Over 40 percent of the adult population in developing countries holds an account with a formal financial institution today. But as recent loan repayment crises and low savings rates around the world demonstrate, improved access to financial products and services is only part of the formula for financial inclusion. Access alone is not sufficient to promote healthy financial behaviors.
The Financial Capability Initiative identifies, develops, and rigorously evaluates products and programs that aim to improve the welfare of the poor by building their financial capability, a key ingredient for achieving full financial inclusion. We focus on testing innovations that are informed by behavioral insights, are cost-effective, and present a promising business case for scale-up. We also promote evidence-based policy and product design by sharing our research insights with financial service providers and policymakers through our events and publications.
The Initiative team oversees a portfolio of randomized evaluations that explore the impact of innovatively designed and delivered financial education programs, as well as financial products that make it easier for consumers to make welfare-enhancing financial decisions. In addition, we support small-scale pilots to develop nascent products and programs into mature interventions that are ready to be evaluated. New evaluations and pilots are selected for funding through periodic open calls for proposals and through Initiative-run training and matchmaking programs that connect practitioners with researchers.
Studies Supported by the Financial Capability Initiative:
Microentrepreneurs in developing countries face complex financial management decisions. But many entrepreneurs do not have the necessary financial knowledge and skills to effectively make financial and business management decisions. Traditional classroom-based financial literacy trainings are the standard solution to this problem.
Numerous developing country governments, such as Brazil and Mexico, have adopted conditional cash transfer (CCT) programs as a social safety net, providing billions of dollars in transferred funds to millions of poor citizens. However, most of these recipients have no previous experience with formal financial products.
Unpacking the theory behind why and how sending people text messages improves their saving and and payment behaviors, and deriving a more robust set of prescriptions on how to implement effective messaging programs.
Can giving users personalized information about the implications of increasing their retirement contributions, formalizing employment, or delaying retirement age on future wealth help them make more informed retirement planning decisions?
Conditional cash transfers have proven effective as incentives for the extreme poor to visit a health clinic or send their children to school. But are such programs sustainable? If the cash assistance is taken away, will families find themselves back where they started before the program? In this study, researchers evaluate if financial education and business training can help recipients graduate from a conditional cash transfer program, and what type of training is most beneficial.
Improving financial literacy and access to bank accounts may help youth save, allowing them to meet current financial needs and invest in their futures. In Uganda, researchers evaluated whether offering financial education or group savings accounts to church-based youth groups increased savings. They found that total savings and income increased among youth offered financial education, group savings accounts, or both education and group accounts.
Over three percent of the world’s population now lives outside their country of birth. Officially recorded remittances, from migrants sending funds to those in their countries of origin, exceeded US$400 billion in 2013. Yet little research has been carried out on these financial transactions.
Behavioral research suggests that self-control, procrastination, attention, and other behavioral biases are an important limitation to the ability of individuals to set aside savings for the long-term. The development of mobile money infrastructures in many developing countries is creating new opportunities for the design and offer of financial products that can help low- and moderate-income individuals overcome these barriers.
Research Pilots Supported by the Financial Capability Initiative:
Micro-Franchising as a Complement to Micro-Credit
The research team conducted a small-scale test of micro-franchising as a way to improve the economic impact of microcredit and to reduce drop-out rates for group liability loans. The team offered a credit- linked micro-franchising product that provided women’s microcredit groups with a specific product to make and sell, training, and marketing and branding support.
Default Savings Deposits for Retail Clients
The research team tested the feasibility and marketability of a default deposit product that allowed consumers to automatically deposit a share of their expenses at participating retail stores into a savings account. The pilot estimated the expected take-up rate of this savings account by consumers. It also assessed the feasibility of passing unrealized savings from value chain improvements on to the customer.
Inclusive Distribution Loans and Entrepreneurship Training to Improve Financial Capability
The research team piloted a credit product linked to the purchase of inventory in the hope of helping low-income women in the Dominican Republic enhance their quality of life by helping them create stable livelihoods and improve their financial capability. The team developed a prototype of the product – a loan exclusively for purchasing inclusive distribution inventories and / or enterprise development training – and offered it to new female clients of ADOPEM.
‘Do you want some cash back?’ Assessing the Demand for a No-Claims Rebate Life-Insurance Product
Despite widespread uninsured risk, the demand for micro-insurance among the rural poor is very low. The research team is testing whether no-claim rebates for a life-insurance policy are a commercially viable way to increase demand for an insurance product. The pilot supports market research to identify the optimal size of a rebate, and to test whether willingness to pay differs across gender groups. The research team also seeks to understand what barriers –such as behavioral biases or a lack of trust – can be overcome by no-claim rebates in order to make insurance a more attractive product.
