Peeling Back the Layers of Group Liability in Bolivia

Policy Issue:
Policy Issue:

Since its inception in the 1970s, the group liability model has been hailed as the innovation that made lending to the poor possible.  Under the group liability model, borrowers take out loans with groups of other borrowers and all group members are  jointly liable for loans extended to others within the same group.  Many microfinance institutions continue to work under this model, yet some practitioners and scholars have begun to question the assumption that the benefits of group liability outweigh the costs. Many contend that group liability not only fails to increase repayment rates but that the policy also locks out those who could potentially benefit from credit access but are unwilling to take responsibility for other people’s loans. It is still unknown whether group liability or self-selection produce better outcomes for microfinance clients and lenders.

Context:

Despite abundant natural resources, Bolivia remains one of the poorest countries in South America. El Alto, a fast growing suburb of La Paz located in the highlands above the capital, is known for its politically active inhabitants whose protests over the use of natural resources have led to clashes with authorities. Cochabamba, on the other hand, is well known for its agriculture production of grains, coffee, cacao, and coca leaf. Pro Mujer, a prominent microfinance lender in Bolivia, provides loans to female clients in these areas. A majority of these clients engage in commercial activity, very often in local markets or selling goods produced in home-based businesses. Pro Mujer calls their borrowing groups “Communal Associations”, and a typical group has between 18 and 25 members.

Description of Intervention:

Researchers randomly selected 300 of the sample 400 Communal Associations to test the impacts of various forms of group liability. In these 300 groups, the Communal Associations were divided into sub-groups called “solidarity groups”.  Each solidarity group included 5-7 individual borrowers.  Rather than being responsible for the repayment of all loans in the Association, borrowers in the treatment Associations were only liable for the loans of the members within their solidarity group, effectively reducing the number of loans for which each woman was liable. 

Additionally, treatment groups were randomly allocated to be formed in different ways. In the first sub-treatment group, researchers shifted liability from the Association level to the solidarity group level without changing the self-selected composition of the solidarity groups. In the second sub-treatment, the solidarity groups were rearranged to be composed of borrowers with similarly-sized loans. In the final sub-treatment group, solidarity groups were rearranged and members were assigned to solidarity groups at random.

Researchers collected data on institutional outcomes important to Pro Mujer, such as repayment rate, loan size, dropout rate, and new member acquisition rate. In addition to analyzing the impact of group liability on borrowers’ behavior, researchers also collected data on how credit officers used their time in order to determine if the new policy had an effect on the efficiency of bank operations.  Loan officers are required to spend much of their time traveling to Communal Association repayment meetings.  If changes to the liability structure improve overall repayment, loan officers may be able to lead meetings and oversee repayment in a more efficient manner, allowing them to take on more borrowing groups.  On the other hand, if the new liability structure worsens repayment, loan officers may end up spending more of their time enforcing repayment, and have less time for other required activities. 

Results and Policy Lessons:

Due to low compliance, data analysis has been delayed.

Gharad Bryan, Xavier Giné, Dean Karlan

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.

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

Dean Karlan, Margaret McConnell, Sendhil Mullainathan, Jonathan Zinman

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.

 

Ricardo Godoy, Dean Karlan, Margaret McConnell, Jonathan Zinman

Paying for Environmental Services: An Experimental Study in Bolivia

Can financial incentives and information influence farmers to account for spillover effects of their cattle management practices?

Policy Issue: 

Some agricultural and farming practices create spillovers that affect others or the environment. These spillover effects, known as externalities, can create a wedge between the benefits a farming practice has to individuals and the effects it has on society as a whole. Although adoption of agricultural technologies that reduce the production of negative externalities, such as pollution or deforestation, is beneficial to society, such technologies will not be adopted if they don’t bring benefits to individual users. The standard policy solution in the face of such externalities is to change incentives so that private individuals benefit from use of socially responsible practices. In recent years, policymakers have advocated payments for environmental services as an incentive-based approach to internalizing the externalities of land use decisions, but there is little empirical evidence on the impacts of such programs.

Context of the Evaluation: 

This study takes place in Bolivia’s Rio Grande Protected Area, where cattle are both a  source of private income, and of negative agricultural productivity, health and environmental externalities. Most participants in the study area own both cattle and forest land. Through forest clearing for pasture and free range grazing in the forest, local cattle management practices generate significant negative externalities at local (watershed) and global (biodiversity, carbon) scales. Free range grazing cattle spend a significant amount of time standing in streams, where much of the best vegetation grows. This causes erosion of the stream banks, and contributes to landslides that close roads and block access to markets.

Details of the Intervention: 

Researchers partnered with Fundación Natura Bolivia, an organization that has worked in the study area for six years implementing payment for environmental services projects. This study will evaluate interventions designed to increase the adoption of more environmentally friendly cattle management practices, including the establishment of pastures with trees and water troughs, which reduce negative externalities related to health, productivity and environmental processes by reducing the time cattle spend grazing near streams.

In half of the eligible villages, financial incentives will be introduced in the form of conditional contracts for cattle management. The other half of the villages will be provided only with information about the harms associated with poor cattle management. In addition to evaluating effectiveness of incentives for conservation outcomes, data collection will focus on ancillary measures that help shed light on the process of collective action within the community.

In the short run, adoption of these management technologies will be costly to individual users, but has the potential to create benefits for everyone in the village by reducing erosion. In the long run (>5 years), the technology is expected to be both privately and socially beneficial, as the reductions in land degradation bring benefits to individual users. By varying the price incentives for adoption and the information about the externalities, the intervention will offer insights into whether incentives and information can help farmers adopt technologies that prevent negative externalities.

Results and Policy Lessons: 

Results forthcoming.

Nava Ashraf, Abhijit Banerjee

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

Dean Karlan, Margaret McConnell, Jonathan Zinman
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