature makes the VSLA a type of Accumulating Savings and Credit Association (ASCA) providing a group-based source of both credit and savings accumulation. CARE’s VSLA model also introduces an emergency fund, allowing members to borrow money for urgent expenses without having to sell productive assets or cut essential expenses such as meals.

    This study will assess the impact of VSLA trainings and group membership on access to credit, savings and assets, income, food security, consumption education, and empowerment.

    Results and Policy Lessons:

    Results forthcoming.  

    We are also working with CARE to evaluate their VSLA programs in Ghana and Uganda. See here for more details. 

     

    Savings, Subsidies and Sustainable Food Security in Mozambique

    Policy Issue:

    Motivated by the recent escalation in food prices around the world, several countries, including Kenya, Malawi, Rwanda, and Zambia, have implemented large-scale fertilizer subsidy programs to boost food security and small farm productivity. If people are unaware of the benefits of using fertilizer, or do not know how to use it, then subsidies may be a useful tool to give people experience with using fertilizer, and promote adoption. However, a long-standing question is whether one-time or temporary provision of subsidized fertilizer can get households to adopt it long-term, or whether input use and farm production eventually return to previous levels after subsidies are phased out. The key to determining whether provision of subsidies can lead to long-term growth, even after the subsidies are no longer in effect, is to discover if farmer practices change fundamentally, or whether these practices change only (if at all) when subsidies are being offered.

    Context:

    Large-scale emigration, economic dependence on South Africa, and a prolonged civil war hindered Mozambique’s development until the mid 1990s. Agriculture accounts for almost 29 percent of the country’s GDP, however agricultural technology adoption has been slow in Mozambique compared to other counties in the region. Most of the farmers interviewed for this study had little or no experience with application of chemical fertilizers and other agro-chemical inputs.

    Description of Intervention:

    Researchers are investigating the impacts of fertilizer subsidies on smallholder farmers in rural Mozambique, and in particular, whether providing farmers opportunities for savings accounts can help subsidies achieve a greater sustainable impact. Vouchers for fertilizer were distributed randomly to a sample of farmers. In partnership with Banco Oportunidade de Moçambique (BOM), researchers also randomized offers of one of several different savings accounts interventions, to see how the subsidies and savings accounts complemented one-another.

    The sample comprises farmers with access to some type of agricultural extension service, either through an NGO or government entity, so that they have access information on how to use fertilizer if they choose to use it. Researchers worked with two sub-groups of farmers. The voucher randomization (VR) sample is comprised of farmers randomly distributed (or not distributed) vouchers for fertilizer. The VR sample enabled researchers to examine the interaction between voucher receipt and savings incentives.

    Treatment Groups:

     

    No savings offered

    Offered regular interest rates

    Offered individual savings with 50% match

    Offered group savings with match

    Received voucher for fertilizer

    Treatment Y-0

    Treatment Y-1

    Treatment Y-2

    Treatment Y-3

    Did not receive voucher for fertilizer

    Treatment N-0

    Treatment N-1

    Treatment N-2

    Treatment N-3

    As shown in the table, the VR sample consists of three treatment groups which received different combinations of interventions, and a comparison group which did not receive an intervention. In treatment group 1, farmers were offered a savings account with standard BOM interest rate. Treatment group 2 offered “matched savings” accounts, where farmer received matched funds equal to 50 percent of his or her average savings balance (up to 3,000 MZN, or US$112) during a defined match period. (The match rate is the percentage of the average balance in the account that is contributed by the project at the end of the match period, not an annual percentage rate.) In treatment group 3, farmers were offered a savings match with a group incentive, where the match rate rises or falls in accordance to the average account balance of the entire group. Farmers are not required to use the match for fertilizer, yet the match amount does allow each farmer to afford the inputs provided in the fertilizer package, which many farmers could not afford otherwise.

    During meetings with farmer groups, project staff discussed the importance of savings and keeping part of one’s harvest proceeds for fertilizer and other agricultural inputs for the next season. Farmers were also given specific instructions about using the fertilizer package for maize, and information on BOM savings services and locations. After farmers completed the baseline survey, savings accounts were offered, and project staff assisted interested farmers in filling out the forms to open an account. Farmers then could make their initial deposit at a BOM branch or a Bancomovil, a mobile bank that services many of the sites.

    During follow-up surveys planned for 2012 and 2013, researchers will collect data on per-capita income and expenditures, maize yields and use of seed varieties and fertilizers, and the creation and use of savings accounts.

    Results:

    Results forthcoming.

    Improving Loan Repayment through Positive Incentives in Uganda

    Policy Issue: 

    Financial markets in developing countries can be hampered by a lack of basic financial infrastructure such as functioning credit bureaus, uniform disclosure rules or the ability to use collateral. These limitations can substantially increase the cost of lending for many banks since there is much less information about the overall applicant pool and enforcement of loans is more difficult. The lack of functioning financial systems can impede any enforcement or screening mechanism that operates through negative incentives, if borrowers who have defaulted on one bank can easily access other lenders. To ensure timely repayment, banks therefore have to rely on more innovative positive incentive schemes.

    Context of the Evaluation: 

    Uganda Microfinance Limited (UML) is a microfinance institution, which primarily lends to small businesses through its 27 branches located across Uganda. In 2008, UML (now called Equity Uganda) had over 25,000 borrowers, a loan portfolio of US$24 million, and a default rate of 4 percent. Although all UML borrowers must have some form of collateral to cover at least 80 percent of the principal loan amount, it is very hard to actually seize the assets if a customer defaults. As Uganda did not have a credit bureau at the time of the study, UML did not have the ability to incentivize timely repayment based on the threat of affecting a borrower’s credit history.

    Details of the Intervention: 

    In collaboration with UML, researchers evaluated the effectiveness of three positive incentive schemes designed to help to reduce late loan payments among small business owners.

    In 2008, all UML customers who had been approved for a business loan were randomly assigned to one of the three treatment groups or a comparison group. In the first treatment - “Cash Back” - which provided incentives for on-time repayment, borrowers received a cash back payment equivalent to a 25 percent reduction of the interest rate if they made all their monthly payments on time. However, fast-growing firms with significant investment opportunities might be willing to forgo the cash back payment if the returns from investing are higher than the benefit of paying on time. In attempt to isolate the incentive effect for such fast growing firms, the second treatment – “Future Interest Rate Reduction” - gave customers a 25 percent reduction in the interest rate of their next loan, if current loan payments were all made in time. In the third treatment – “SMS Reminders” - borrowers received SMS reminders every month three days before the payments are due.

    If small businesses strategically delay repayment since they know that lenders have only limited enforcement mechanisms, then the provision of incentives for on-time payments should increase repayment by reducing the benefits of this behavior, while sending SMS reminders should not have any impact. In contrast, if late payments were predominantly a function of the inability of small business to manage their finances, steeper incentives would not help, since payment failures are simply a function of their inability to manage the finances of the business. SMS reminders, on the other hand, might help prevent firms missing payment due to oversight.

    Monthly loan repayment information was collected from the bank between March 2008 and June 2009. This data was complemented by personal and business characteristics obtained from the loan application and loan appraisal forms.

    Results and Policy Lessons: 

    Impact on Loan Repayment: The three treatments had similar effects on borrower repayment behavior. Borrowers in the “Cash Back” incentive group were 8.6 percent more likely to make all payments on time than the control group. The offer of a “Future Interest Rate Reduction” increased the probability of paying on time by 7.3 percent, relative to the control group. Perhaps most interestingly, borrowers in the “SMS Reminder” group, which was almost costless for the bank to implement, were 9 percent more likely to pay every installment on time.

    Heterogeneous Treatment Effects: The effect of the treatments varied significantly across different subgroups of borrowers. The impact of “Cash Back” incentives were stronger for customers with smaller loans and less banking experience, the “Future Interest Rate Reduction” seemed to be most effective for customers with larger loans, while the “SMS Reminders” were particularly effective for younger customers.

    Evidence supports the hypothesis that small businesses in developing countries pay late not because of strategic reasons but because they suffer from a lack of financial management, which affects their ability to make payments on time. This has broader implications for the design of credit products. The repayment behavior of a borrower may be partly driven by simple product details, such as the ease with which the borrower can pay the loan. Thus, loan programs that facilitate easy repayment or frequent reminders may improve loan repayment behavior and reduce the cost of lending.

    Small and Medium Enterprise Financing and Mentoring Services in Emerging Markets in the Dominican Republic

    Policy Issue
    Recent work in the area of development finance has focused on poverty reduction through microfinance institutions (MFIs). These institutions are thought to enable entrepreneurship by providing small personal loans to borrowers who otherwise would have difficulty accessing capital markets, but new entrepreneurs are also faced with complex financial decisions for which they may be unprepared. Studies have shown that there is a strong association between higher financial literacy and better business decisions and outcomes, but there is little evidence on the best ways to quickly convey complex financial practices to business owners. Should courses place more weigh on conveying every aspect of complex materials, or teaching basic concepts in greater depth?
     

    Context of the Evaluation
    In the Dominican Republic, ADOPEM is a savings and credit bank which serves primarily low-income urban individuals and small businesses. They offer loans of US$70 – US$1,400 to both individuals and groups, and also operate a training center with programs covering basic computing, entrepreneurship, and trade skills. Many clients operate small businesses with few or no employees, including enterprises such as general stores, beauty salons, and food services, which bring in an average of US$85 per week. Many ADOPEM clients have been found to have errors in their accounting books, and relatively few individuals kept their business and personal accounts separate.
     
    Details of the Intervention
    Researchers partnered with ADOPEM to evaluate two methods of financial literacy training: one which emphasized classic accounting principles, and one which focused on simple “rule of thumb” methods for decision making. From a pool of 1,193 ADOPEM clients who had expressed interest in financial training, two-thirds were assigned to receive five to six weeks of training, which was offered once a week for three hours at a time and included out-of-class assignments. These classes were taught by qualified local instructors with experience in adult education, and were offered for free or nearly free. Two variations  of the training were tested:

    Accounting Treatment:  This program was adapted from financial education models designed by Freedom From Hunger and the Citigroup Foundation, and focused on a traditional, principles-based approach to accounting techniques. It covered topics such as daily record keeping of cash and expenses, inventory management, accounts receivable and payable, and calculating cash profits, and investment.

    Rule of Thumb Treatment:  This treatment taught participants simple rules for financial decision making, focusing on the need to separate business and personal accounts. It taught clients about paying oneself a fixed salary, distinguishing between business and personal expenses, and easy-to-implement tools for reconciling accounts.
    Additionally, a randomly selected subset of each treatment group received weekly follow-up visits from a financial counselor, in an effort to distinguish between the effects of having learned the material and the effects of actually implementing it regularly in business practices. Counselors visited participants and answered any questions they had about course material, verified and encouraged completion of accounting books, and helped correct any mistakes that they found.
     
    Results and Policy Lessons
    Effects on Business Practices: Results indicate that the “rule of thumb” treatment had significant effects on clients’ business practices. The likelihood that clients were separating business and personal cash and accounts, keeping accounting records, and calculating revenues formally increased by 6 percent to 12 percent relative to the comparison group. By contrast, the accounting treatment seems to have had no impact on business practices.
     
    Effect on Revenue Streams: Participants in the "rule of thumb" treatment reported an increase of 0.11 standard deviations on an index of revenue measures. The most significant effect is observed in the level of sales during bad weeks. The "accounting" treatment had no impact on revenues.
     
    There was no discernible impact of receiving follow-up visits from counselors on either treatment group. There were, however, some differences in treatment effects across various groups. Training had a larger effect on more educated clients’ likelihood to separate business and personal cash and likelihood to save. Additionally, the “rule of thumb” treatment also had a larger impact on people who had not expressed great interest in accounting training. This suggests that charging fees or making training programs optional may not target programs to those who will benefit most.

    Informal Finance - Mapping Global Savings and Lending Practices

    To understand the potential gains from formal banking, we must first understand the risks and returns that the poor face from financial-service options in the informal sector. Yet, while informal financial products dominate the financial lives of the poor, we have scant data and analysis on either informal savings or informal debt. This project aims to fill that gap by collecting detailed information on a range of informal financial vehicles from countries across various regions of the world.

    Policy Issues:

    This study aims to improve our understanding of several long-standing puzzles about the demand and supply of both informal moneylending and savings.

    Informal Moneylending

    Although MFIs and other formal financial institutions now offer and deliver loan services to the poor, many of these poor still continue to access capital informally, notably from moneylenders. Often referred to as “loan sharks”, informal moneylenders are frequently criticized for lending money at exorbitantly high interest rates and preying on poor people in dire situations. Are the observed high interest rates actually usurious, or do they simply reflect high lending costs? Which characteristics of informal loans account for the fact that even in areas with high formal finance saturation, informal lending is still prevalent? What are the characteristics of informal lending models? The fact that we are not as of yet capable of confidently answering these important questions points to a knowledge gap. This lack of systematic data across many countries in the developing world to facilitate studying informal loans and comparing them to their counterparts offered in the formal sector is at odds with the fact that informal financial products dominate the financial lives of the poor. The study aims to collect accurate information by using innovative survey instruments, to compare the costs of formal and informal lending services available to the poor.