Incentives and Reminders to Save Up for Improved Housing
Low-income households in the Dominican Republic face behavioral barriers to saving such as inattention and self-control. The research team developed a product that might help households overcome these barriers by combining a savings account with behavioral nudges and incentives. The finished product provided households with a labeled commitment savings account and reminders to save. Households that achieved their savings goals received a credit line for the acquisition of construction materials.
A Diamond in the Rough: Rehabilitating Defaulters
Borrowers in default have very low credit scores and slim prospects of receiving credit in the future. The research team piloted a new program that tried to rehabilitate defaulters who were over 365 days late on their loan payments, by offering them the opportunity and support to rebuild their credit histories. The product bundle included large write-offs of existing debt, small loans, financial and business education, and reminder visits from bank staff. The team piloted variations on the bundle to identify the most promising product designs.
Opportune Delivery of Financial Rules of Thumb via Mobile Phones
Recent evidence suggests a greater efficacy for financial rules-of-thumb training. Meanwhile, much work has evaluated the impact of mobile phones on pricing and financial transactions. But what if the two were combined? The research team will develop and pilot a financial rules of thumb training program for coffee farmers in Peru. The research planning grant will be used to finalize the research design needed to evaluate the impact of delivering SMS follow-ups to the training program.
SMS for Savings - Payday Reminders for City Council Workers in Nairobi
Blue-collar municipal employees in Nairobi, Kenya, receive payments via direct deposit to a savings account. However, frequent withdrawals mean that savings levels are typically low. The research team partnered with the City Council of Nairobi to develop and test a low-cost SMS-based intervention on its 10,000 municipal employees. SMS messages contained a variety of simple behavior tips to encourage better savings habits. Upon assessing the feasibility of the intervention and conducting preparatory qualitative research, the research team planned to compare this program’s impact against traditional classroom-based financial training, through a randomized experiment.
Social Capabilities Opening the Door for Savings and Entrepreneurship among Chinese Children and Youth
The Shanghai Better Education Development Center currently provides financial education alongside social education to children and youth according to the Aflateen and Aflatoun curricula. Program participants, however, save individually in an unstructured manner, potentially leading to suboptimal savings and ineffective use of financial assets. The research team piloted modifications to the curriculum, providing a more direct link between financial education and the savings mechanisms available to youth. Through piloting and qualitative research, the team developed a new curriculum based on group-level savings, to go with the existing individual savings curriculum.
The Impact of Incentives for Financial Education Trainers on Consumer Outcomes
CFPA Microfinance intended to introduce a supplemental financial education program in order to improve the financial capabilities of its clients. CFPA, China’s largest microlender, was planning a roll-out of this program in 2014, and hoped to use this research in informing its roll-out strategy. Staff motivation and quality of delivery were of primary concern in such a model, where loan officers delivered financial education on top of their existing duties. The research team examined the impact of different incentive schemes on the motivation of loan officers, and the alignment of the officers’ interests with those of the clients. Both financial incentives tied to performance, and non-financial incentives were piloted at the preparatory stage of this research.
"Train the Trainer": Promoting Savings by Training Banking Correspondent Agents in Andhra Pradesh
Under the National Rural Employment Guarantee Act, Electronic Benefits Transfers (EBT) for the rural poor in India have proliferated. However, with most beneficiaries withdrawing their entire wages at one time, there has been limited use for this in broadening financial inclusion. The research team explored ways to encourage customers to divert some benefits payments to build savings. Research preparation activities included piloting a platform for the delivery of financial information via mobile phones, and assessing the feasibility of using text messages to reach these clients. Further, the research team tested possible incentive schemes to provide to FINO’s local Business Correspondent Agents (BCAs), to promote savings behavior amongst end-users.
Optimizing Health and Savings Education Delivery: Learning Through Incentives and Reminders
Individuals in Nigeria have been found to underutilize the savings opportunities and health products available to them. In the hope of reducing this gap, Hasal Microfinance Bank Ltd. was planning to roll out a savings program that is bundled with health insurance. Through this preparatory award, the research team piloted such a bundled savings-health insurance product, and tested the role of education, SMS reminders, and incentives in improving clients’ behavior. The most promising intervention and designs were subsequently studied in a randomized experiment to isolate the effects of bounded rationality and inattention on the underutilization of savings products, while also determining the most effective channels for providing savings and health insurance to clients.