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

Poor microentrepreneurs have surprised skeptics with their ability to repay loans, but microfinance institutions and commercial banks lending to the poor still struggle with relatively high transaction costs and low rates of return. In “the text message capital of the world,” the Philippines, researchers tested the effect of text message reminders on client repayment rates. In contrast with previous research, they found that text message reminders did not increase repayment on average. Yet for repeat borrowers, who had known their loan officer longer, reminder messages with the officer’s name did result in significantly higher repayment rates.

Policy Issue:

High loan repayment rates have helped fuel the recent and rapid growth in microfinance in the developing world. However, although final default rates are frequently low, late repayment is still a large issue for many lenders. All types of MFIs, from strictly for-profit to mission-oriented, would benefit from inexpensive mechanisms for boosting timely repayment rates and lowering administrative costs per borrower. One such solution may be automated loan repayment reminders sent via text (or SMS) on mobile phones. This study tests the effectiveness of one such intervention in improving repayment and reducing default.

Context of the Evaluation:

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

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

Details of the Intervention:

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

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

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

Results and Policy Lessons:

The study did not find that text messages reminders increased repayment on average. The timing treatments did not have significant effects relative to the control group, nor significant differences from each other. Nor did framing the message as a loss or gain produce significant improvements relative to the control group, or significant differences from each other.

However, researchers did find that including the loan officer’s name significantly improved repayment. That is, results suggested that this message reduced the likelihood that a loan was unpaid 30 days after maturity by 5.5 percentage points, a 41 percent reduction. The effects of mentioning the loan officer’s name are only significant for borrowers who had been serviced by the same loan officer before.

While most text messages did not work, the results suggest a role for personalrelationships between borrowers and loan officers. For repeat borrowers who know their loan officer, the reminder messages with the officer’s name may trigger feelings of obligation and/or reciprocity to pay back the loan.

Text Message Reminders and Incentives to Save in Bolivia

Policy Issue:

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

Context of the Evaluation:

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

Description of Intervention:

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

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

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

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

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

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

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

Results and Policy Lessons:

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

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

Saving for Health Expenditures in Kenya

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

Policy Issue

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

Context of the Evaluation

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

Details of the Intervention

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

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

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

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

Results and Policy Lessons

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

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

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

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

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


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

    Transaction Costs, Bargaining Power, and Savings Account Use

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

    Access to Savings in Nepal

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

    Policy Question:

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

    Context of the Evaluation:

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

    Description of the Intervention:

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

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

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

    Results and Policy Lessons:

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

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

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

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

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



    Silvia Prina

    Impact of Rural Microcredit in Morocco

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

    Policy Issue: 

    Microcredit is the most visible innovation in anti-poverty policy in the last half-century, and in three decades it has grown dramatically. With more than 200 million borrowers,1 microcredit has undoubtedly been successful in bringing formal financial services to the poor. Many believe it has done much more, and that by putting money into the hands of poor families (and often women) it has the potential to increase investments in health and education and empower women. Skeptics, however, see microcredit organizations as extremely similar to the old fashioned money-lenders, making their profits based on the inability of the poor to resist the temptation of a new loan. They point to the large number of very small businesses created, with few maturing into larger businesses, and worry that they compete against each other. Until recently there has been very little rigorous evidence to help arbitrate between these very different viewpoints.

    Context of the Evaluation: 

    In the past, most microfinance services in Morocco have been concentrated in the urban and peri-urban areas, while people in rural areas used various forms of informal credit. The level of access to formal credit from a bank or financial institution is very low in these locations: the initial surveys of this project showed that only 6 percent of those in comparison villages borrowed from formal credit sources.

    Between 2006 and 2007, Al Amana opened around 60 new branches in sparsely populated rural areas. The main product Al Amana offers in rural areas is a group-liability loan, and, since March 2008, individual loans for housing and non-agriculture businesses were also introduced in these areas. Groups were formed by three to four members who agreed to mutually guarantee the reimbursement of their loans, with amounts ranging from MAD 1,000 (Moroccan dirhams) to MAD 15,000 (US$124 to US$1,855) per group member. Individual loans were also offered, usually for clients that could provide some collateral.

    Details of the Intervention: 

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

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

    By the time of the endline survey, 17 percent of surveyed households living in treatment villages had taken a loan from Al Amana. Over three-fourths of those who had taken loans from Al Amana received group-liability loans, and borrowers were predominantly men. Households in areas where credit was offered had borrowed an average total of 10,571 MAD (US$1,310).

    Results and Policy Lessons: 

    Al Amana program increased access to credit significantly: households were 8 percentage points more likely to have a loan of some kind in treatment villages relative to comparison villages, where around one-quarter of households had loans. The main effect of improved access to credit was to expand the scale of existing self-employment activities of households, including both keeping livestock and agricultural activities.