    Informal Savings

    Poor households typically use a myriad of informal financial mechanisms to satisfy diverse financial needs. However, informal financial options alone are unable to meet all of a household’s savings needs, and households often report that having access to a savings account is their greatest financial need (Kendall, 2010). Informal schemes often entail high risk and as a consequence tend discourage medium and long-term accumulation. Few existing studies analyze the risks and returns of using informal financial tools, and the factors that influence behaviors in different contexts.One of the reasons for this dearth in knowledge is the difficulty in collecting accurate information. This explorative study aims to create and test high-quality instruments to collect both quantitative and qualitative data about informal savings practices, in order to analyze the contours of demand in these markets, evaluate the risks and returns that the poor face when using the products offered to them, and understand the heterogeneity in informal savings arrangements around the world.

    Context of the Evaluation:

    Seventeen summer interns spent three months into the field in several developing countries - Bangladesh, India, Philippines, Peru, Ghana, Malawi, Mali, Morocco, Rwanda, Ethiopia, Tanzania, Uganda and Senegal -  in order to collect quantitative and qualitative data. Of this group, six of them participated in the third year of ongoing research about informal moneylending,  while the remaining eleven started up an explorative study about informal savings, taking the first steps for further research.

    Details of the Intervention:  

    Informal Moneylending

    From 2009 to 2011, IPA has been gathering data in eleven countries on the business practices of informal moneylenders operating in both urban and rural areas. The crux of this work has been qualitative surveys of moneylenders and their clients with a focus on activities and business cycles. In the spring of 2011, we conducted pilot studies to test various methods of tracking the daily activities of informal lenders, such as in-person shadowing, asking lenders to maintain daily diaries, text-message communication, and other technology-based instruments. These ongoing methods returned more accurate data than self-reported surveys.Over the summer of 2011, we expanded the information-gathering process, resulting in a more precise measure of the direct and opportunity costs of informal lending.  Additionally, we interviewed formal financial organizations, which compete with informal services in order to further understand the relative costs and benefits of different forms of finance. These interviews covered organizations such as MFIs, banks, and other loan associations. In the process, information on ROSCAs and other informal loan and savings vehicles was also collected.

    Informal Savings

    2011 was the first year of data collection on informal savings. In each country,interns visited three areas -  rural, semi-urban and urban -  and interviewed several respondents from different backgrounds, with the goal of developing an understanding of how the poor manage household income and expenditure flows, in terms of how they make decisions, which savings instruments they use and what their costs and returns are. The information was gathered both through informal interviews and a structured survey instrument, the latter being piloted all along the summer. It was continually updated with improvements and will serve as a basis for further research.

    In Summer 2012 we conducted a second wave of data collection. Sixteen interns conducted research on informal savings in eleven different countries using quantitative and ethnographic methodologies. In the quantitative component, interns interviewed respondents from a representative sample to develop an understanding of which informal and formal savings instruments people use in each country, and assessed what are the costs, risks and returns associated with each of these instruments. The information was gathered through a structured survey instrument that was piloted in the beginning of the summer. In the ethnographic component, interns conducted a mix of immersion, observation, semi-formal interviews and focus groups in order to further understand savings behavior in the study locations. Interns focused in particular on research gaps that had been highlighted in the context of existing projects.

    Results and Policy Lessons:

    Results Forthcoming.

    Northern Uganda Social Action Fund – Youth Opportunities Program

    Youth unemployment is a persistent problem in the developing world, particularly in post-conflict settings, posing both economic and security issues. In growing, stable economies such as Uganda, what holds back youth from reaching their potential?  One theory suggests that youth unemployment is due primarily to the lack of sufficient capital to support entrepreneurship. If this is true, cash transfers or cheap credit could lead to a burst of self-employment. Evidence from other areas, such as studies on microcredit, suggests that alleviating these constraints with loans has little effect on earnings. In Northern Uganda, which is returning to peace after twenty years of war, the government’s Youth Opportunities Program offered cash transfers to groups of youth to increase employment and reduce conflict. Follow-up surveys two and four years later found a shift from agricultural work towards skilled trades and strong increases in income. Women in particular benefited from the cash transfers, with incomes of those in the program 84% higher than women who were not. There were no differences, however, in social outcomes such as community participation, aggression, and social cohesion.

    See the full paper herea policy note for the World Bank here, and Chris Blattman’s blog discussion here.

    Policy Question:
    In developing countries, high unemployment - particularly among youth - is a pressing concern. Jobs, particularly higher-skilled labor and productive small enterprise, provide incomes and reduce poverty. For governments, transitioning from an economy based on small-scale agriculture to one based on entrepreneurship and production is critical for long-term growth. Employment is also seen as important for building social stability and political engagement in communities uprooted by long-term conflict.
     
    One form of intervention offers cash in the hopes that youth will invest it in the training and assets to learn a trade or form a business. In the development community, anxiety persists over whether this is an effective approach: will youth with little or no financial or business training be able to direct the money towards successful long-term entrepreneurship?  Previous research also raises questions about the ability of women in particular to invest aid into increasing lifetime earnings, given occupational constraints and pressure to share windfalls.1
     
    Uganda’s largest employment program sought to test if an intervention as simple as giving cash could help accomplish the country’s long-term economic and social goals for its youth.
     
    Context of the Evaluation:
    Twenty years of insurgency, instability and conflict led to high rates of poverty and unemployment in northern Uganda, but by 2005 a measure of peace and stability had returned to the region. The centerpiece of the post-conflict recovery plan was a decentralized development program, the Northern Uganda Social Action Fund (NUSAF). In 2006, to stimulate employment growth through self-employment, the government launched a new NUSAF component: the Youth Opportunities Program (YOP), which provided cash transfers to groups of young adults with the goal of encouraging trade-based self-employment. 
     
    Description of the Intervention:
    The YOP intervention had two official aims: to raise youth incomes and employment and to improve community reconciliation and reduce conflict. The program, targeted at youth from ages 16 to 35, required young adults from the same town or village to organize into groups and submit a proposal for a cash transfer to pay for: (i) fees at a local technical or vocational training institute of their choosing, and (ii) tools and materials for practicing a craft.
     
    The average applicant group had 22 members. Group cash transfers averaged nearly UGX 12.8 million (US$7,108), and varied by both group size and group request. The average transfer size per member was UGX 673,026 (US$374) – more than 20 times the average monthly income of the youth at the time of the baseline survey.
     
    Due to vast oversubscription, the 535 eligible groups were selected at random, using a lottery, to either receive the YOP program or be part of the comparison group. A baseline survey was conducted with 2601 individuals in 2008, and 87 percent were successfully followed and interviewed in the endline surveys two and four years later.
     
    Results and Policy Lessons:
    Overall, the program seemed to have strong economic effects. Four years later, beneficiaries of the YOP program had 41% higher income and were 65% more likely to practice a skilled trade, such as carpentry, metalworking, tailoring, or hairstyling. Hours worked were 17% higher, nearly entirely accounted for by these new professions – while most still farmed part-time, hours spent in agriculture were not different. They were also 40% more likely to keep records, register their business, and pay taxes.
     
    Within the sample, gains were highest for those who had the highest initial credit constraints, those with fewest initial assets and access to loans. The effects were particularly strong for women. Women who received the cash grants four years later had 84% higher incomes than women who did not, while men were earning 31% more than their counterparts in the comparison group. This gender difference may reflect particular capital constraints faced by women.
     
    While employment programs including this one are often implemented by governments with the aim of reducing social instability or promoting cohesion, the data show no evidence for impacts in these domains. After four years there were no measurable differences in cohesion, aggression, or community and political participation between participants in the YOP program and those in the comparison group.
     
    Overall, the data show that the poor used the money effectively; investing in training and tools needed to start businesses and experienced a significant growth in income, even after four years. Even though impacts in social domains were negligible, the economic outcomes show the potential of alleviating capital constraints for spurring economic growth among the poor. 
     
    Read the full paper here.
     
    A midterm policy report here and policy note by the World Bank here were based on the initial 2-year follow up data.
     
    [1] Fafchamps, M., McKenzie, D., Quinn, S., Woodruff, C., 2011. When is capital enough to get female microenterprises growing? Evidence from a randomized experiment in Ghana. Unpublished working paper.

    Group vs. Individual Micro-Lending in Peru

    One of the most famous innovations of microfinance was the idea of “social collateral” – a way to guarantee the loans of people who have limited physical assets. However, it’s not clear that requiring group liability is actually a good thing. For instance, it can drastically raise the cost of a loan for a good client if she is forced to cover for other loans. Furthermore, it can force someone to guarantee people who take out much larger loans, which may prove to be impossible. It’s possible that, at least for some clients, individual liability loans may be better if the other mechanisms of microfinance (such as social embarrassment of being a debtor) ensure high repayment rates.

    IPA ran a study in the Philippines testing this question, and found that repayment rate under individual liability did not go down, while growth increased. We are replicating the study in Peru.

    The first phase of the study, in 2010, is to convert pre-existing communal banks (depending on if the group is in a rural area, the associations range from around 8-20 clients who all guarantee each other) to individual liability products, maintaining the rest of the group structure. Depending on the results, it’s possible that as Pro Mujer expands to new regions we’ll test impact with new associations.

    We hope to implement financial diaries in the field in order to see, among other things, if clients under different liability structures have different approaches towards repaying their debts.

    Informative vs. Persuasive Advertising of Savings Products

    Policy Issue:

    Many argue that increasing financial literacy among poor households would increase usage of financial products, and savings products in particular.  However, this theory raises an immediate question: if financial literacy increases take-up of savings products, why don’t banks and microfinance institutions include financial literacy materials in their advertising?   One explanation for this relative lack of “informational advertising” or use of financial literacy materials is that banks cannot capture all of the increase in savings product use from the advertising (i.e. there are spillovers).  The informative advertising may make customers more likely to use savings products in general from any firm, thus the bank conducting the marketing may not benefit.  Another method, referred to as “persuasive advertising” that tries to convince the customer that a particular firm is superior may be a more effective means of promoting a particular bank’s products.   This study assesses the impact of both informative and persuasive advertising to better understand the role of financial literacy in savings product take-up.

    Context of the Evaluation:

    This project takes place in Cagayan de Oro City, a sprawling city of more than 550,000 people in Northern Mindanao, Philippines.  Study areas are urban or peri-urban, including informal settlements with tenuous land rights and areas that are frequently affected by flooding.  The majority of respondents live below the poverty line, and, during the baseline, only half reported having a household member with salaried employment.  Common occupations in these areas include construction work, driving jeepneys, tricycles, or pedicabs, and operating small neighborhood stores or eateries.  Nearly half of the respondents surveyed reported never having saved with a formal financial institution, though a majority said they have saved at home, and some through informal savings mechanisms. At the time of the project launch, commitment savings accounts were available at both partner banks, Green Bank and First Valley Bank, but few respondents reported using the bank for any purpose.  Green Bank offers the SEED Commitment Savings Account, while First Valley Bank offers the Gihandom Savings Account. 

    Description of Intervention:

    This evaluation assesses the impact of two types of advertising campaigns on savings product take-up. First Valley Bank and Green Bank of Caraga hired teams of marketers to implement a new advertising campaign promoting the banks’ commitment savings products.

    The target sample, households in 12 barangays close to both partner banks (within two regular-priced rides using standard local transportation, 14 pesos or approx. 30 US cents) were given a baseline survey. This survey captured information about basic demographics, work experience and income levels, poverty level (using the PPI), cognitive ability, thoughts on advertising, and previous experience with formal financial institutions and saving.   All households were randomly assigned to one of three treatment groups or a comparison group.

    Marketers from both banks distributed two types of fliers advertising the bank’s commitment savings product to households in the treatment groups. Informative fliers contained basic financial literacy information that highlighted the costs of borrowing versus saving, while persuasive fliers emphasized the quality and trustworthiness of a particular bank.  Each treatment group received one flier from each bank in a random order: both informative, both persuasive, or mixed (one informative and one persuasive or vice-versa).  All fliers were bright and colorful and had a map of the bank's location on the back and noted the four key features of the savings product: 2% interest rate , opening/minimum balance of 100 pesos, free lockbox for savings (paid for by IPA), and goal-setting feature (date or amount restrictions on withdrawal).  IPA worked with the banks to refine product terms and conditions and ensure equivalency on a number of key features, terms, and fees so that no significant variation existed between the two banks’ products.

