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.
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:
Farmers who were offered the standard Mumuadu loan product;
Farmers who were offered the Mumuadu loan product with complimentary crop price insurance;
Farmers who received financial literacy training, before being offered the standard Mumuadu loan product;
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.
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.
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.
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.
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 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.
There are growing concerns that American households tend to borrow too much and save too little, making it hard to meet basic needs, build assets, prepare for retirement, and pay for emergency expenses. Large debt burdens may compromise individuals and families’ ability to create a safety net or make investments for the future. In an ongoing study, researchers are evaluating the effect of peer support and text message reminders on financial outcomes of individuals enrolled in a debt management program in the United States.
There are growing concerns that American households tend to borrow too much and save too little. This imbalance can have strong implications for households’ ability to meet basic needs, build assets, prepare for retirement, and weather negative shocks such as emergency expenses or unexpected unemployment. Families with large debt burdens may continue to borrow and thus compromise their ability to create a safety net or make investments in the future. Many see Debt Management Plans (DMPs) as a promising tool for debt reduction, yet creating a DMP and sticking to the program requires ongoing work and effort. Descriptive evidence suggests that limited attention, apprehension about giving up credit cards, a perceived lack of support, and the five-year time period of plans may hinder clients from completing them. To promote DMP use and completion, text message reminders and peer support programs may help individuals follow through on DMP commitments. However, little evidence exists on the effectiveness of such programs and whether they help people reduce their debt.
Context of the Evaluation:
Low-income individuals in the United States often rely heavily on expensive financial services such as payday loans, auto title loans, pawn shop loans, and bank overdrafts. Individuals frequently turn to expensive debt obligations because their riskiness disqualifies them from traditional, lower-priced alternatives.
Clarifi is a non-profit organization that provides low-cost access to various financial products, services, and resources. Debt Management Plans (DMPs) are one of Clarifi’s financial planning tools that aim to help clients manage and repay their debt with the help of experienced credit counselors. The retention rate of clients who join Clarifi’s DMP programs is 80 percent, meaning that 20 percent of DMP enrollees leave the program within the first year.
Details of the Intervention:
Working with Clarifi and its Debt Management Plan clients, researchers are evaluating the effect of various messaging and peer support programs on the financial outcomes of participants. The evaluation involves 1,000 of Clarifi’s clients in southeastern Pennsylvania, southern New Jersey, New York state.
As part of Clarifi’s general program, all clients in the study participated in educational workshops and outreach, as well as debt repayment counseling prior to enrollment in a DMP. At the time of enrollment into DMPs, researchers randomly selected individuals to receive peer support, reminder messages, or both. Those in the peer support group were able to select up to five peer supporters (friends of family) to monitor their progress on a DMP. Peer supporters received information on the client’s progress, including notification when the client missed a scheduled debt payment.
To test the impact of regular text message reminders, individuals from each group (peer support or no peer support) were then randomly divided into a comparison group (no messaging) or one of three message reminder types: tasks, plans, or goals. These messages are designed to counter specific types of limited attention.
Researchers designed and piloted a program called Borrow Less Tomorrow (BoLT) that took a behavioral approach to debt reduction, combining an accelerated loan repayment schedule with peer support and reminders. Results from a sample of free tax-preparation clients in Tulsa, United States suggest a strong demand for debt reduction: 41 percent of those offered BoLT used it to make a plan to accelerate debt repayment. The results also offer suggestive evidence that the BoLT package reduced credit card debt.
A mounting body of evidence suggests that behavioral factors, such as lack of self-control and an inability to remain focused on achieving a financial goal, impede individuals’ ability to accumulate wealth. Most financial products and policy instruments developed to overcome these behavioral issues focus on asset accumulation, such as retirement planning. For many households, however, debt reduction offers a more efficient path than asset accumulation to achieving greater wealth. Nevertheless, the availability of behaviorally-oriented financial interventions to reduce debt is far more limited, and additional research is needed to understand how such debt reduction programs should be structured and how they affect individuals’ financial health. This study is the first known evaluation to apply behavioral economics to debt reduction services.
Context of the Evaluation:
This study took place in 2010 in Tulsa, Oklahoma, a city located in the southern United States. Researchers partnered with the Community Action Project of Tulsa (CAP), an anti-poverty agency that provides a range of social services—including early childhood education, first-time homebuyer’s assistance, and free tax preparation—to low- and moderate-income individuals. The 465 participants of this study comprise individuals who sought tax preparation services from CAP under its Volunteer Income Tax Assistance program.
The majority of participants in the sample were low-income, with 75 percent reporting a total annual household income of less than US$30,000, which is equivalent to the bottom 31 percent of the national income distribution1. The average individual credit card and auto loan debt of the sample was US$2,447 and US$5,546, respectively, which was low relative to U.S. averages. The mean age of the sample was 44 years and 74 percent was female.