    Among livestock-rearing households, there was an increase in the stock of animals held. Across all households, microcredit offers generally increased sales, household consumption, and profits. However, effects on profits were mixed across business types. While more profitable businesses in microcredit villages increased their profits, profits fell for businesses in microcredit villages that already made relatively small profits. While overall self-employment income increased in villages offered microcredit, this increase was accompanied by a decline in income from day labor and salaried positions. This labor tradeoff resulted in no overall change in income levels between treatment and comparison villages.

    [1] CGAP. “Financial Inclusion” http://www.cgap.org/topics/financial-inclusion. Accessed: 2015. 01.20

    Borrower Responses to Fingerprinting for Loan Enforcement in Malawi

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

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


    Reducing Barriers to Saving in Malawi

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


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

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

    Description of Intervention:

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

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

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

    Results and Policy Lessons:

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

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

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

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


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

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

    Using Encouragement to Overcome Psychological Barriers to Saving in Peru

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

    Policy Issue:

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

    Context of the Evaluation:

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

    Details of the Intervention:

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

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

    Results and Policy Lessons:

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


    The Impact of Microcredit in the Philippines

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

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

    Policy Issue: 

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

    Context of the Evaluation: 

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

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


    Details of the Intervention: 

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

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

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


    Results and Policy Lessons: 

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

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

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

    Determinants of Microcredit Delinquency in the Philippines

    Intuition suggests that certain personality types are predisposed to loan default. Accurately identifying these personality types could have profound implications for consumer banking policy, and also important lessons for our understanding of why credit markets may fail. In partnership with the Rural Bank of Mabitac in the Philippines, researchers implemented two experiments and a survey to predict if prospective clients with various personality traits would pay back their loans. The study found that both individuals with higher moral costs and individuals who were the least naïve displayed lower default rates than other groups. The study also found that that survey-based social capital measures are not predictive of loan default for these individual loans, contrary to the results from a prior study with group loans. More general personality index measures were not good predictors of default, either.

    Policy Issue:

    In microfinance, lending institutions have come to rely on the knowledge of the group to identify and screen out less trustworthy borrowers.  With more traditional, individual-liability lending programs, institutions rely on credit investigation and the subjective intuition of credit officers to screen clients. While intuition may tell us that certain personality types are predisposed to loan default, there is little evidence to indicate which personality types, if any, are predisposed to not pay back loans. Accurately identifying personality characteristics that make a person more likely to default could have profound implications for consumer banking policy, and also important lessons for our understanding of why credit markets may fail.

    Context of the Evaluation:

    The Rural Bank of Mabitac, the partner in this study, aims to provide sustainable financial assistance to microentrepreneurs in the areas of Laguna and Quezon in the Philippines. The bank, which has over 4,000 microfinance clients, has a very high default rate of 71 percent (default defined as not completing full payment on or before the maturity date of loan).  This study took place from 2005 to 2006 in various locations across the island of Luzon in the Philippines.

    Participants in the study were mostly female clients of a the bank. The vast majority were entrepreneurs, and the most common form of business was corner stores. Most of the participants had secondary or post-secondary education and were relatively wealthy by national standards.

    Details of the Intervention:

    To find out if people with certain personality traits are more likely to default on their loans, researchers collected information about clients’ personalities, then tracked their repayment behavior over a one-year period.  

    The Rural Bank of Mabitac provided researchers with the financial transaction data through one year for all of the subjects involved in the study. Bank staff conducted two experiments and a survey immediately after clients received approval for a new individual loan.

    The first experiment was designed to identify subjects with high moral standards. Bank staff interviewed clients and in exchange for a small cash reward. However, when the survey was completed, clients received slightly more than they were owed, leading them to believe the bank made an error. Researchers recorded whether the client returned the excess amount of money while still in the bank, left and then came back to return it, or kept it.

    The second experiment was designed to identify subjects who were not able to complete a future task and those who were naïve about the likelihood that they would complete the task. Bank staff administered a short survey to clients to measure their planning capability. Staff asked some clients to either complete the survey on the spot or text back the responses by a pre-specified date in order to receive monetary compensation. Others were told they would receive monetary compensation if they texted the answers back on a pre-specified date.

    Researchers then administered a survey with the social capital questions from the General Social Survey (GSS) on trust, fairness and helpfulness. Finally, they examined the relationship between personality index measures and behavior in financial settings using the Big Five personality index model, which identifies five personality characteristics: openness, conscientiousness, extraversion, agreeableness, and emotional stability.

    Results and Policy Lessons:

    From the first experiment, researchers found that those with “high moral standards” –who voluntarily returned to the bank to return the excess money—were 15 percent less likely to default within the first year of the loan, and if they did default, they defaulted on a smaller amount. 