    A few weeks later, marketers from both banks returned to all households reached in the baseline, including comparison households, and offered to help open savings accounts.  To reduce the non-financial barriers to savings that respondents might face, marketers took ID photos for respondents and made copies of other documents required to open accounts.  Marketers also worked with respondents to help set a savings goal.  At the end of each day, marketers submitted completed application packets and initial deposits for processing by the bank.  When accounts had been processed, marketers returned to households to hand over lockboxes and passbooks and answer any additional question the clients may have had about their new accounts.  All households were visited by representatives from both banks in a random order to eliminate any first-mover effect.

    Results and Policy Lessons:

    Results forthcoming. 

    Introducing Financial Services to Newly Monetized Native Amazonians

    In many indigenous communities throughout Latin America, traditional economies based on barter and reciprocity are rapidly becoming monetized. This is especially true in the Amazon basin, where the construction of new roads and encroachment by cattle ranchers and colonist farmers give native Amazonians increasing exposure and access to money.  Many governments have also introduced wage-earning teachers, child support subsidies, and social security to the elderly in these remote areas. As a result, in native Amazonian communities where most people still depend on hunting, fishing, plant gathering, and subsistence farming for food and shelter, money is becoming an increasingly important part of the village economy. However, savings culture and financial tools to promote the accumulation of money for larger purchases and emergencies do not exist in many of the communities.

    Policy Issue:

    In many indigenous communities throughout Latin America, traditional economies based on barter and reciprocity are rapidly becoming monetized. This is especially true in the Amazon basin, where the construction of new roads and encroachment by cattle ranchers and colonist farmers give native Amazonians increasing exposure and access to money.  Many governments have also introduced wage-earning teachers, child support subsidies, and social security to the elderly in these remote areas. As a result, in native Amazonian communities where most people still depend on hunting, fishing, plant gathering, and subsistence farming for food and shelter, money is becoming an increasingly important part of the village economy. However, savings culture and financial tools to promote the accumulation of money for larger purchases and emergencies do not exist in many of the communities.

    Context of the Evaluation:

    With little financial literacy, villagers may be aided by simple products like savings lockboxes to save l money for large purchases and emergencies. The proposed intervention is based on the idea that individuals lack a safe place to save money temporarily and require a means to curb impulsivity. Prior research with the Tsimane’ has shown them to have very high rates of impulsivity. As a result, lockboxes that do not allow for easy access to these savings may improve the ability of clients to stall unnecessary consumption in the present, and consequently change savings behavior.

    The Tsimane’, a native Amazonian society living in communities near San Borja in the Department of Beni will be offered such a product. IPA is collaborating with CBIDSI (Centro Boliviano de Investigación y Desarrollo Socio Integral), a Bolivian nonprofit explicitly working with research and development among the Tsimane’.

    Details of the Intervention:

    The study includes 1100 households in 70 villages randomly assigned to one of two treatment groups or a comparison group. Households in the first treatment group will receive a savings lockbox along with its key. Those in the second treatment group will receive the same lockboxes but will be required to go the nearest town (San Borja – from a few hours to two days from participating communities) to access the lockbox key from the office of CBIDSI.  The comparison group will not be offered any locked box product.

    To assess whether savings boxes in the possession of female household heads produces greater household saving and expenditures on children than saving boxes in the hands of male household heads, locked boxes will be randomly given to either female or male heads of households. The variation of key placement will allows us to evaluate whether possession of the key encourages impulsivity and altered expenditure patterns. Outcomes will be measured one year after the introduction of the lock boxes in a follow-up survey. The outcomes of interest include income (e.g. sales at markets, waged labor etc.), consumption (e.g. “large” purchases), savings activity (e.g. contributions to lockbox, traditional forms of savings, perceptions etc.), household well-being measures (e.g. anthropometric indicators of short-run nutritional status and household emergencies).

    Results and Policy Lessons:

    Results forthcoming.

     

    Evaluating the Efficacy of School Based Financial Education Programs

    Policy Issue:

    Surveys on financial knowledge and behavior have revealed that individuals in both developed and developing countries around the world lack adequate knowledge to make informed financial decisions. Empirical evidence demonstrating correlations between financial literacy and various measures of well-being has directed service providers, donors, and policymakers to include financial training and business education programs as part of broader anti-poverty strategies. Financial education, especially when provided in the early stages of life, has the potential to create long-lasting impacts. Intuitively, financial education provides useful tools to people of all ages, yet empirical evidence for this impact is thin and often mixed. This project tests two financial education curricula for primary school students. Specifically, it measures the impact of financial education on student behavior attitudes, and outcomes.

    Context of the Evaluation:

    Saving and finances are part of daily life for many youth, yet traditional school curricula often overlook the specific issues and challenges students encounter with money. This curricular gap represents a missed opportunity for students and teachers. Aflatoun, a Dutch non-governmental organization providing social and financial education to 540,000 children in 33 countries,operates a voluntary after school club in Ghana for primary and junior high schools. Aflatoun uses a uniquely designed “social and financial education curriculum” to improve children’s saving habits as well as financial attitudes and self-esteem. Aflatoun’s training on handling money, saving on a regular basis, and spending responsibly aims to teach children, at a young age, lessons and behaviors that they will carry with them throughout their lives.

    Aflatoun operates in collaboration with local partners to implement its programs. Two project partners in Ghana - the Women and Development Project (WADEP) and the Netherlands Development Organization (SNV) - trained instructors and managed program implementation. SNV Ghana worked with three other implementing partners in two regions to train teachers and monitor the implementation of clubs: Berea Social Foundation (Western Region), Support for Community Mobilization Projects and Programs  (Western Region), and Ask Mama Development Organization (Greater Accra Region).

    Details of the Intervention:

    The study included 5,000 primary school students aged 9 - 14 in 135 public schools in semi-urban and rural Ghana, including 30 schools in Greater Accra, 60 in Volta, and 45 in Western District. One-third of the schools in each region were randomly assigned to each of three different groups: the Aflatoun program, Honest Money Box (HMB) intervention, or a comparison group without treatment.

    The Aflatoun curriculum includes lessons about planning, budgeting, saving, proper spending, as well as self-esteem building exercises. It uses songs, games, and worksheets, which put children at the center of the learning process. Aflatoun also adapts its messages and activities to the context of the countries in which it operates, focusing on cultural heritage and community in order to foster a collective sense of empowerment among participant children. The HMB intervention, in contrast, is solely focused on financial education and is designed to provide a comparison for Aflatoun’s unique social and attitudinal curriculum. IPA developed the HMB intervention as a group savings scheme with a financial literacy curriculum. Some of the topics covered in the curriculum include: What is Money?, Saving and Spending, Planning and Budgeting, and Entrepreneurship, as well as lessons in how to use the Money Box, a lockbox that stores group savings.  

    To implement the two programs, local partner organizations trained approximately 200 teachers (two teachers in each selected school). Teachers instructed two multi-grade clubs, with an average of 54 students per club, and delivered the assigned curriculum, in addition to providing a secure storage space for the money saved, generally in the teacher’s locked office. Clubs met, on average, once a week after school at a time decided by the members. Students saved money from their pocket change and recorded transactions on individual passbooks. IPA and partner organizations monitored the teachers to ensure that implementation met pre-determined standards.

    The evaluation was conducted over the course of one school year.  Between 20 and 40 children per school were chosen to be surveyed.. The baseline survey  was conducted in September 2010 and the endline in August 2011. The surveys collected data on financial well-being of students and their families, cognitive function, and perspectives on savings and time and risk preference. The endline survey captured the same information as the baseline, in addition to a financial education endline assessmentand a psychosocial module to understand students’ outlooks and levels of self-control.

    Results:

    Presentation from the “Impact and Policy Conference” in Bangkok, September 2012.

    Analysis is ongoing, results forthcoming.

     

    Psychology of Savings: Commitment Savings Programs in the Philippines

    Researchers ask whether sending regular text messages reminding clients to save can encourage Filipino account holders to increase their balance.

    Policy Issue

    With little money to spare, the poor are particularly vulnerable to the income shocks associated with unexpected events such as natural disasters or health emergencies.  Many households facing these unexpected costs may be forced to take on debt or sell assets to remain afloat.  Those with access to accumulated savings, however, may be better able to maintain constant consumption levels and avoid more drastic measures.  Of course, savings is not only useful in times of emergency: many microfinance clients borrow repeatedly as a way of getting liquid cash, and some women always having loans outstanding. Savings may provides a cheaper (interest free) way for microentrepreneurs to finance business investments. Access to formal financial services is increasing, but   many households in the developing world still do not have a savings account, or do not use the one they have.  Though many people express a desire to save more, little is known about the best way to encourage people to follow through on that desire to save. 

    Context

    For a variety of reasons, the poor in the Philippines are underserved by traditional banks. Many live far from bank branches or are unable to meet minimum deposit requirements to open an account. But despite high levels of poverty, cellphones are extremely prevalent. Sixty percent of all Filipinos are estimated to be mobile phone subscribers and the total number of text messages sent everyday to phones in the Philippines was averaged at 1 billion in 2007. Even among poor households, cell phones can be an essential communications tool and many Filipinos send and receive text messages regularly. This unique situation, with a combination of a very high penetration of mobile phones and relatively low penetration of banking services, offers an opportunity to test whether text message reminders can influence savings behavior.

    Description of Intervention

    The First Valley Bank designed a savings product to allow clients to commit to savings and avoid spending saved funds. Clients who opened the “Dream” savings account were given a small box into which they could insert coins, but which only bank staff could open to take the coins out. The client could take the box to the bank, where the contents would then be deposited into the client’s account. Clients were restricted from withdrawing from their accounts until they had reached a certain “goal amount” and after a certain maturity date.

    The principle intervention consisted of sending periodic text messages to a subset of randomly chosen savings account clients. Half of the clients receiving reminders received positively framed messages, which emphasized that the client’s dreams would come true if she continued to save money, while the other half received negatively framed messages, which emphasized that those dreams would not come true if she failed to save.  A third group, the comparison group, received no “reminder” text messages. 

    An independent randomization assigned some clients to receive “late” text message reminders, regardless of whether or not they had already been assigned to receive a regular reminder.  This late deposit reminder was only activated if the client failed to make their monthly deposit.  These lateness reminders also varied between loss and gain wording, emphasizing either the gain or achieving one’s dreams or the loss of failing to achieve them.

    Results

    As a part of a cluster of savings experiments conducted in the Philippines, Bolivia, and Peru, results indicated that receiving a reminder increased the total amount saved in the reminding bank by 6.3%. Clients randomly assigned to receive some form of reminder were also 3.1% more likely to reach their savings goal by the goal date.

    There was no evidence of a difference in the savings rates of clients receiving positively-framed versus negatively-framed reminders or late versus regular reminders.

    Starting a Lifetime of Saving: Teaching the Practice of Saving to Ugandan Youth

    Policy Issue:

    Programs promoting financial literacy and savings among the poor have become popular in recent years, in hopes that they may enable individuals and families to meet their financial demands. Developing a financially educated population may help promote large-scale change in a country’s economic situation by increasing the savings rate and thereby smoothing individual consumption and increasing investment in productive resources.  At this point, however, very little information exists as to whether or not financial education significantly improves savings behavior.  Particularly, the impact which financial literacy programs can have relative to other means of promoting savings, such as designing group savings accounts that leverage peer pressure, is not known. Quantifying this impact can help researchers understand what drives financial decisions, and enable policymakers to fund programs that will have the largest impact on savings behavior.

    Context of the Evaluation:

    The population of Uganda is disproportionately young: 52 percent of Uganda’s population is under 15 years of age and 29 percent of the country’s adult population is between 15 and 34 years of age[1].   In addition to being very young, the population of Uganda has extremely low savings rates, even relative to its sub-Saharan neighbors, which on average have the lowest savings rates in the developing world. Between 2001 and 2003, for example, Uganda’s average savings rate was 5.2 percent.   Its neighbor Kenya, by comparison, had an average rate of 12.7 percent for the same period.[2]  Uganda’s current savings rate remains alarmingly low, at 10 percent[3].

    Founded in 1984, the Foundation for International Community Assistance (FINCA)International’s mission is to provide financial services to the world’s lowest-income entrepreneurs .  FINCA Uganda was founded in 1992, and hasexperience and expertise in providing financial assets, as well as, youth-oriented savings products to the world’s lowest-income entrepreneurs.

    Description of the Intervention:

    The Church of Uganda maintains a large network of youth fellowship groups, based out of village churches around the country. These groups were targeted for this intervention because they offer a high level of trust among members, as well as, a high degree of consistency across the different groups, relative to other youth group structures in Uganda.  Each group has an average of 25 members with a well balanced mix of genders and occupations.

    This evaluation examines two interventions: a financial education curriculum (a knowledge-based intervention) and a specially-designed youth group savings account (an access-based intervention). The curriculum was developed in partnership with Straight Talk Foundation – a highly successful Ugandan organization specializing in communication to youth – based on the Your Future, Your Moneycurriculum from the Global Financial Education Program and materials from Binti Pamoja, an organization that promotes the rights of teenage girls.