Details of the Intervention:
In 2010, researchers developed and piloted a program called Borrow Less Tomorrow (BoLT) to help CAP clients reduce their debt. During tax season (January-April), researchers and CAP staff asked tax preparation clients if they would be willing to complete a financial and behavioral survey in exchange for a US$5 gift card to a local gas station. Among the group that completed the survey, a total of 465 individuals were eligible to participate in the study because they had a positive balance on auto or credit card debt and had expressed interest in reducing their debt. All participants also granted permission for researchers to pull their credit reports on a regular basis to monitor debt payments and financial status.
Researchers randomly assigned 238 individuals to be offered BoLT (the treatment group), and 227 individuals to not be offered BoLT (the comparison group). For those offered BoLT, the research team explained the program components to the participant and worked to identify a single, suitable debt on which to focus effort (e.g. a debt with a substantial balance and a high interest rate).
BoLT comprised three separate interventions:
Planning/Goal Setting: The surveyor used a simple repayment schedule calculator to show the participant how small increases in monthly payments could help dramatically reduce the time and cost to pay off their debt. The participant and surveyor would then establish a realistic repayment plan. In addition to an overall acceleration in repayment, participants were also offered the option to escalate payments every month. For example, a participant could commit to paying US$25 in month 1, US$35 in month 2, and so on to pay off debt at an even lower cost and faster pace.
Peer Support: For those participants who agreed on an accelerated repayment plan, surveyors offered the participant the option of selecting one or more peers to be notified if she fell off-track with her repayment commitment. The peer could then offer encouragement (but not financial support) to help the participant regain momentum and reach her repayment goal.
Reminder Notices: As a tool to focus participants’ attention on their debt reduction goals, those who agreed on an accelerated repayment plan were also offered the option of receiving a monthly reminder by email or phone to stay on track with their commitments.
Results and Policy Lessons:
Demand for debt reduction support: Overall, researchers found strong demand for behaviorally-motivated debt reduction support. Among those randomly assigned to receive the offer to participate in BoLT, 41 percent signed up for an accelerated repayment plan. Of those who signed up for the plan, 41 percent signed up to escalate payments every month. Conditional on take-up of BoLT, 27 percent accepted the offer to receive peer support and 81 percent accepted the offer to receive monthly reminder notices. Households living in extreme poverty (i.e. incomes less than US$10,000 per year) were less likely to sign up for BoLT, but there is no evidence that take up differed by whether a participant demonstrated more or less self-control or attention paid to her finances.
BoLT Performance: By monitoring credit reports, researchers found that 51 percent of BoLT participants were on-schedule with their repayment plan after 12 months in the program. The study demonstrated weak evidence that those who were offered the opportunity to participate in BoLT achieved a lower overall level of debt after one year than the comparison group, which did not receive the BoLT offer. However, many of the estimated differences in debt reduction between the treatment and comparison groups were not statistically significant. The researchers found no evidence of a difference in credit scores, payment delinquencies, or credit line use between the treatment and comparison groups.
While noting that these pilot results should be considered with caution due to limited sample size and the use of just a single program design, the researchers found strong demand for debt reduction products and services, but only suggestive evidence that this product led to improved financial well-being for participants. They posit that debt reduction products and services could be used by businesses and financial advisors to enable employees and clients to achieve their financial goals.
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.
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.
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.
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. 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:
 According to administrative data: http://www.unicef.org/infobycountry/uganda_statistics.html#77
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. 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. Uganda’s current savings rate remains alarmingly low, at 10 percent.
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:
 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.
 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.
 Dovi, Efam, “Africa: Boosting Domestic Savings on the Continent.”
Can financial education and business training help recipients of a conditional cash transfer program manage their personal finances and ultimately graduate from the program?
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.
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. 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.
Without a system for managing finances, small businesses may miss opportunities to increase profits and trim expenses. In particular, entrepreneurs in developing countries who rely on informal businesses to meet basic consumption needs may benefit from formal record keeping systems. Many of these entrepreneurs, often with little formal education and low levels of financial literacy, do not maintain records of business expenses or sales. Providing small business owners with tools to manage their finances may be a way to improve both business outcomes and household consumption levels.
For additional information on current SME Initiative projects, click here.
Context of the Evaluation:
Colombia has an estimated 400,000 micro and small stores or "tiendas”. In Colombia, these retailers comprise 52% of food and retail sales. While tienda entrepreneurs sell hundreds of different products, and have managed to keep contact with wholesalers, most continue to use unsophisticated business administration tools (writing down sales and purchases on notebooks) or none at all. Colombia also has one of the most penetrated information communication and technology (ICTs) markets: there are 92.3 cell phone subscriptions per 100 people, and 45.5% of the population uses the internet.