    In the second experiment, clients who chose to text-back were not more likely to actually text-back relative to those not given the choice, which suggested the presence of subjects with naïvely optimistic beliefs. Rationally aware subjects—those who did not choose the text-back option—were less likely to default relative to the other groups.

    Researchers did not find evidence that survey-based personality index measures were good predictors of loan default. This could be either because default was driven circumstances out of the clients’ controls, and therefore not correlated with personality, or because the index used in this study did not successfully identify the clients’ personality traits.

    From a policy perspective, these experiments suggest that financial institutions could benefit from further exploration of surveys and experiments to provide information on clients’ financial behavior, particularly given the growth of cell phone ownership and the introduction of mobile banking.

    Read about a related project in Peru

    The Psychology of Debt: An Experiment in the Philippines


    Policy Issue:

    In many developing countries it is commome for street vendors or small-scale entrepreneurs to borrow small amounts of money for their working capital at very high interest rates. Over time, these interest rate payments can amount to a burdensome proportion of a vendor's take-home profit. 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 program would benefit these small-scale entrepreneurs.

    Context of the Evaluation:

    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 and Policy Lessons:

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

    See here for a similar study in Chennai, India.


    Psychological Responses to Microfinance Loan Recovery Strategies in Peru

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

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

    Details of the Intervention:

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


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

    Testing for Peer Screening and Enforcement in Microlending: Evidence from South Africa

    The microcredit model, in which individuals are liable to a group, has been tremendously successful in extending credit to the extreme poor. Yet individuals may also be able to select creditworthy peers and hold them accountable to repay their loans. In South Africa, researchers evaluated whether people have enough information to identify reliable borrowers among their peers and if they can help enforce loan repayment. They found that when given incentives, peers were not effective at screening for creditworthiness, but they were effective at enforcing peer repayment and reducing default.

    Policy Issue:

    Without collateral or credit history, it can be difficult for the poor to gain access to credit through traditional channels, because lenders often impose restrictions on borrowing when they have limited information about a person’s ability to repay a loan. One way that lenders try to reduce the risk of lending to the poor is by using peer intermediation to help identify reliable borrowers and enforce loan repayment. Group lending, where the possibility of future loans for a group of borrowers is contingent on everyone in the group repaying, is one example of this. However, little is known about the channels by which peer networks influence repayment behavior. For example, in group lending models it is not always clear whether peers pressure other members into repaying, or whether they screen out unreliable individuals beforehand to ensure that potential group members are reliable. Peer intermediation may also be effective under individual liability programs, where banks hold individuals rather than groups accountable for repayment. More empirical research is needed to determine whether and how peer mechanisms can help lenders extend credit to the poor.

    Context of the Evaluation:

    Opportunity Finance South Africa, a for-profit micro-lending institution, is among the largest microfinance institutions operating in South Africa with over 3,000 active borrowers. They offer small, high-interest loans with a fixed monthly repayment amount to poor borrowers in Kwazulu Natal province, where nearly 50 percent of people live in poverty and over 30 percent are unemployed. During the time of the study, average loan size was around US$400, and having a documented, steady job was a necessary condition for receiving a loan.

    Details of the Intervention:

    Researchers partnered with Opportunity Finance South Africa to test its Refer-A-Friend program, which offered existing clients the opportunity to receive a bonus for referring a friend who met particular criteria. In order to test whether people have information about the reliability of their peers and can enforce loan repayment, referrers were randomly divided into two groups, each of which received a different set of incentives.

    1.     Screening Incentive Group: Referrers in the first group received a bonus if the person they referred was approved for a loan.  As a result, they had an incentive to screen for candidates who were likely to get approved for a loan based on observable characteristics.

    2.     Screening and Enforcement Incentive Group:Referrers in the second group received a bonus if the person they referred was approved and subsequently repaid the loan on time. They had an incentive to both screen for creditworthiness and encourage repayment.

    The 4,408 existing clients who were given the opportunity to make a referral ended up referring a total of 430 people, of whom 245 were ultimately approved for a loan. Existing clients could earn US$12 for referring someone who was subsequently approved for a loan and/or repaid a loan, while those referred earned US$5 upon approval. 

    Once the referrals were approved, researchers introduced a second stage of randomization, which changed the initial set of incentives that referrers faced. Half of the referrers in Group 1 were offered an additional bonus of US$12 if the person they referred repaid the loan, thus introducing an enforcement incentive with the potential to double their total bonus. Incentives remained unchanged for the other half of Group 1. Among referrers who were originally in Group 2, half received a bonus as soon as their referee’s loan was approved, thus removing the original enforcement incentive. Incentives remained unchanged for the other half of people in Group 2.

    Researchers measured screening and enforcement effects by comparing repayment performance and default rates of loans referred by people facing different incentive structures.