    The ten-session, fifteen-hour curriculum focused primarily on teaching concepts and skills for improving savings behavior, ranging from role-playing the differences between saving and borrowing to achieve a goal, to how to keep a budget, to strategies for successfully discussing sensitive topics around money.

    The group savings account was designed without fees and with simple account-opening procedures to minimize the barriers that were found in focus group discussions to most discourage young Ugandans from opening accounts.

    Two hundred forty church groups, representative of all of Uganda’s regions, were selected based on their level of activity and access to district capitals. The sample population was randomly assigned into four groups, including one group which received neither intervention and served as the comparison group:

     

    Offered/encouraged to open youth group savings account

    No account offered

    Financial literacy training

    Treatment Group A

    Treatment Group C

    No financial literacy training

    Treatment Group B

    Comparison Group (Group D)

    In total 120 groups were offered the financial education program by FINCA-hired and IPA-managed financial educators and 120 groups were offered the group savings account.

    Results and Policy Lessons:

    Results forthcoming.



    [1] Uganda Bureau of Statistics (UBOS) and Macro International Inc. 2007. Uganda Demographic and Health Survey 2006. Calverton, Maryland, USA: UBOS and Macro International Inc. Page 11.

    [2] Bank of Uganda research department, Sept. 14, 2005.  Found in “Savings Habits, Needs and Priorities in Rural Uganda.” Prepared by Richard Pelrine, Olive Kabatalya. Rural SPEED and Chemonics International.  Produced by USAID, September, 2005.

    [3] Dovi, Efam, “Africa: Boosting Domestic Savings on the Continent.”

    The Role of Mobile Banking in Expanding Trade Credit and Business Development in Kenya

    Policy Issue:

    Access to finance is a critical constraint for small businesses everywhere.  Credit provided by up-stream suppliers to down-stream firms (“trade credit”) can relax the constraints on capital. Trade credit can help small businesses, like retail shops and kiosks, to purchase non-perishable goods for resale and free up resources for short- and long-term uses.  However,the provision of this type of credit may be limited by high transaction costs, up-stream liquidity constraints, and concerns over repayment.  As trade credit agreements in low-income countries usually involve small amounts, judicial systems are unlikely to enforce repayment of loans in court. Without a system to distribute small loans in an economically feasible manner and manage repayment, suppliers have little incentive to extend this service. This project evaluates a new method of extending trade credit facilitated by mobile banking and inventory management technologies and will shed light its potential to foster small business development in a developing country context.

    Context of the Intervention:

    Working with Financial Sector Deepening (FSD), a Kenyan Trust focusing on development of financial services for the poor, researchers will evaluate a trade credit product that uses a mobile network to increase the efficiency of loan origination and repayment.  In collaboration with FSD, a large supplier of non-perishable products (the Coca Cola Bottling Company (CCBC)), and a Kenyan bank (Equity Bank), researchers will conduct a randomized evaluation of the new trade credit product.

    This technology has the potential to overcome two particular challenges.  First, by reducing the transactions costs of making repayments, new mobile technologies make it economically feasible to offer trade credit products requiring small, frequent repayments. Second, the centralized information system allows centralized monitoring of both credit and repayment histories.

    Description of the Intervention:

    CCBC uses 240 independently owned distributors to deliver its products to about 40,000 retail outlets in Kenya. These retailers typically make purchases (in cash) and take delivery of product once every few days, depending on expected demand and available cash on hand.  There is presently no pre-ordering of any sort in the supply chain, and no short-term credit. All payments are made in cash at or just prior to the time of delivery.

    CCBC will automate their supply chain, enabling every case of product to be recorded and tracked at the retailer level.  A natural next step in the automation process is to integrate financial transactions.  This project takes advantage of this advance in supply chain automation to build in a trade credit product.  In particular, the tracking system will allow real-time monitoring of both cash and mobile phone-based transactions, and hence enable more efficient administration of credit contracts. Critically, the trade credit will be provided not by the independently owned distributors, but by Equity Bank via it’s in-house mobile banking platform. This is the feature that makes the trade credit product viable for a larger number of retailers.

    The project will involve working with 1,200 retailer selling Coke products in and around Nairobi, Kenya. Of these, two thirds will receive the trade credit while one third will serve as a comparison group.  While all credits will be repayable to Equity Bank, the distributors of Coke products will be given explicit incentives to ensure repayment for half the retailers to whom the credit is offered.  The study will assess the commercial viability of the product, the role of distributors in administering it, and its impact on business development and employment creation.  If the intervention is profitable for lenders and borrowers, the project partners are keen to expand the credit product at a much larger scale and to other suppliers.

    Results and Policy Lessons:

    Results forthcoming.

    Evaluating Village Savings and Loan Associations in Uganda

    Microfinance institutions have increased access to financial services over the last few decades, but provision in rural areas remains a major challenge. Traditional community methods of saving, such as ROSCAs can provide an opportunity to save, but do not allow savers to earn interest on their deposits as a formal account would, or provide a means for borrowing. Savings Groups attempt to address these shortcomings by forming groups of people who can pool their savings in order to have a source of lending funds.

    Policy Issue:

    Although during the last decades microfinance institutions have provided millions of people access to financial services, provision of access in rural areas remains a major challenge. It is costly for microfinance organizations to reach the rural poor, and as a consequence the great majority of them lack any access to formal financial services.  Traditional community methods of saving, such as the rotating savings and credit associations called ROSCAs, can provide an opportunity to save, but they do not allow savers to earn interest on their deposits as a formal account would.  In addition, ROSCAs do not provide a means for borrowing at will because though each member makes a regular deposit to the common fund, only one lottery-selected member is able to keep the proceeds from each meeting.

    Village Savings and Loan Associations (VSLAs) attempt to overcome the difficulties of offering credit to the rural poor by building on a ROSCA model to create groups of people who can pool their savings in order to have a source of lending funds.  Members make savings contributions to the pool, and can also borrow from it.  As a self-sustainable and self-replicating mechanism, VSLAs have the potential to bring access to more remote areas, but the impact of these groups on access to credit, savings and assets, income, food security, consumption education, and empowerment is not yet known. Moreover, it is not known whether VSLAs will be dominated by wealthier community members, simply shifting the ways in which people borrow rather than providing financial access to new populations.

    Context of the Evaluation:

    The Village Savings and Loans program in this study is implemented in rural communities across seven districts in Eastern, Western, and South-Western Uganda.  Community members are predominantly engaged in farming or animal breeding depending on the region. With little access to formal financial institutions, these small farmers do not have the opportunity to invest in agricultural inputs like fertilizer that could increase their income.

    Description of the Intervention:

    Three hundred ninety-two villages were selected to participate in this study and randomly assigned to a treatment or comparison group. Half of the villages in the treatment group were introduced to the VSLA model by community-based trainers who received an orientation by CARE and its local implementing partners. 

    Community-based trainers present the model to villagers at public meetings. Those interested in participating are invited to form groups averaging about twenty and receive training.  These groups, comprised mostly of women, meet on a regular basis, as decided by members, to make savings contributions to a common pool.  At each meeting, members can request a loan from the group to be repaid with interest. This lending feature makes the VSLA a type of Accumulating Savings and Credit Association (ASCA) providing a group-based source of both credit and savings accumulation. CARE’s VSLA model also introduces an emergency fund, allowing members to borrow money for urgent expenses without having to sell productive assets or cut essential expenses such as meals.

    This study will assess the impact of VSLA trainings and group membership on access to credit, savings and assets, income, food security, consumption education, and empowerment.

    Results and Policy Lessons:

    Results forthcoming.  

    We are also working with CARE to evaluate their VSLA programs in Ghana and Malawi.

    Remembering to Save: Timing of SMS Reminders in Ecuador

    Savings can provide a safety net for the poorest, allowing them to create a cushion against risks, build assets for their future, and smooth income during periods of low income.  However, the majority of the world’s poor does not have access to formal savings mechanisms, and instead are forced to save informally through such methods as hiding money in their homes, or purchasing assets such as jewelry and livestock.  These methods tend to be risky, inefficient and costly.  In addition, there has been very little research on how to design appropriate products taking into accoun

    Savings can provide a safety net for the poorest, allowing them to create a cushion against risks, build assets for their future, and smooth income during periods of low income.  However, the majority of the world’s poor does not have access to formal savings mechanisms, and instead are forced to save informally through such methods as hiding money in their homes, or purchasing assets such as jewelry and livestock.  These methods tend to be risky, inefficient and costly.  In addition, there has been very little research on how to design appropriate products taking into account the specific needs of the poor and to incentivize more disciplined savings behavior. 

    Context of the Evaluation:

    The proposed intervention is based on the idea that individuals do not foresee events in the future and thus do not save for those expected needs in the present.  As a result, mechanisms to remind clients in a frequent and timely manner to save now, such as a text message after a pay-period, may improve the ability of clients to consider future needs, stall unnecessary consumption in the present, and consequently save for the future. Salient and timely reminders can refocus attention from current activities to investment for longer term goals and lead to improved client savings behavior.

    FINCA Ecuador is one of many microfinance institutions (MFIs) that provides financial services to the Ecuador’s lowest-income entrepreneurs so they can create jobs, build assets, and improve their standard of living. These services include microenterprise loans, health and home insurance, and health services via third party providers for clients and their families.   More recently, FINCA Ecuador became a regulated bank and, as a result, is required to offer savings services to its clients.

    Description of the Intervention:

    The study sample of 2700 clients was drawn from FINCA’s database of existing savings clients with cellular phone information and new clients who opened accounts during the first five months of the study. Baseline data was collected from new clients at the moment they opened the account. The baseline survey collected information such as current financial activity, savings goals, and banking preferences (i.e. preferred banking hours/days). Eligible clients were required to have a cell phone but were not required to have a certain income or savings balance, apart from the minimum balance required by FINCA to open an account. After the baseline data was collected, clients were randomly assigned to a treatment or comparison group. Clients in the treatment group received text message reminders to save via cell phones.  The messages varied across several dimensions, including (a) Frequency: the interval at which messages are sent e.g. weekly vs. monthly (b) Duration: the length of time over which the messages are sent e.g. two months vs. four months (c) Timing: the moment at which the messages are sent e.g. time of day (morning vs. afternoon) or day of the week (Monday, Wednesday, Friday) (d) Content: the substance of the message e.g. phrasing of text. The messaging intervention lasted for eight to ten months depending on the treatment.   Frequency of deposits and average account balances, as well as, bank transaction data during the intervention period was collected for the entire sample.

    Results and Policy Lesson:

    Results forthcoming.

    Moving Beyond Conditional Cash Transfers in the Dominican Republic

    Can financial education and business training help recipients of a conditional cash transfer program manage their personal finances and ultimately graduate from the program?

    Policy Issue

    Cash transfer programs are increasingly common across developing countries. These programs provide income support to those living in extreme poverty, and in the case of conditional cash transfer (CCT) programs, provide incentives for parents to invest in the human capital of their children by making the transfers conditional on certain behaviors, like attending school or visiting a health clinic. Despite their established benefits in terms of improving health and educational achievement, many policymakers and development practitioners remain concerned about the extent to which households may become dependent on cash transfers to maintain their living standards. Even with greater access to healthcare and education, it can be difficult for beneficiary households to manage their personal finances, find and maintain a stable job, or start a new business. It is not clear whether families will revert to pre-program poverty levels when the transfers are no longer provided, or whether the transfers enable more permanent changes in household and business finances, ultimately allowing beneficiaries to graduate from the program.

    Evaluation Context

    Solidaridad is a CCT program in the Dominican Republic that provides cash transfers to poor households if they invest more in education, health, and nutrition. Eligible families receive around US$75 every three months if they comply with certain conditions, including the school enrollment and attendance of all household children, and regular health check-ups for children under the age of five years old. Approximately 20 percent of the Dominican population lives in moderate or extreme poverty, and are eligible to receive trimonthly transfers from the program.[1] The beneficiaries receive these transfers via a debit card to be used to purchase basic food products at authorized stores, and meet every three months in community groups (núcleos) to receive training in nutrition and preventive health. However, Solidaridad does not currently have a graduation strategy to encourage beneficiaries to improve their household financial management and develop stable income sources from jobs or small business creation.

    Description of the Intervention

    Researchers are using a randomized evaluation to assess whether providing financial literacy and business training to CCT beneficiaries can help them graduate from the program, and what type of training is most beneficial.

    Two hundred and forty núcleos, with a total of 3,600 individuals, will be selected from government administrative data and randomly assigned to either the treatment or comparison group. All members of the treatment group will receive financial literacy training intended to improve household financial management skills. In addition, núcleos in the treatment group will also be randomly selected to receive one or more of the following:

    • Professional vs. peer trainers. Of the 120 núcleos in the treatment group, half will receive financial literacy training from professional trainers, while the other half will receive the training from their peers.
    • Business vs. job skills training.In addition to the financial literacy training, half of the núcleos in this treatment group will receive an additional training session on financial management for businesses, while the other half will receive additional training on job skills (finding, acquiring, and maintaining employment).
    • Budgeting notebooks. Within each núcleo, a random subset of beneficiaries will be selected to receive notebooks that can be used to maintain household and/or business budgets to test whether the notebooks increases the impact of the training.
    • Access to formal financial services. Of the beneficiaries who already own a business and are interested in and eligible to receive a loan, a random subset will be offered a loan and an accompanying savings account from a local commercial bank.