Frogtek, a firm specialized in creating business tools for entrepreneurs in emerging markets, identified that a major challenge for micro-retailers was managing their perishable inventories and figuring out how often they would need to restock them. While several non-governmental programs have tried to address these issues through financial education and literacy training programs, shopkeepers continue to use unsophisticated methods, or none, and cannot easily determine the size of their inventory or actual profits.
Description of Intervention:
To address these challenges, Frogtek created “Tiendatek”, a smart phone application to help shopkeepers systematize their business by managing their accounting, inventories, sales, payments to suppliers, expenses and earnings. The tool is distributed through personal sales associates who visit the shopkeepers, demonstrate the product, and provide training on its use during the length of the pilot. All data generated by the shopkeeper is uploaded and stored on a Frogtek web server. Additionally the Tiendatek application creates simple and advance reports on sales, purchases, credit, inventory, and break-even points based on the data uploaded by the user.
This study pilot targeted clients of a microfinance institution, Bancamía, who are shopkeepers with sales of about 4.5 million COP (about 2500 USD) a month. Frogtek staff interviewed the candidates, assessed their interest, delivered the phone and provided training in one or two visits. Fifty participants were selected to receive a baseline survey approximately ten to twenty days after receiving the new phone and an endline survey, eight to ten months after the initial phone delivery. Shopkeepers participating in the pilot received a phone, charger, SIM card with data access, and a TiendaTek manual free of charge. Those shopkeepers who become frequent users of the application by the end of the study, will be able to keep the phone and receive a three month data plan. By collecting data on the use of the application, store production, sales, satisfaction, and perceived improvements, this comparative study will assess the use of Tiendatek, possibly for further analysis in a randomized evaluation.
Results and Policy Lessons:
Diaz, Alejandro, Jorge Lacayo, and Luis Salcedo. 2007. ”Selling to ‘mom-and-pop’ stores in emerging markets” The McKinsey Quarterly,
De Jacobs, Alicia. “Colombia Retail Food Sector” USDA Foreign Agricultural Services Global Agricultural Information Network Report, October 2010.
United Nations Conference on Trade and Development 2010 Information Economy Report
This project will evaluate the impact of commitment contracts and reminder messaging on savings behaviors among low- and medium-income credit union members in Washington DC. Traditional financial products which dominate the consumer finance market tend to operate under the assumption that consumers act in a rational manner and fail to take into account cognitive biases which can impede the realization of financial goals. Here we test a savings product that includes two features designed to overcome these biases. A built-in commitment contract attempts to encourage consumers to forego present expenditures in lieu of future payoffs. Regular messaging attempts to overcome limited attention, which may result in an inability to stick to a budget or savings plan.
This project will evaluate the effectiveness of financial education and commitment contracts in promoting higher levels of saving, reduced reliance on credit card debt and healthier financial portfolios among low-income individuals in the United States. U.S. households in the bottom quartile of wealth spend, on average, more than they earn, and many low-income consumers lack formal savings accounts. Consumers tend to have time-inconsistent preferences for savings and consumption; they tend to be more impatient in the near-term than in the long-term and thus have a propensity to make purchases that are later regretted. This project will evaluate the impact of commitment devices as a mechanism for mitigating time-inconsistent tendencies in spending, borrowing and saving.
The study is designed as a survey with an embedded experiment and took advantage of Mexico's privatized social security system, which requires workers to choose their retirement investment funds (AFOREs) from an approved list. This research project will collect detailed survey data and implement a series of field experiments in order to further understand the factors that determine workers' investment choices. The survey will collect information on financial planning, financial literacy, and investor perceptions of the privatized social security market.
The survey will also contain two field experiments. The first will examine if survey participants are more likely to switch funds when provided with transparent information on the fees each AFORE charges. The second will test if financial literacy can be taught by providing simplified information on the importance of compounding interest, coupled with information about fees charged by the AFORE. The survey results will allow for estimates of the impact of each piece of information on fund choice and sensitivity to fees. This information can be combined with information on market-level responses by AFOREs, with regard to their fees and total number of investors.
If most people (regardless of income) choose funds to minimize fees, AFOREs will compete on price. But if more people choose based on brand names or convenience, then funds will be less concerned with price and more concerned with brand promotion. Previous research has suggested that more-educated consumers choose funds to minimize fees, while less-educated consumers choose funds based on brand name or convenience. Because lower income individuals are likely to have less education, market outcomes may lead to lower net returns for low-income households.
Since social security is intended to be a safety net that provides income in old age to all citizens, differences in individuals' investment behavior (and firm response) across demographic groups is critically important for understanding the impacts of privatization on income distribution.