    Results and Policy Lessons:

    Researchers found that referred clients were 32 percentage points more likely to be approved for a loan than drop-in clients, from a base of 23 percent. However, incentives for peer screening did not significantly improve repayment rates, suggesting that, relative to lenders, peers did not necessarily have better information about the creditworthiness of people in their network.   

    Incentives for peer enforcement, on the other hand, did have a significant impact on various measures of repayment performance. The enforcement effect, generated by the incentives that referrers faced after loan approval, significantly improved referees’ loan performance by reducing late repayment, increasing the likelihood that the loan was repaid in full at maturity, lowering the proportion of the principal still owed at maturity, and reducing the number of loans that lenders deemed unrecoverable. On the whole, the enforcement effect reduced default rates by between 9 and 19 percentage points. This suggests that peers can be extremely effective in enforcing repayment, and even small incentives create social pressure that can lead to large reductions in default.  

    This study shows how referral programs offer one way of identifying and isolating the often unobservable effects of peer selection and peer enforcement. Results suggest that peer enforcement can have large effects on individuals’ repayment behavior, while peer selection may only be partly effective at generating information that banks can use to make lending decisions. The research methods employed can serve as guidance for lenders, demonstrating how to build into operations low-cost testing to learn more about using peers to bring in new clients, and reduce risk.

    Related paper citation:

    Bryan, Gharad, Dean Karlan, and Jonathan Zinman.  “Referrals: Peer Screening and Enforcement in a Consumer Credit Field Experiment.” American Economic Journal: Microeconomics, forthcoming (June 2014). 

    Small Consumer Loans for the Working Poor in South Africa

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

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

    Policy Issue: 

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


    Context of the Evaluation: 

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

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


    Details of the Intervention: 

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

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

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


    Results and Policy Lessons: 

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

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

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

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

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


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

    Interest Rate Sensitivity Among Village Banking Clients in Mexico

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

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

    Context of the Evaluation: 

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

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

    Details of the Intervention: 

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

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

    Results and Policy Lessons: 

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

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


    Interest Rates and Consumer Credit in South Africa

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

    Policy Issue:

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

    Context of the Evaluation: 

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

    Details of the Intervention:

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

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

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

    Results and Policy Lessons:

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

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

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

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

    Marketing Effects in a Consumer Credit Market in South Africa

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

    Policy Issue: 

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

    Context of the Evaluation: 

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

    Details of the Intervention: 

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

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

    Results and Policy Lessons: 

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

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

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

    Selected Media Coverage:

    Examining the Effects of Crop Price Insurance for Farmers in Ghana

    Policy Issue:
    Many small-scale farmers in the developing world face significant income uncertainty, and rural farmers who live from harvest to harvest don’t have much room for error. Variables beyond the farmers’ control, such as fluctuating crop prices, can make a significant difference in how much a family earns for the year.  Farmers may be unwilling to take on additional risks by borrowing and making long-term investments due this uncertainty. This reluctance is thought to contribute to the decision of many farmers not to invest in technologies such as hybrid seeds, fertilizer, or irrigation that could potentially improve crop yields. Many lenders are also extremely wary of extending credit to farmers, fearful that they will inherit the risks inherent to farming. Crop price insurance could help solve this problem, reducing the risk to farmers and providing them with encouragement to make investments in their farms. Lenders, too, may feel more confident in lending to farmers with greater income certainty, facilitating even more capital investments.
    Context of the Evaluation:
    In Ghana, 50 percent of the rural population lives in poverty. In the Eastern Region where Mumuadu Rural Bank (MRB) operates, an estimated 70 percent of households make a living in the agricultural sector, but agricultural loans make up only 2 percent of the bank’s loan portfolio. Focus groups with maize and eggplant farmers in the area revealed that farmers were hesitant to borrow for fear that fluctuations in crop prices could force them to default. Rainfall fluctuations, typically an important source of risk for farmers, are not a great concern in this part of Ghana. The prices offered for traded crops, however, do fluctuate greatly. Information gathered in baseline surveys suggested that there was a potential but untapped market for crop price insurance: farmers in the area served by MRB expressed that they would be willing to pay to guarantee a certain minimum crop price. Despite this encouraging baseline finding, banks and insurance providers face the challenge that insurance is not a commonly understood concept among farmers in the region.
    Details of Intervention:
    Researchers developed an agricultural loan product in coordination with MRB that had an insurance component that partially indemnified farmers against low crop prices. Specifically, if crop prices at harvest dropped below a set price floor (the 10th percentile of historical prices for eggplant and the 7th percentile for historical maize prices), the bank would forgive 50 percent of the loan and interest payments. Borrowers were not required to pay any premium for the insurance product. The goal of incorporating insurance into the loan product was to reduce farmers’ risk in borrowing to invest in agriculture inputs. The intervention targeted maize and eggplant farmers in particular because the crops are both commonly grown in the region and subject to volatile (but historically well documented) prices.
    Standard Mumuadu procedure is to invite farmers to meet in a group with Mumuadu employees to discuss the bank’s financial services, and to encourage farmers to come to a branch to apply for a loan. The average loan size is approximately US$159, which represents a significant change in cash flow for the borrower. For this project, Mumuadu employees approached community leaders to obtain a list of all maize and eggplant farmers in the village. The same community leaders then invited farmers to attend one of the bank’s information sessions. Farmers on the list were randomly assigned to one of four groups, each of which received a variation on the Mumuadu marketing pitch. The four groups were:
    1. Farmers who were offered the standard Mumuadu loan product;
    2. Farmers who were offered the Mumuadu loan product with complimentary crop price insurance;
    3. Farmers who received financial literacy training, before being offered the standard Mumuadu loan product;
    4. Farmers who received financial literacy training, before being offered the Mumuadu loan product with complimentary crop price insurance.
    Prior to the marketing of the loans, Mumuadu employees conducted a survey of the farmers, gathering information relating to their credit history, risk perception, financial management skills, and cognitive ability. An analysis of baseline data, bank administrative data, and a followup survey that focused on farmer investment decisions allowed researchers to draw conclusions on the effect of crop price insurance on borrower behavior and agricultural investment in Ghana.
    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.