    Key outcome measures include knowledge and management of household and business finances, household and business assets, and the employment status and conditions of household members.

    Results and Policy Lessons

    Results forthcoming


    [1]Government of the Dominican Republic. “Programa Solidaridad.” http://www.solidaridad.gov.do/

    Alarm Boxes: Combining Commitment and Reminders

    Policy Issue: 

    In addition to the lack of banking infrastructure, many other constraints limit the availability and effectiveness of savings services for the poor. There has been very little research to map the demand for services so that products can be designed with clients’ needs and cash-flow in mind. These constraints in the supply and demand for savings service point to the need for specialized market research and product development efforts.  Efforts to unveil the actual needs and perceptions of low-income clients to better devise products and incentives for them may result in more rigorous savings behavior.  

    The proposed intervention is based on the idea that individuals do not foresee events in the future and thus do not save for those unexpected needs in the present. Furthermore, individuals lack a safe place to save money temporarily and require a means to curb impulsivity. As a result, mechanisms to remind clients in a frequent and timely manner to save now, such as programmed alarms and lockboxes that do not allow for easy access to these savings, may improve the ability of clients to take future needs into account, stall unnecessary consumption in the present, and consequently change savings behavior.

     
    Context of the Evaluation: 

    Although the gross domestic savings rate in Bolivia in 2009 averaged about 20 percent of the country's GDP, on par with its neighbors (Peru at 26 percent and Ecuador at 21 percent), Bolivia’s savings rate has been historically much lower than those of other countries in Latin America, and access to savings services is severely constrained among the poor.1 Given the predominance of microfinance institutions (MFI) in the financial services sector in Bolivia, the responsibility of generating savings products and services for the poor generally falls on these institutions. Increasingly, due to the commercialization of the sector in Bolivia, the capturing of savings has become a major driving force behind MFI sustainability and growth.

    Ecofuturo is a for-profit Bolivian microfinance institution that operates in many regions of Bolivia. Ecofuturo offers an array of individual credit, insurance, and savings products. These savings products range from basic non-programmed accounts to more complex commitment accounts that require the client to meet deposit quotas in order to qualify for rewards, such as higher interest rates. Working with Ecofuturo, IPA developed an innovative lockbox with a daily alarm that can only be turned off by depositing money. The lockbox acts as a psychological barrier to impulsivity by requiring its owner to visit the local bank branch where designated bank staff keep the key. By incorporating the use of alarms to the already familiar concept of lockboxes (i.e. piggy banks), IPA will test the impact of a technology that is both simple and cost-effective. The alarm acts like a reminder, not unlike a text message reminder to a cell phone, but over a period of time could prove to be more cost-effective and relevant for those who do not have access to a cell phone.

     
    Details of the Intervention: 

    IPA first tested the alarm box with a small pilot sample with plans to launch the product to approximately 800 Ecofuturo clients to evaluate its impact on savings behavior. In total, IPA will work with 2400 existing savings account holders. Two-thirds of the clients will be randomly selected to get an offer of a lockbox, and of those clients, half will be offered boxes with alarms. The remaining group of clients will serve as a comparison group. The impact of an information wheel that clients can use to determine daily savings amounts required to ascertain a goal in a given time will also be assessed. Within each of the three groups (comparison, lockbox, lockbox with alarm), half of the clients will be randomly selected to receive the wheel. Savings rates and frequencies will be measured amongst treatment and comparison groups after approximately one year.

     
    Results and Policy Lessons: 

    Results forthcoming.

     

    1 The World Bank Group. http://data.worldbank.org/indicator/NY.GDS.TOTL.ZS

    The Impact of Credit-Scoring on Small and Medium Enterprise (SME) Lending and Performance in the Philippines

    How does access to credit affect the growth of small and medium enterprises – both firms receiving loans as well as their competitors, suppliers and customers? Limited access to credit is commonly identified as a key constraint to SME growth, but little evidence exists of the direct and indirect effects of loans on small firms in a given market. Researchers are working with a large bank in the Philippines, using random assignment to offer loans to SME applicants who fall just below the threshold to be automatically approved for a loan. The researchers will compare the firms that received the loans to a similar group that did not. Comparing the two groups will allow for a better understanding of the impact of loans on firm performance and growth as well as any additional effects on firms in the same market or in the loan recipient’s supply chain.  
     
    For additional information on current SME Initiative projects, click here.
     
    Policy Issue:
    Small businesses are often thought to be an important source of employment, innovation, and economic growth. In many developing countries, small and medium enterprises (SMEs) make up a large share of registered businesses, but a much smaller share of GDP. Data from several countries suggest that few SMEs grow to become larger businesses. One reason could be that unlike larger businesses, SMEs have limited access to credit, preventing them from making larger investments to improve their operations, upgrade to new technologies, or expand.
     
    Most SMEs’ financing needs exceed the small loans that microfinance institutions provide. Yet larger commercial banks often find it too expensive to lend to SMEs because the cost of assessing whether an SME is creditworthy is high relative to the return banks could earn by lending to them. Many banks also perceive SMEs as being too risky and more likely to default on loans. Credit scoring has been used extensively in developed countries to reduce the cost and time required to process loan applications and to assess the riskiness of loan applicants in order to make small business and consumer lending profitable for banks. Can a credit-scoring system increase lending to SMEs in emerging markets, and does access to credit improve these businesses’ profitability? How does increased access to credit affect other businesses in the same market, namely the competitors, suppliers, and customers of businesses receiving loans?
     
    Context of the Evaluation:
    In the Philippines, the vast majority of registered enterprises are small or medium sized. Nationwide, there are over 800,000 micro, small, or medium enterprises. These businesses span a range of industry sectors, including wholesale and retail trade, manufacturing, and services. Promoting SME growth is a central focus of national policy and all banks are mandated to set aside at least 8 percent of their total loan portfolios for SMEs. The Development Bank of the Philippines (DBP) is a development banking institution mandated to provide medium and long term loans to SMEs. In 2013, DBP began to roll out its new Retail Lending Program for Micro and Small Enterprises in 45 bank branches across the country. Under this program, DBP will make lending decisions using credit scoring software, which will determine loan approvals based on verifiable client information and an objective credit score, replacing the current approval process which relies on loan officers’ perceptions about applicants’ creditworthiness.
     
    Details of the Intervention:
    Researchers are conducting a randomized evaluation in partnership with the Development Bank of the Philippines (DBP) to test how access to credit affects both borrowing businesses’ performance and that of their competitors and suppliers.
     
    Each of the 45 DBP branches will advertise the new Retail Lending Program to SMEs in their area and encourage them to apply. The branches will be assigned to either target SMEs in certain randomly chosen industries for loans (e.g. bakeries or water purification plants) or to not target any industries in particular. After SMEs submit an application, the credit scoring software will assign each applicant a score. Applicants whose scores fall in a pre-defined range just below the minimum score that automatically qualifies someone for a loan will be randomly assigned to either receive a loan or serve as part of the comparison group. In branches that are randomly assigned to target certain industries, marginally qualified applicants in the targeted industries will have a 90 percent chance of receiving a loan. This randomized “bubble” will include approximately 250 of these marginally qualified applicants.
     
    DBP’s credit committee will then review all loans approved by the credit scoring system prior to final approval, reserving the right to deny loans based on information not included in the credit scoring model, such as criminal history. Loan officers will separately record whether they would have normally approved the loan without the credit scoring system, allowing researchers to compare credit scoring to the current, more subjective lending approach.
     
    Businesses in the treatment group will receive loans between PHP 300,000–10,000,000 (US$5,590–186,200). The terms of the loans will range from three months to five years. A baseline survey will be conducted with all sample firms prior to loan disbursement. One year after the loans are disbursed researchers will conduct a follow-up survey to measure the SMEs’ investment and profits. Administrative data from DBP will be used to measure loan repayment and default.
     
    Researchers will also survey the SMEs’ competitors and suppliers to examine whether receiving a loan had an impact on those firms. Increased access to credit may make SMEs more efficient and profitable, potentially taking away business from their competitors. On the other hand, if increased access to credit leads some businesses to develop better methods of production that their competitors can copy, access to credit could potentially indirectly benefit their competitors. Similarly, access to credit may have spillovers on a loan recipient’s suppliers as a result of business expansion or adoption of new technologies. This study will examine whether increased access to credit indirectly benefits or harms borrowers’ competitors and suppliers.
     
    Results and Policy Lessons:
    Project ongoing.

    Enterprises for Ultra-poor Women After War: The WINGS Program in Northern Uganda

    What’s holding back impoverished women? Can small grants programs help the most vulnerable women develop sustainable livelihoods? Do employment and poverty relief empower them and improve their lives? This evaluation assessed the impact of a program that gave cash grants and basic business skills training to the poorest and most excluded women in post-war northern Uganda. The program led to dramatic increases in business and reductions in poverty. Despite these economic gains, however, there was little change in social integration, physical or mental health, or empowerment.

    Find a policy note with more detail here and a full in-depth policy report here (PDFs)
     
    Policy Issue:
    According to one view, women have the ability to run businesses and make profits, but they are held back by too few assets, too little access to loans, too few skills, and a host of social barriers. What happens, then, when these economic barriers are removed? This study evaluates a program that gives cash, business skills training, and ongoing advising to some of the poorest women in the world, in northern Uganda, to understand its effect on new business development and poverty.
     
    Another view holds that for women, with economic success comes empowerment - more independence, more decision-making power in the household, and the freedom to leave abusive relationships. This study also tests whether an entrepreneurship program that reduces poverty also empowers the women in other aspects of life.
     
    Evaluation Context:
    The study takes place in northern Uganda, which is emerging from twenty years of conflict and displacement. Young women and girls in particular suffered economically and educationally from the war. The women who participated in this study were displaced from their homes and lands for years, and are returning and rebuilding a life. Thus this study can inform strategies for post-war reconstruction for women and for the society in general.
     
    In 2007, the NGO AVSI Uganda and two of the IPA Investigators surveyed more than 600 young females aged 14 to 35 affected by the conflict in northern Uganda, including more than 200 women formerly abducted by an armed group. The evidence from the survey, along with program experience among NGOs in northern Uganda, suggests that the development of new economic opportunities and building social capital will be crucial ingredients in reducing poverty and improving the health, education and psychosocial well-being of youth, especially young women. 
    AVSI and the investigators worked together to design a program that would relieve the most serious economic constraints on women: The Women’s Income Generating Support (WINGS) program.
     
    Description of the Intervention:
    AVSI identified the 15 poorest and most vulnerable women in 120 villages that they wanted to support - 1800 in all. To each, they delivered WINGS’ three core components:
    1.       Four days of business skills training (BST)
    2.       An individual start-up grant of roughly $150
    3.       Regular follow-up by trained community workers
    Additional optional components of the program include group formation, training, and self-support; and spousal inclusion, training, and support. Based on records provided by AVSI, the total cost of the intervention is estimated at approximately $688 per person.
     
    Evaluation Design:
    The evaluation combined a randomized design with qualitative data collection. AVSI could help no more than 900 people in 60 villages at first - serving 900 already required them to triple their usual capacity. Thus AVSI and IPA held public lotteries with village leaders. 60 villages were selected to participate immediately, while the remaining 60 participated 18 months later. This design allowed for assessing 18-month impacts by comparing women in participating villages to those just about to receive the program.
     
    Results:
    Economically, the program was transformative. For example:
     
    Cash Earnings: Earnings nearly doubled. For the average WINGS beneficiary, monthly cash income increased by UGX 16,211 to 32,692 UGX, a 98% increase over controls. In absolute terms, an increase of UGX 16,211 does not seem large (about $6.50 a month at market exchange rates). However, relative to the average income in the control group, UGX 16,481 ($6.60), it is huge. 
     
    Consumption, Assets, and Savings: Participants in the WINGS program had a 33% increase in household spending, a value of UGX 11,741 ($4.72). There is also an increase in wealth, and the results imply that WINGS clients substantially increase their durable assets. Savings for program beneficiaries tripled on average, going from UGX 40,740 ($16.36) to UGX 169,862 ($68.22). 
     
    These economic gains, however, were not matched by gains in health or empowerment. In fact, there was almost no effect on non-economic measures. For instance:
     
    Physical and mental health: There was no significant difference in psychological distress. Women in both the program and comparison groups reported a reduction in psychological distress over time, which is not surprising because the overall quality of life in northern Uganda improved after war and displacement. Women in the WINGS group did not improve more or faster, however. If anything, they were sick about a half a day more in the previous month. 
     
