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

    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. 

    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.

    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.

    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. 

    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.

    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.

    The Impact of Smartcard Electronic Transfers on Public Distribution

    Policy Issue 
    State-sponsored welfare programs are often constrained by corruption and inefficiency. The problem is of particular concern in India, where former Prime Minister Rajiv Gandhi once suggested that only 15 percent of spending on social programs actually reached the intended beneficiaries. Such corruption adds strain on state finances and reduces the potential impact of the programs. One potential solution involves transferring benefits through debit cards that can verify the identity of the recipients using biometric authentication. This has the potential to reduce financial leakages, transaction costs, and time spent accessing payments. However, it may also have negative impacts on participation if beneficiaries do not register for the biometric debit cards or lose them. It may also simply displace corruption into other dimensions of the programs.  
     
    Evaluation Context
    In 2006, the Government of the state of Andhra Pradesh (AP) started a pilot initiative to provide all residents with "Smartcards" to ensure efficient and timely transfer of government benefits to the poor, and to reduce the possibility of fraudulent payments. While the cards are intended to be used to access any government services, the government has chosen to pilot the program with two large social welfare schemes: the Mahatma Gandhi National Rural Employment Scheme (NREGS) and the state-sponsored social security pension (SSP) program .
     
    Description of the Intervention 
    Researchers are using a randomized evaluation to assess the impact of Smartcards on leakages within NREGS and SSP, and welfare outcomes for the program beneficiaries. As of 2009, the Government of Andhra Pradesh (GoAP) had started rolling out the Smartcards in 15 districts, with 8 districts yet to start coverage. In 2010, researchers partnered with the GoAP to conduct a rigorous randomized evaluation of the Smartcard Program in these eight districts. 
     
    In these eight districts, the mandals (sub-districts) were randomly assigned to three phases of coverage, with the first phase being the treatment group, and the last phase service as the comparison group. A total of 157 mandals were placed in the first and third phases, with a time lag of around two years between the start of coverage in Phase 1 and Phase 3 sub-districts. Mandals in the comparison group will be phased into the program after the completion of the endline survey.
     
    In each district, the Department of Rural Development gave a list of all households who were eligible for the SSP and NREGS programs (within the treatment mandals) to a contracted bank. The bank then conducted an enrollment camp in each village to collect fingerprints, photos, and other details for each beneficiary. The collected data was then encrypted on biometric "Smartcards." The bank was also responsible for appointing a business correspondent (BC) to physically transport the cash from the bank to the village and a Customer Service Provider (CSP) to manage the required technology (card and fingerprint readers, printers, mobile phones, etc.) and cash management within each village. To receive payments, the Smartcard is inserted into a card reader. After the identity of the beneficiary is established using the fingerprint reader, the payment is made in cash and two receipts are printed (one for the beneficiary and one for government records). In addition, the CSP uploads the record of disbursements on a daily basis, which is then submitted to the Government.
     
    A baseline study was administered from August to September 2010, prior to any Smartcard payments. A midline study was then administered between September and October 2011. The endline survey is currently underway.
     
    Results
    Project ongoing, 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. 
     

    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 1831 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.

    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

    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.

    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).

     

    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.

    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.

    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.

    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.

     

    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

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