    Commitment Savings Accounts and Quitting Smoking in the Philippines

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

    Policy Issue: 

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

    Context of the Evaluation: 

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

    Details of the Intervention: 

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

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

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

    Results and Policy Lessons: 

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

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


    Selected Media Coverage:
    Sticking to It - Project Syndicate

    Commitment Savings Products in the Philippines

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

    Policy Issue: 

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

    Context of the Evaluation: 

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

    Details of the Intervention: 

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

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

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

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

    Results and Policy Lessons: 

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

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

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

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

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


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

    Trust and Microfinance in Poor Communities in Peru

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

    See here for a similar study in the Philippines.

    Policy Issue: 

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

    Context of the Evaluation: 

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

    Details of the Intervention: 

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

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

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

    Results and Policy Lessons: 

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

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

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

    Credit with Health Insurance: Evidence from the Philippines

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

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

    Commitment Savings Accounts for Remittance Receivers in Mexico

    Policy Issue:

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

    Context of the Evaluation: 

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

    Details of the Intervention: 

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

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

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

    Results and Policy Lessons: 

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

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

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


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

    Evaluating Village Savings and Loan Associations in Ghana

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

    Policy Issue:

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

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

    Context of the Evaluation:

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

    Description of Intervention:

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

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

    Results and Policy Lessons:

    Results Forthcoming.

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

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

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

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

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

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

    Health Education for Microcredit Clients in Peru

    Policy Issue:

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


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

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

    Description of the Intervention:

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

    Results and Policy Lessons:

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

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

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

    Group versus Individual Liability for Microfinance Borrowers in the Philippines

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

    Policy Issue:

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

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


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

    Description of Intervention:

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

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

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


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

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

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

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


    Business Education for Microcredit Clients in Peru

    Policy Issue:

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

    Context of the Evaluation: 

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

    Details of the Intervention:

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

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

    Results and Policy Lessons:

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

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

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

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

    Selected Media Coverage:

    Evaluating the Saving for Change Program in Mali

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

    Deposit Collectors in the Philippines


    Policy Issue: 

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


    Context of the Evaluation: 

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

    Details of the Intervention: 

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

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


    Results and Policy Lessons: 

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

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

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

    Savings Account Labeling for Susu Customers in Ghana

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

    Increasing the Development Impact of Remittances among Filipino Migrants in Rome

    In 2012, remittances from migrant workers to developing countries were roughly three times the total amount of global foreign aid, yet little is known about how to make these funds work better.1  2 Researchers in this study explored this in two ways: First, they introduced a financial product that enabled migrant workers to pay schools in the Philippines directly for their children’s or other relatives’ education. Second, they tested if giving migrants different degrees of control over how remittances are used for educational purposes made them more likely to send money home. Simply labeling remittances as funds to be used for education raised the amount of money migrants sent home substantially—by more than 15 percent—while adding the ability to directly pay the school only added a further 2.2 percent. 

    Policy Issue:

    Migrant remittances are one of the largest international financial flows to developing countries. They exceeded US$400 billion in 2012, which was roughly three times the amount of total foreign aid flows to developing countries that year.3 However, little is known about how to maximize the impact of remittances. Studies have shown that spending on the education of relatives back home is one of the most significant expenditures for migrant workers and that remittances improve educational attainment of migrant’s children. Previous studies also suggest that financial products that provide migrants with greater ability to monitor and control how remittances are spent can lead them to send more money home. This study evaluated how migrants’ remitting behavior changes when they can label remittances to be used for education or directly transfer remittances to their child’s school back home. It also investigated the demand for a new financial product that allowed migrants to channel tuition payments directly to schools and to receive information about student performance.