    Child investments: Woman are often targeted by anti-poverty programs because they are believed to be more likely than men to use the profits to benefit the household, especially children’s education and health. Women in the program spent slightly more on children’s health and education, but there was no corresponding improvement in children’s health status or school enrollment, at least after 18 months.
     
    Empowerment: The conventional wisdom also assumes that lending to women will enhance their status in the household. Data from this study, however, showed no evidence of resulting empowerment for women in household decision-making, independence, gender attitudes, or rates of intimate partner violence. This pattern has been seen before, and is often referred to as the “impact-paradox.” 
     
    Overall, the WINGS program impacted women’s economic standing significantly, but the data show that translating these gains into improvements in psychological health, physical health, or empowerment is more complex.
     
    For more, you can read a first person account of the project on the Freakonomics Blog.

    Ultra Poor Graduation Pilot in Ghana

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? This 24-month program provides beneficiaries with a holistic set of services including: livelihood trainings, productive asset transfers, consumption support, savings plans, and healthcare. By investing in this multifaceted approach, the program strives to eliminate the need for long-term safety net services. Spanning seven countries on three continents, the Ultra Poor Graduation program is being piloted around the globe. IPA is conducting randomized evaluations  in IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana to understand the impact of this innovative model.

    Policy Issue:

    Households well below the poverty-line face an interrelated set of challenges, each of which colludes to keep families in extreme poverty. These families are food insecure, do not have access to financial services, have few assets, savings, and inadequate access to healthcare, and often cannot afford education for children or need children to work. Without many opportunities or tools with which to change their situation, these households are vulnerable to shocks, such as bad harvests, and often dependent on charitable or government services for basic food support during lean seasons.

    Graduating from Ultra Poverty (GUP) uses the Ultra Poor Graduation model, developed by BRAC as part of its Targeting the Ultra Poor Program in Bangladesh, to confront extreme poverty by offering a holistic set of services. The model addresses the varied needs of households in extreme poverty by providinga sequenced set of services, including consumption support, productive asset transfer, livelihood training, savings services, and healthcare. This approach is based on the premise that beneficiaries require intensive support, beyond financial services, to make a sustainable change out of extreme poverty. In Ghana, the GUP evaluation provides an opportunity to measure the impact of the savings component of this program.

    Making weekly visits and providing a holistic bundle of services is costly. Evidence suggests that poor households, who are resource constrained, may be able to improve their economic welfare with improved financial products like savings accounts. The Savings Out of Ultra Poverty (SOUP) program in northern Ghana provides households with the opportunity to save money in a secure account through a weekly Susu collection program to build capital for future expenses, providing an opportunity to learn whether savings alone can make a difference for households in extreme poverty.

    By comparing the impact of the GUP and SOUP interventions, this study will help determine the impact of savings alone as well as savings when combined with a holistic package of services and which approach is more cost effective in improving household economic and social outcomes in the short and medium term.

    Context of the Evaluation:

    In Ghana, the GUP and SOUP programs are being implemented in 155 communities in the districts of Tamale Metro, East Mamprusi, and Bulsa in the Northern and Upper East Regions.  Presbyterian Agricultural Services (PAS), a local organization with experience delivering a wide range of services relating to agriculture, health, and saving, is implementing both programs with the support of IPA and in partnership with local rural banks. IPA is also conducting the impact evaluation.

    The GUP and SOUP programs serve women in the poorest households of selected communities. At the time of the baseline 84 percent of these women were illiterate, 18 percent had a household member with access to some sort of paid work, 66 percent lived in houses with mud or sand flooring, 93 percent had houses with thatched roofs and nearly all households relied primarily on subsistence farming.

    Description of Intervention & Evaluation:

    Households in selected communities were identified using a Participatory Wealth Ranking (PWR) process where villagers were asked to collectively rank the economic status of their community members.  Field officers confirmed the poverty status of eligible families and households. Communities were then randomly assigned to receive GUP, SOUP or to serve as comparison group with no intervention. Half of the eligible GUP households were also randomly assigned to receive weekly Susu collection as part of the package of services, and half of the SOUP households received a 50 percent match on any savings deposits made.   GUP and SOUP household receiving savings services are visited weekly by PAS field agents like “Susu” or “small small moneys” agents who collect savings for safe keeping.  PAS field agents deposit savings in household bank accounts and do not charge additional fees. Transactions are recorded for each household in a passbook provided by the bank.  Clients can withdraw money at any time by visiting a local bank branch.

    GUP households receive consumption support during the lean season, an asset to jump-start a new entrepreneurial venture, membership to the National Health Insurance Scheme and weekly training with support from field staff throughout the 2-year program. Households are also supported by community support committees, connected to health services, and receive assistance in opening an account a local bank.

    Households selected to receive the SOUP program receive savings accounts and weekly Susu collection services only – without all of the other components of the original Ultra Poor Graduation program. Half of the SOUP participants also receive a 50 percent match of all weekly savings deposits up to GHS 1.50 ($0.88 US) per week. There is no minimum or maximum to the amount that clients can save each week.

    By disaggregating the savings component from the rest of GUP program both by randomly offering savings accounts with the original model and creating a savings-only program, researchers will be able to examine the overall importance of savings accounts in assisting ultra poor households.  Furthermore, the matched savings intervention will allow analysis of the incentives on participant savings.  Specifically, researchers will be able to determine whether households are already saving the maximum amount possible, or if incentivizing savings can further increase deposits.

    Results:

    Results forthcoming.

    For additional information on the Ultra Poor Graduation Pilots, click here.

    Ex-combatant Reintegration in Liberia

    For post-conflict societies, the challenges of reintegrating ex-combatants and war-affected youth are likely to far outlast and outsize the formal demobilization, disarmament and reintegration (DDR) of ex-combatants. These programs, conducted in war’s immediate aftermath, form an important part of a policymaker’s post-conflict toolkit. While ex-combatants receive special policy attention, poor and underemployed men are also widely considered a threat to political stability.

    Find a more in-depth policy report here. 

    Context of the Evaluation:

    In Liberia, where the bulk of the population is young, poor, and underemployed, many rural youth continue to make their living through unlawful activities, including unlicensed mining, rubber tapping, or logging. Many of them are ex-combatants, and some remain in loose armed group structures, doing the bidding of their wartime commanders. While the security situation has steadily improved since 2003, the government, the UN, and NGOs fear that these youth are a possible source of instability, particularly in hotspot regions where mining, rubber tapping, or logging and the allure of “fast money” attract young men from around the country. These youth may also be recruited into regional conflicts as mercenaries. Agriculture is and will continue to be a major source of employment and income for rural Liberians. The international NGO Landmine Action (LMA, now known as Action on Armed Violence) runs an innovative and intensive agricultural training program, targeting ex-combatants and other high-risk youth in rural hotspots.

    Description of the Intervention:

    The LMA program is broader and more intensive than most ex-combatant reintegration programs, and is designed to rectify some of the main failings of prior demobilization programs: it is oriented towards agriculture (the largest source of employment in Liberia); it provides both human and physical capital; and it integrates economic with psychosocial assistance. It also targets youth at natural resource hotspots that presented the most immediate security concerns.

    LMA took youth selected for the program to residential agricultural training campuses, where they received 3-4 months of coursework and practical training in agriculture, basic literacy and numeracy training, psychosocial counseling; along with meals, clothing, basic medical care, and personal items. After the training, counselors facilitated graduates' re-entry with access to land in any community of their choice.  Graduates received a package of agricultural tools and supplies, valued at approximately US$200. The program's total cost is approximately $1,250 per youth, excluding the cost of constructing the campuses. The program was designed to give youth a sustainable and legal alternative to illegal resource extraction, ease their reintegration into society, reduce the risk of re-recruitment into crime and insurrection in the future, and to improve security in hotspot communities.

    LMA recruited twice as many youth as it had space for in its programs, and researchers randomly assigned half of the youth to treatment (receiving the program), and half to a comparison group (not receiving the program). By comparing these two groups 18 months after the program, researchers can see the effect of the intervention on agricultural livelihoods, shifts from illicit to legal employment, poverty, social integration, aggression, and potential for future instability.  Despite massive migration, 93% of the youth were found at the time of the endline survey. The qualitative study included observation and a series of interviews with 50 of the youth.

    Results and Policy Lessons:

    Engagement in agriculture: More than a year after completion of the program, program participants are at least a quarter more likely than the control group to be engaged in agriculture, and 37% more likely to have sold crops. Interest in and positive attitudes toward farming are also significantly higher among program participants. 

    Illicit activities:The program had little impact on rates of participation in illicit activities like mining, but those who participated in the program do spend fewer hours engaged in illicit activities, as agricultural hours seem to substitute somewhat for hours spent in illicit activities.

    Income, expenditures, and wealth:  There was a sizable increase in average wealth from the program, especially in household durable assets, but no change in current income (last week and last month), savings or spending for the average program participant. Overall, the evidence suggests that cash cropping provides periodic windfalls from sales, and that these are mainly invested in durable assets (and not necessarily in agricultural inputs or equipment).  Qualitative observations also suggest that access to markets may have been an important constraint on success.

    Social engagement, citizenship, and stability:  There were small but positive improvements across most measures of social engagement, citizenship, and stability. While not all of the estimated impacts are large enough to be statistically significant, they nevertheless suggest a small but broad-based reduction in alienation and some gains in stability. The evidence on aggression and crime, however, does not point to a significant reduction in illegal or aggressive behaviors among program participants.

    Interest and mobilization into the election violence in Cote d’Ivoire:Conflict broke out in Cote d’Ivoire shortly before the launch of the program evaluation.  Self reported rates of interest in the violence and mobilization were fairly low among the sample population, but they were especially low among program participants – they tended to report a third less interest in or links to recruiters and recruitment activities. Given the difficulty of shifting such behaviors, these impacts of the program are regarded as extremely promising.

    For a policy memo with detailed results, as well as recommendations for reintegration, livelihoods, and poverty alleviation programs in Liberia, please see here.

    Increasing Savings and Reducing Reliance on Credit Card Debt for Low-Income Individuals in Washington DC

    This project will evaluate the impact of commitment contracts and reminder messaging on savings behaviors among low- and medium-income credit union members in Washington DC.  Traditional financial products which dominate the consumer finance market tend to operate under the assumption that consumers act in a rational manner and fail to take into account cognitive biases which can impede the realization of financial goals. Here we test a savings product that includes two features designed to overcome these biases. A built-in commitment contract attempts to encourage consumers to forego present expenditures in lieu of future payoffs.  Regular messaging attempts to overcome limited attention, which may result in an inability to stick to a budget or savings plan.

    Does Microfinance Promote Generosity? Evidence from India.

    Poor households often rely on the generosity of others to cope with periodic shocks to their health and income. Despite its pivotal role, there is substantial variation across poor communities in the level of observed proxies for generosity (such as transfers across households and measures of altruism and trust).

    An important role for public policy may be to enable generosity and improve informal insurance in settings where resources are scarce and institutions are weak.

    This project will evaluate the impact of an influential development program—microfinance—on generosity in poor communities.

    Impact evaluations of policy initiatives or development projects rarely take into account measures of giving, trust, and mutual exchange, even though these are key elements of the overall well-being of individuals and communities. This project will exploit the randomized rollout of a local microfinance provider’s new branches in South India. It will conduct a large-scale household survey before and after microfinance interventions, in order to measure changes in self-reported measures of inter-household acts of generosity (financial transfers, gifts, interest-free loans, lending of durable products, etc.).

    This project is part of the Science of Generosity research initiative at the University of Notre Dame.

    Estimating the Impact on the Lender's Bottom Line and Borrowers' Household Welfare of Expanding the Supply of Consumer Credit to the Working Poor in South Africa

    Policy Issue:

    Microcredit is one of the most visible innovations in anti-poverty policy in the last half-century, and in the past three decades it has grown dramatically. While some microfinance institutions (MFIs) focus on maximizing profits, others carry a social mission and seek to maximize access to credit for the poor, subject to their available budget. Regardless, nearly all MFIs face tightening pressure from policymakers, donors, and investors to eliminate their reliance on donor or government subsidies. Economic modeling, policy, and practice suggest that loan pricing (selecting interest rates and repayment conditions) is critically related to reliance on these subsidies. Yet existing research offers little insight into interest rate sensitivities in MFI markets,and little methodological guidance on how to determine optimal interest rates.Instead MFIs and policymakers rely largely on intuition, and often presume that the poor are insensitive to interest rates.

    Context of the Evaluation:

    The cooperating Lender has operated for over 20 years as one of the largest, most profitable microlenders in South Africa. The Lender competes in a “cash loan” industry segment that offers small, high-interest, short-term, uncollateralized credit with fixed monthly repayment schedules to the working poor population. Cash loan sizes tend to be small relative to the fixed costs of underwriting and monitoring them, but substantial relative to a typical borrower’s income. For example, the Lender’s median loan size of 1000 Rand (US$150) was 32 percent of the median borrower’s gross monthly income. Cash lenders focusing on the highest-risk market segment typically offer one-month maturity loans at 30 percent interest per month. As a comparison, informal sector moneylenders charge 30-100 percent per month.

    Description of Intervention:

    Researchers are testing how the poor respond to changes in interest rates using data from a field experiment in South Africa. Researchers worked with the cooperating Lender  to randomize the interest rate offered in “pre-qualified,” limited-time loan offers that were mailed to over 50,000 former clients with good repayment histories. Most of the offers were at relatively low rates, and the offer rate randomization was stratified by the client’s pre-approved risk category. The standard interest rate schedule for four-month loans was: 7.75 percent per month for low-risk clients, 9.75 percent for medium-risk, and 11.75 percent for high-risk. At the Lender’s request, 96 percent of the offers were at lower-than-standard rates, with an average discount of 3.1 percentage points on the monthly rate. The final range of interest rates faced varied from 3.25 percent per month to 14.75 percent per month.

    Loan price is not the only parameter that could affect demand. Liquidity constrained individuals may respond to loan maturity as well, since longer loan maturities reduce monthly payments and thereby increase the amount of cash available each month. To test this theory, a subset of clients eligible for maturities longer than four months also received a maturity suggestion as well. The suggestion took the form of non-binding “example” loan showing one of the Lender’s most common maturities (four, six, or twelve months), where the length of the maturitywas randomly assigned. Clients wishing to borrow at the offer rate then went to a branch to apply, as per the Lender’s standard operations.

    Results and Policy Lessons:

    Demand Response to Price: Among the sub-sample of clients that received interest rate offers below the standard rate for their risk category, a price decrease from the maximum to the minimum rate offered in this sample increased take-up by 2.6 percentage points, or 31 percent of the baseline take-up rate. High interest rates, on the other hand, depressed the levelof take-up: clients that received interest rate offers above the standard rate for their risk category were 3 percentage points (36 percent) less likely to apply. Higher rates also reduced repayment. Taken together, these results indicate that people’s demand for credit increases moderately when interest rates are lower than the market price, but drops off steeply when interest rates are above average.

    Maturity Date: While the sub-sample for the maturity estimate is small, loan size is found to be far more responsive to changes in maturity date than to changes in the interest rate, which is consistent with the hypothesis that liquidity constraints affect loan size, since longer maturities reduce monthly payments and thereby improve cash flows. There is also some evidence that only relatively poor borrowers are sensitive to maturity, whereas for price sensitivity this does not appear to be the case.A practical implication is that some MFIs should consider using maturity rather than (or in addition to) price to balance profitability and targeting goals.

    For this particular lender, the cost of reducing interest rates (lost gross interest revenue) slightly exceeded the benefits (increased gross revenue from marginal borrowing, increased net revenue from higher repayment rates). Thus this Lender, which had no social targeting objectives, had no incentive to cut rates. Policymakers keen on avoiding subsidies often prescribe that MFIs should raise rates. However, evidence from this study also shows that this would have been disastrous for the Lender, as increasing interest rates above standard reduced both loan take up and eventual repayment.

     

    Limited Insurance within the Household in Kenya

    Policy Issue:

    Individuals in developing countries are often subject to considerable financial risk, but most lack access to formal financial services that would allow them to insure themselves against unexpected income shocks like medical expenses or natural disasters. Instead, households often use informal systems of gifts and loans from friends or family to cope with large unplanned expenses. While these informal networks do provide some protection against shocks, they can also face problems of information asymmetry and payment enforcement. Many individuals may therefore attempt to cope with risk within the household where information sharing and enforcement are presumably easier. Whether intra-household insurance mechanisms are effective in insuring against risk remains, however, an important question. If members of a household do not insure each other against risk, then programs which impact the ability of individuals to cope with risk (such as formal savings accounts or microinsurance programs) could substantially increase people’s welfare.

    Context of the Evaluation:

    The towns of Busia, Sega, and Ugunja in Western and Nyanza Provinces of Kenya are semi-urban areas located along a major highway. Though many people in the area earn their living from agriculture, a substantial fraction earns at least some income from self-employment. The individuals in this study were drawn from a group of daily income earners (men who work as bicycle taxi drivers - called boda bodas in Kiswahili - and women who sell produce and other items in the marketplace). Daily income earners were targeted in this study because their informal employment made them more susceptible to transitory income shocks.

    A very small minority of the sample had access to formal savings: just 2 percent of men and 1 percent of women had savings accounts. However, informal savings and credit sources were common. Sixty-three percent of men and 44 percent of women participated in Rotating Savings and Credit Associations (ROSCAs) -a group of individuals who make regular cyclical contribution to a fund, which is then given as a lump sump to a different member at each meeting. Men and women were equally connected to informal credit groups (around 90 percent of both men and women received a loan in the past year and around 85 percent gave a loan).

    Description of Intervention:

    This study presents results from a field experiment in Kenya designed to test whether intra-household risk-sharing mechanisms (such as financial transfers within the household) operate efficiently. One hundred and forty-two married couples were followed for eight weeks. Every week, each individual had a 50 percent chance of receiving a 150 Kenyan shilling (US$2) income shock, equivalent to roughly 1.5 days’ income for men and 1 week’s income for women. As these shocks were, by definition, random, the experimental design made it possible to test for efficiency by comparing theresponsiveness of private consumption to shocks received by an individual and to those received by his spouse. Assuming that household members were risk averse, failing to insure temporary shocks (such as those administered in this study) would leave potential gains from trade unexploited. For example, if a woman is sick, without insurance (i.e. a transfer from her spouse), she may be unable to see treatment and subsequently will be unable to work and make a daily income, and to fulfill her responsibilities as caregiver for her family, producing inefficiency in the household. If the household pooled risk efficiently, increases in private consumption should be the same for shocks received by an individual and those received by their spouse.

    The shocks were announced to each spouse, so that it was not possible for one member of a household to hide an income shock from the other. Payments were made privately, however, and individuals were told that they could spend the money however they chose.

    Each week both spouses were visited separately by a trained enumerator who administered a detailed monitoring survey that included questions on consumption, expenditures, income (and income shocks), labor supply, and transfers given and received over the previous seven days. In addition, a background survey and a survey to measure risk aversion were administered.

    Results and Policy Lessons:

    The study rejects the unitary theory of the household which suggests that the household behaves like a single decision maker, and the collective model of the household in which members fully insure each other against shocks. In weeks in which they received the shock, men spent, on average, 16.9 percent of the increase on private expenditures. However, private expenditures did not change in weeks in which their wives received the shock.

    In contrast, for women, private expenditures did not respond to shocks (received either by herself or her husband). Women did, however, transfer 16.3 percent of the shock to their husbands, whereas husbands transferred none of their shock to their wives.

    If people spend windfall income differently than their regular labor income, the results may not be generalizable. The researcher addresses this possibility by examining how private expenditures respond to weekly fluctuations in labor income and finds that both men and women increase private expenditures in weeks in which their labor income is higher. This suggests that the experimental findings were not necessarily specific to the experiment.

    While the welfare consequences of failing to insure small shocks over a short time period are not likely to be very large, they suggest that intra-household risk-sharing mechanisms are ineffective, which could have important welfare effects. Overall, the findings suggest that programs which provide more formal risk coping mechanisms could have large effects on household welfare.

    Jonathan Robinson

    Ultra Poor Graduation Pilot in Yemen

    Can ultra poor households in Yemen graduate from extreme poverty with help from a holistic set of services? This 24-month program provides beneficiaries with a holistic set of services including: livelihood trainings, productive asset transfers, consumption support, savings plans, and healthcare. By investing in this multifaceted approach, the program strives to eliminate the need for long-term safety net services. Spanning seven countries on three continents, the Ultra Poor Graduation program is being piloted around the globe. IPA is conducting randomized evaluations in IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana to understand the impact of this innovative model.

    Policy Issue:

    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Ultra Poor Graduation Pilots attempt to apply a model, developed by BRAC in Bangladesh, which recognizes that the ultra poor need the "breathing space" that is provided by temporary consumption support, but that public funds may be better used to build households’ capacities to maintain a sustainable livelihood. The idea is that this initial assistance, lasting two years, will place households securely on the first rung of the development ladder, which they can then climb with the help of appropriate development strategies. The model incorporates a comprehensive package of services: a productive asset (such as chickens or goats), consumption support, livelihood trainings, healthcare, and financial services. Ideally this wide set of support services will help households to weather any shocks they may face along during their climb out of ultra poverty.

    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts.

    Context of the Evaluation:

    Located on the tip of the Arabian Peninsula, Yemen faces economic challenges. Food insecurity, aggravated by a scare supply of water, leaves 32 percent of the country undernourished [1].  Over 45 percent of the population lives under $2 US a day and about 17 percent lives under $ 1.25 US a day [2]. The Social Welfare Fund (SWF), the Yemeni welfare department, and the Social Fund for Development (SFD), a government-run development agency, have partnered with IPA to pilot the Graduation Model in three governorates of southern Yemen.

    Description of the Intervention:

    The Graduation Model in Yemen works in accord with the SWF welfare system.  All households in the sample frame come from the SWF welfare lists and receive an average quarterly stipend of 3,000 YR ($15 US).  The poorest households are identified using the Progress Out of Poverty Index and are verified as the poorest during SWF field officer visits.  These households are then randomly assigned to either a treatment or comparison group. Beneficiaries in treatment households receive training on an income generating activity such as, sewing, raising livestock, or petty trading.  As households’ income and food consumption stabilizes, beneficiaries are required to open a savings account at the local post office and are encouraged to reach a savings goal of 10,750 YR (about $ 50US) by the end of the two year program. In addition, these ultra poor households are monitored throughout the program with weekly visits from field officers and receive additional trainings on confidence building, social integration, and sanitation practices.

    Results and  Policy Lessons:

    Results forthcoming.

    For additional information on the Ultra Poor Graduation Pilots, click here.

     

    [1]World Bank, “Yemen Country Brief

    [2] The World Bank, “Yemen

    Urban Property Rights in Mongolia

    Policy Issue

    Having a well-defined system of land and property rights is thought to be extremely important for increasing investment, as ownership of land may incentivize investment by ensuring that tenants receive the long-term returns from improving their land. Property rights may also be an important component in access to credit, since land can be used as a collateral asset and increase the likelihood of a borrower receiving a loan. Large land-titling policies have been undertaken in several developing countries, particularly in South America and Southeast Asia in order to increase land investments and income security. However, the linkage between property rights, access to credit, and increased investments has not been well-established empirically.

    Context of the Evaluation

    More and more poor rural Mongolians are abandoning traditional nomadic herding practices and migrating to the cities in search of better lives. The bulk of these migrants are moving to Mongolia’s three biggest cities – Ulaanbaatar, Erdenet and Darkhan – where they either settle in suburban “ger areas” or peri-urban rangeland areas, often creating informal settlements. Mongolian laws give ger area residents the right to obtain ownership to the land upon which they live. However, the complexity and expense of this process make it difficult to become an owner and thus use the land as a marketable asset.

    The Urban Property Rights Project aims to improve the formal system for recognizing and transferring land rights to ger area residents. This effort includes legal and regulatory reform, upgrading the technology necessary for accurate land parcel mapping, and providing direct assistance to households to privatize and register their land plots. The project is being carried out in Ulaanbaatar and eight other regional centers. 

    Details of the Intervention

    This evaluation focuses on the land titling component of the project known as the Privatization and Registration of Ger Area Land Plots Activity. This component will provide direct assistance to 75,000 households seeking to privatize and register land plots in urban ger areas. A random subset of eligible houses in the area will be randomly chosen to receive door-to-door assistance with the registration process. This assistance will include support for both the necessary paperwork as well as the registration fees.     

    After the program is implemented, the researchers will evaluate its impact on access to credit, investment in land and housing, property values, labor market outcomes and household income using both household level surveys and aggregate institutional data.

    Results and Policy Lessons

    Results forthcoming.

    Training and Technical Assistance for New Entrepreneurs in Morocco

    Little empirical evidence exists on the effectiveness of business training and support. In particular, the extent to which such a support program might raise revenues and augment survival rates of new enterprises is unclear. The impact evaluation of the pilot phase of the Enterprise Support Project will measure the effectiveness of training, technical assistance and personal coaching provided to small businesses and revenue generating activities (AGRs) throughout Morocco in order to inform the decision of whether to scale-up the program after its pilot phase. The evaluation will provide critical information to program implementers, the Millennium Challenge Corporation (MCC) and the Agence du partenariat pour le progrès (APP) in addition to the government of Morocco regarding the effectiveness of the project and ways in which it might be improved.

    The objective is to measure the specific contribution of the training and support program on key business outcomes. In particular, the principle research questions the evaluation is designed to address are:

    • Did the Enterprise Support Project contribute to an increase in revenues and profits of the participating businesses/AGRs?
    • Did the project improve survival rates of businesses/AGRs?
    • Did the program affect employment?
    • Were the benefits generated by the project greater than project costs?