    Context of the Evaluation:                                              

    The Philippines is one of the top recipients of officially recorded remittances, topped by only China and India, with Filipinos sending US$26 billion back home in 2013.4 From 1981 to 2011, approximately 1.8 million Filipinos migrated overseas—an average of 60,000 departures every year.5 There are estimated to be approximately 113,000 Filipino migrants in Italy, remitting about US$500 million on average back to the Philippines each year. Nearly half of these remittances are for educational purposes. The majority of Filipino migrants who participated in this study were women and they primarily worked as domestic assistants in private residences. Their median monthly wage was €900 and the median amount of remittances was €380 per month. The median amount of remittances sent home for education each year was about €970. Almost 96 percent of participants remitted regularly in the last year and 72 percent sent money home every month.

    The intervention is a pilot to help inform the Philippine Association of Private Schools, Colleges, and Universities and the Bank of the Philippine Islands (BPI) on whether there is sufficient demand for a new financial product called “EduPay,” whether it can be profitable for BPI to offer this product, and whether it leads to increased financing for schooling in these transnational households. The EduPay product allows migrants to send tuition payments for their children or other relatives directly to schools back home and monitor their academic performance.  

    Details of the Intervention:

    To evaluate remittance behavior and demand for EduPay, researchers carried out games that tested participants’ remittance decisions in different scenarios and then they offered them the EduPay product.

    Participants were asked to play four games, with the order randomized, to test if their likelihood to remit changed under different circumstances. The games mimicked real life choices in which a migrant makes money and then has to decide how much to keep for herself and how much to give to family members back home. In the first game, migrants were entered into a lottery to win €1,000 and asked how much they would like to allocate any winnings between themselves and between people back home in the Philippines. In the second game, migrants were offered the same lottery but they were also given the option to label any of the amount shared as money for education. In the third one, migrants had both the option to label education remittances and to send the money directly to the student’s school. The fourth game was identical to the third, but if they chose to send money directly to a school, the migrant would also receive the student’s attendance and grade reports.

    Researchers hypothesized that the willingness of the migrant to use education labels and to send money directly to the school might differ with the information that their household in the Philippines received about the choice the migrant made. To test this, researchers randomly assigned the migrants into three groups, as follows:

    Private information: Migrants were told that the most closely connected household in the Philippines would not be informed of any of their decisions.

    Information sharing: Migrants were told that the household in the Philippines would be informed of all the choices they made.

    Social excuse: Migrants assigned to this group were told that, as in group two, the household in the Philippines would be informed of all choices made. However, if the migrant chose any of the EduPay options, the survey team would inform the household that a small donation to a Filipino community organization in Rome was made when the EduPay option was chosen.

    Finally, the migrants were offered the EduPay product, which gave them the opportunity to send tuition payments directly to schools in the Philippines from a BPI branch in Rome. EduPay also sent the migrant attendance records and grade reports from the child’s school so that they could better monitor their academic performance. In the study, implementation was strong and all EduPay transactions were executed successfully. Researchers then examined whether participants’ decisions in the games predicted their demand for the EduPay product.

    Results and Policy Lessons:                                                                                             

    The introduction of simple labeling for education raised remittances by more than 15 percent relative to migrants who were not offered the labeled or direct payment product. They sent about €708 of a possible €1,000 home relative to €615 in the comparison group. Labeling also increased the likelihood that migrants would remit at all by 4.6 percentage points. Adding the ability to directly send this funding to the school only added a further 2.2 percent. This suggests that migrants are prepared to remit more money when given the option to explicitly label some of this money for education purposes. Giving the migrant more control over how the money is actually spent, by transferring their remittances directly to the school, resulted in little additional increase in the amount of money they sent home.

    Furthermore, researchers found that behavior in this game was useful for predicting whether migrants would sign up for the EduPay product. Migrants who remitted more for education purposes in the game, and who remitted more with education labeling than without, were more likely to want to use the product. They also found that demand for EduPay was driven more by a demand for the ability to label remittances for education, than by the option that gave them the opportunity to control how the money was spent.

    The findings from this study are in line with recent evidence, which shows that simply labeling money for certain purposes can change spending and saving behaviors. The future challenge for researchers and policymakers is to identify how to implement these simple interventions most effectively. Given that remittance flows are so large, a proven approach to enhancing their development benefits could have substantial influence on policy.

    [1] Yang, Dean. "International Migration, Remittances and Household Investment: Evidence from Philippine Migrants’ Exchange Rate Shocks*." The Economic Journal 118, no. 528 (2008): 591-630.

    [2] Edwards, Alejandra Cox, and Manuelita Ureta. "International migration, remittances, and schooling: evidence from El Salvador." Journal of development economics 72, no. 2 (2003): 429-461.

    [3] The World Bank. “Migration and Remittances.”Last modified April 2014.

    [5] International Organization for Migration. “Country Report for the Philippines.” 2013. p. 50


    Tablet-Based Financial Education

    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. To address this financial capability gap for beneficiaries of Más Familias en Acción (MFA)—Colombia’s government CCT program—Fundación Capital has designed LISTA, a tablet computer-based program founded on the notion of “freeing financial education”  or creating a learning process without the physical presence of a trainer. Researchers are collaborating with Fundación Capital and the Government of Colombia to conduct a randomized evaluation of LISTA to study its impact on financial knowledge and behavior.

    Policy Issue:
    Three-fourths of the newly banked global poor—an estimated 375 to 600 million people1—have never received any form of financial training and are left to make decisions that affect their financial futures with little help or formal instruction. As new services such as CCTs and mobile banking expand, this number is expected to grow. Traditional financial education programs may not be the answer, for randomized evaluations have found mixed results for these types of interventions in developing countries.2 And even when financial training does lead to improvements in financial practices and behavior, it is difficult to customize the curriculum to the needs, interests, and location of each participant in a cost-effective and scalable way. 
    To address these challenges, Fundación Capital, a regional non-profit organization dedicated to reducing poverty through the management, design, and implementation of innovative projects, designed a tablet computer-based application founded on the notion of “freeing financial education,” i.e. designing a training process that does not require the physical presence of a trainer and can happen in the pupils’ (CCT recipients) homes. This allows them to study at their own pace and customize their learning by focusing on topics most relevant to them. It uses an approach that integrates audio, video, and gaming elements, in an attempt to overcome literacy barriers and make the experience more entertaining. This evaluation will test the impact of this tablet computer-based application on financial knowledge and attitudes along with informal and formal financial practices and products used by the CCT beneficiaries. If successful, it has the potential to be cost-effectively scaled to reach millions of newly banked individuals.
    Context of the Evaluation: 
    In Colombia, the Más Familias en Acción (MFA) program reaches 2.6 million poor and extremely poor   families. This includes households that rank lower than established thresholds on the national poverty index (SISBEN), families in extreme poverty, and victims of displacement caused by Colombia’s internal armed conflict. The cash transfers are provided through channels including ATMs, local agents, and mobile phone-based wallets. This intervention has been tailored for women participating in the MFA program,  and is being implemented and evaluated in medium-sized municipalities (populations ranging from 30,000 to 50,000) on the Atlantic and Pacific coasts, two of the poorest regions in Colombia where there are no other current financial education interventions.
    Details of the Intervention:
    Researchers and IPA are partnering   with Fundación Capital and the Government of Colombia to evaluate the impact of the LISTA application on financial attitudes, knowledge, and practices of the beneficiaries. The application lets users organize and visualize savings, expenses, and debt, and includes educational content and videos on topics such as budgeting and the MFA program. It also contains information and simulations about ATM use and other financial products as well as games about financial rules of thumb that can be played individually or in groups.
     60 municipalities were randomly assigned to a group:
    • Tablet-based financial education: In communities in this group, tablets will be distributed among líderes (leaders) of MFA to share with other intervention participants in their communities. Fundación Capital will hold an introductory session where leaders who agree to participate in the program set goals for the number of women they will help train with the tablet application during the tablet-rotation period. Each leader will have about two months to reach their goals, after which they will rotate the tablet and pass it along to a different leader in the community, allowing more households to be reached with a smaller number of tablets. A kit of printed materials will be distributed to LISTA users once they have completed the training which includes reminders of basic financial rules of thumb, a savings calendar, formats and templates for budgeting, and completion diplomas. The materials are designed to reinforce motivation for LISTA users, put in practice what they have learned in the application, and permit them to retain some physical and personalizable training material as a reference for when the tablet leaves their home.
      • SMS Reminders:  The group who receives the tablet intervention will be further randomized into two sub-groups. One sub-group will receive access to the tablet-based financial education application and printed materials only, while the other will also get text ‘reinforcement’ messages offering reminders and rules of thumb. These text messages will be sent for four months after the beneficiary’s leader group has completed tablet usage. The messages are designed to remind users at opportune times – e.g., just before or after a transfer payment – about the content of the LISTA application and printed kit. They will also inform the users specifically about the government-provided financial products available to them through the CCT program. 
    • Comparison group: Does not receive any training or reminders
    The groups will be compared using administrative data including savings and transaction data, as well as survey data on financial knowledge, attitudes, and practices. Finally, telemetric tablet data will be used to explore the degree to which self-customization of the curriculum was linked to observed outcomes. 
    Results and Policy Lessons:
    Study ongoing, results forthcoming. 
    1 Anamitra Deb and Mike Kubzansky. March 2012. Bridging the Gap: THE BUSINESS CASE FOR FINANCIAL CAPABILITY – Monitor and Citi Foundation.
    2 Xu, L. and B. Zia. 2012. “Financial Literacy around the World. An Overview of the Evidence with Practical Suggestions for the Way Forward.” World Bank Policy Research Working Paper 6107.