     

     

    Agricultural Microfinance in Mali

    Agriculture is a way of life for most people in Mali. The vast majority of cultivated land is used by small farmers for subsistence agriculture. Previous research has shown that returns to agricultural investment are high, but in practice many farmers do not take on profitable investments. Can microfinance help alleviate constraints to investment among small farmers?

    Policy Issue: 

    Underinvestment in agricultural inputs such as fertilizer, hybrid seeds, or labor is thought to drive low crop yields in Africa and other parts of the developing world. Several factors may help explain why farmers fail to invest in such potentially profitable inputs. It is possible that they are wary of the riskiness of adopting new agricultural methods or tools—if they invest and their crops still fail, they will have even less money than if they had not invested at all. Farmers may also lack the capital necessary to purchase these inputs, and be unable to obtain credit to finance investment in their farms. Microfinance services are intended to address such constraints, but microfinance institutions often emphasize small business clients and do not structure products to target or facilitate agricultural lending. Can microfinance help alleviate constraints to investment among small farmers?

     
    Context of the Evaluation: 

    In Mali, agriculture represents 80 percent of employment and about 37 percent of Gross National Product. However the agricultural sector is dominated by subsistence farming supporting single households. This study takes place in the region of Sikasso, within the ‘cercles’ of Bougouni and Yanfolila. In these areas, cash crops like cotton, maize, sorghum, millet and groundnuts are most frequently cultivated. To generate additional income, women in the area often work in the production of shea butter and men in gold-mining.

     
    Details of the Intervention: 

    Soro Yiriwaso is a Malian microfinance institution whose mission is to increase economic opportunities for poor Malians, especially women, by offering durable financial services. At the start of the study, Soro Yiriwaso did not offer financial services in any of the study villages. Out of the main 200 study villages, Soro Yiriwaso began operations in 90 randomly selected villages. In these villages, officers promoted the ‘Prêt de campagne’ product, a group agricultural loan offered to women who form an association specifically for the purpose of receiving and managing the money. The loans averaged around 32,235 Francs CFA (65 USD), and were offered at the start of the planting season, to be repaid with interest after harvest.

    Grants Treatment: A randomly selected group of farmers from the villages that were not offered the ‘Prêt de campagne’ product, as well as those from the ‘loan’ treatment group who did not receive a loan were provided with a grant of 40,000 Francs CFA (80 USD). These grants were given to both men and women before the planting season, with no restrictions on how and when they could spend the money.

    Savings Treatment: Another randomly selected group of farmers from the villages that were not offered the ‘Prêt de campagne’ product were offered a savings product designed jointly by Soro Yiriwaso and IPA. The savings product required women to decide on a target savings amount and deposit plan immediately after the harvest season, but they were only allowed to withdraw savings at the beginning of the next planting season. A small non-cash bonus was given to women to incentivize adherence to the savings plan.

    Fertilizer Treatment: In order to evaluate the returns to fertilizers, and why small-holder farmers do not use more fertilizers on their plots, 23 separate villages were randomly selected to receive grants of different amounts of fertilizer. Women farmers who cultivated rice in these villages were assigned to receive one of three different quantities of fertilizer: no fertilizer, the officially recommended quantity, or half of this recommended quantity.

    Results and Policy Lessons: 

    Project ongoing; results forthcoming.

    Roots and Remedies: Persistent poverty and violence amongst urban street youth in Liberia

    Policy Issue:

    Poor and underemployed youth can be found at the hearts of riots, revolutions, civil wars, and petty and organized crime. In post-conflict countries, where state capacity is weak, frustrations are many, and jobs are few, policymakers are particularly concerned about these youth’s potential to destabilize society. Liberia, which recently suffered through 14 years of civil conflict, has named “youth disempowerment” as one of two major threats to durable and lasting peace. Liberia’s 2009 Youth Fragility Assessment sums it up this way: “the youth… simply wish for… the prospect of some day earning an income, even a modest one. For many, this is the impossible dream... the challenge is to make it possible, soon and for everyone.” The stakes are extremely high. The World Bank writes: “while much of the world has made rapid progress in reducing poverty in the past 60 years, areas characterized by repeated cycles of political and criminal violence are being left far behind….," and calculates a civil conflict costs the average developing country roughly 30 years of GDP growth. A quarter of the world’s population (1.5 billion people) live in places plagued by recurring and endemic violence.

    How can governments and NGOs raise employment and reduce the risk of violence among these poor and risky populations? Aid programs increasingly focus on helping youth through markets, especially through microenterprise development. The logic of this assistance, however, rests on the existence of market failures among the poorest of the poor: imperfect credit markets, or production discontinuities such as minimum start-up costs or low returns to small investments. Cash grants or credit are needed to achieve minimum scale. Street youth with no assets and weak social networks may be particularly vulnerable to this trap. But so far there has been little research proving the existence of market failures or the ability of aid to help.

    Meanwhile, both psychologists and economists have begun to explore the extent to which behavioral skills – such as impulse control, time preferences for immediate vs. delayed gratification, risk aversion, conscientiousness, setting and keeping long range goals, and being deliberate in choices – contribute to poverty. In a war zone, being highly present-focused might indeed be the optimal survival strategy. During peacetime, however, the absence of such preferences could in theory constitute a second source of persistent poverty: a behavioral poverty trap, leading to low savings rates, wastage of any windfalls, and high-risk behavior including involvement in drugs, crimes, and violence. Importantly, core principles underlying much economic and psychological theory assume that such preferences are fixed in young adulthood, leading anti-poverty projects to take a paternalistic approach. Again, little research has critically examined these assumptions.

    Counter to conventional wisdom, preliminary investigation suggests that a behavioral transformation program, akin to cognitive behavioral therapy, can be successful. This finding, if true, would be groundbreaking, challenging conventional economic and psychological models of behavior, which posit that preferences and behaviors are stable and difficult to change, especially among adults.

    Context of the Evaluation:

    The study is designed to disentangle how cash and capital constraints versus dysfunctional preferences and behaviors contribute to the poverty and violence of the young men and women living on Monrovia’s streets, and to create an inexpensive and scalable program that will reduce poverty, violence, and social instability among unstable youth in Liberia and beyond.

    On the preferences and behaviors side, the questions are (a) What role do cognitive and behavioral traits play in persistent poverty and violence?; (b) Are these cognitive and behavioral traits malleable in adulthood, and is sustained cognitive behavior change possible?; and (c) Will changing them reduce poverty and violence? On the market failures side, the questions are (a) What role does the lack capital and credit play in persistent poverty and violence?; (b) Will unconditional cash transfers relieve this constraint and reduce poverty and violence?; and (c) Do capital constraints and cognitive and behavioral deficiencies interact, and must both constraints be relieved to reduce poverty and violence in sustained way?

    Description of the Intervention:

    This “Sustainable Transformation for Youth in Liberia” (STYL) program is an experimental program, being jointly run by the research team and two NGO partners: CHF International and NEPI. As of mid-2012, STYL will have enrolled approximately 1,000 youth. Youth are recruited from urban areas where large numbers of underemployed youth congregate, and are targeted for the program on the basis of exhibiting the following characteristics: persistently poor; homeless; lack of self-discipline; angry, hostile, depressed; idle and not busy with productive pursuits; involved in organized or petty crime, and/or conflict with the law; and getting drunk and/or high regularly.

    The STYL study is currently experimentally evaluating two interventions, each on its own as well as in concert with the other.

    A behavioral Transformation Program (TP), akin to cognitive behavioral therapy (similar to Alcoholics Anonymous) and life-skills programs. The TP has the aims of bolstering the cognitive and social skills necessary for entrepreneurial self-help, raising youth’s aspirations, and equipping the youth to reach them. The TP involves half-day sessions 3-times a week, for 8 weeks, held in groups of 20 led by 2 counselors. The curriculum includes modules on anger management, impulse control, future orientation and planning skills, and self-esteem.

    An unconditional cash grant program, in which youth are given a large $200 one-time cash grant disbursement. How the grant is spent is entirely up to the recipient, though a grant orientation session provides some basic training on financial management and business planning.

    Individual youth are randomly assigned to either receive the TP; the cash grant; the TP and then the cash grant; or neither.

    The plan is to conduct both short-term and long-term endline surveys to capture treatment effects, through surveys and behavioral games. If the basic interventions are shown to be effective, the research team hopes to further improve program design through iterative tweaking and testing, including varying cash grant size and TP length and intensity, and trying additional potentially complementary interventions, in order to help policymakers achieve goals most cost-effectively.

    Results and Policy Lessons:

    Forthcoming.

     

    Jason Margolis interviews ex-combatants and researchers Tricia Gonwa and Chris Blattman.

    Brain Drain in Ghana

    "Brain drain", or the emigration of skilled workers, is one of the most common concerns African countries have about migration. Yet migration, broadly speaking, plays a significant role in economic development in the form of remittances and continued interaction of migrants with their home countries.

    In order to provide more empirical evidence on the determinants and effects of skilled workers' migration, we propose to collect primary data on 1976-2004 cohorts of top high (secondary) school students in Ghana.

    The project will analyze various aspects of the "brain drain" issue, including the reasons for migration of the highly skilled and the channels through which highly skilled migration affects the sending country (such as whether there is any evidence for involvement in trade facilitation, knowledge transfer, the level of remittances sent, etc.).  The project will also provide insights into the optimal design of education policy when facing increasingly globalized labor markets.

    David McKenzie

    Ultra Poor Graduation Pilot in India

    Can an intensive package of support lift the ultra poor out of extreme poverty to a more stable state? This 24-month program provides beneficiaries with a holistic set of services including: livelihood trainings, productive asset transfers, consumption support, savings plans, and healthcare. By investing in this multifaceted approach, the program strives to eliminate the need for long-term safety net services. Spanning seven countries on three continents, the Ultra Poor Graduation program is being piloted around the globe. IPA is conducting randomized evaluations in IndiaPakistanHondurasPeruEthiopiaYemen, and Ghana to understand the impact of this innovative model.

    Policy Issue: 

    Governments have often attempted to address the needs of the ultra poor by offering consumption support that is costly and offers no clear pathway out of food insecurity. The Ultra Poor Graduation Pilots attempt to apply a model, developed by BRAC in Bangladesh, which recognizes that the ultra poor need the "breathing space" that is provided by temporary consumption support, but that public funds may be better used to build households’ capacities to maintain a sustainable livelihood. The idea is that this initial assistance, lasting two years, will place households securely on the first rung of the development ladder, which they can then climb with the help of appropriate development strategies. The model incorporates a comprehensive package of services: a productive asset (such as chickens or goats), consumption support, livelihood trainings, healthcare, and financial services.Ideally this wide set of support services will help households to weather any shocks they may face along during their climb out of ultra poverty.

    This project is a part of a set of evaluations, in partnership with CGAP and the Ford Foundation, that intends to determine whether the model, pioneered in Bangladesh, is effective in a range of contexts.

    Context of the Evaluation: 

    Over 30% of West Bengal’s 82 million residents are believed to live below the poverty line, and an estimated 18% of the wealthiest rural citizens actually hold “below poverty line” cards. Murshidabad is one of the poorest districts of West Bengal, and is ranked 15 out of 17 in terms of the Human Development Index. Over 70% of the population of West Bengal lives in rural areas.

    Bandhan, a Kolkata-based microfinance institution, was launched in West Bengal in 2002 to address economic and social poverty by providing greater access to formal credit. Due to rapid growth over the past seven years it now has an estimated client base of over 1.2 million borrowers in 12 states in India, providing a variety of products including loans for microenterprises and agriculture.

    Details of the Intervention: 

    This evaluation will help determine whether income generating assets indeed prove to be beneficial to ultra poor households, and what kind of asset provision proves most successful. The researchers will assess the impact of Bandhan’s newest venture: an outreach into ultra-poor households based on the provision of assets rather than cash and a holistic set of services. The first step in the process was to determine who was actually in this category. This was done through social mapping and wealth ranking using Participatory Rural Appraisals (PRAs) in each of the target villages.

    After a second verification of selected participants, beneficiaries were divided into a comparison and treatment group, of which the randomly selected treatment individuals received a grant of US$100 to purchase a productive asset of their choice. These assets included both farm and non-farm assets, although livestock, such as cows or goats, was the most popular selection. Households were also given access to a fund for health expenditures – a feature that may reduce their vulnerability.

    Bandhan will meet with the selected households on a weekly basis for 18 months to check their status and provide supplemental business-skills training. Upon completion of this training, all households will be surveyed to determine program impacts. One year later, a second follow up survey will be conducted to evaluate the long term impacts of the graduation program. Measured outcomes will include income, assets, school attendance of children, health, and food security.

    Results:

    Forthcoming

    After completion of this evaluation, Bandhan in partnership with Axis Bank is scaling up the program in West Bengal.

    For additional information on the Ultra Poor Graduation Pilots, click here.