    Rules of Thumb: Providing Timely Useful Financial Management Advice at Scale

    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. Despite their popularity, there is little evidence on whether such trainings improve microentrepreneurs’ decision-making or the actual performance of their businesses. Researchers aim to test a new financial capability intervention that differs from the traditional method in two ways: first, it simplifies the training into easy-to-remember and easy-to-adopt rules of thumb; and second, it leverages mobile technology to deliver the material cheaply and at particularly useful times for microentrepreneurs.

    Policy Issue:
    Worldwide, there are approximately 400 million micro-, small-, and medium-sized enterprises and the sector constitutes an important source of economic mobility for the poor[1]. Microentrepreneurs in developing countries, however, face complex financial decisions in many areas of life, whether in their personal finances in the form of savings decisions and retirement planning or in a business context as small business owners or investors. However, many lack the training or skills they need to manage the complex finances of a small enterprise. 
    Traditional financial education programs may not be the answer: recent randomized evaluations have found mixed results for financial education programs for microentrepreneurs in developing countries[2]. Overall, the literature points towards little impact of these programs on important business outcomes such as sales, profits, and employment[3]. Further, even when financial capability training leads to better outcomes for its target population, it may not be cost-effective as conducting training is expensive and not easily scalable. Previous research, however, suggests that rule-of-thumb based training, which focuses on delivering simple financial heuristics instead of in-depth information about financial concepts, may be more effective at improving financial behaviors[4]. This study will build on this research and aims to explore whether and how rule-of-thumb training can be delivered in a cost-effective way to improve financial management decisions and outcomes.
    This evaluation is being carried out in two cities in India: Bangalore in the state of Karnataka, and Indore in the state of Madhya Pradesh. The intervention targets microentrepreneurs in urban and peri-urban areas of the two cities who have outstanding individual business loans with the microfinance institution Janalakshmi. The participating microenterprises have taken an average loan of INR 50,000-200,000 (US$800-3,200). The businesses include provisions and textile shops, fruit and vegetable vendors, tailors, micro manufacturing, and traders.
    Description of the Intervention:
    Researchers are conducting a 12-month long randomized evaluation to understand how simplified financial lessons, in the form of rules of thumb delivered via a mobile phone platform, can improve financial management behaviors and financial outcomes for microentrepreneurs. Researchers have randomly assigned the study population—including microentrepreneurs holding individual loans who have expressed interest in participating in the program—into either a treatment group that will receive the rule-of-thumb based financial training along with action-based reminders, or the comparison group that will not be offered the training. In the treatment group, the training and reminders will be delivered weekly through voice-based messages on the microentrepreneurs’ mobile phones over 12 weeks. The training messages will be followed by reminder messages. The objective of the reminders is to prompt microentrepreneurs to complete the financial management actions covered in the previous week’s training.
    All study participants will be surveyed at baseline, midline, and endline on topics including financial knowledge and financial management practices. In addition, partner-provided administrative data will allow the researchers to measure impacts on outcomes like loan repayment and borrowing behavior. The intervention was launched in the field in December 2015 and the results are expected in 2016.
    Study ongoing, results forthcoming.
    [1] World Bank/IFC. 2010. “Micro, Small, and Medium Enterprises Around the World: How Many Are There, and What Affects the Count?”
    [2] Xu, L. and B. Zia. 2012. “Financial Literacy around the World. An Overview of the Evidence with Practical Suggestions for the Way Forward.” World Bank Policy Research Working Paper 6107.
    [3] McKenzie, D. and C. Woodruff. 2012. “What Are We Learning from Business Training and Entrepreneurship Evaluations around the Developing World?” World Bank Policy Research Working Paper 6202.
    [4] Drexler, A., G. Fischer, and A. Schoar. 2014. "Financial Literacy Training and Rules of Thumb: Evidence from a Field Experiment” American Economic Journal, 6(2): 1-31.

    Insurance Against Cognitive Droughts: The Psychology of Water Scarcity and Insurance

    Recent research suggests that droughts may impact farmers’ cognition in addition to their agricultural income. As water becomes scarcer and the risk of a poor harvest increases, farmers may focus so much attention on the availability of water that they perform worse on other mental tasks. In Brazil, researchers are studying the cognitive impacts of drought to understand if rainfall insurance can prevent these effects by reducing farmers’ potential for a significant loss of income during a drought.
    Policy Issue:
    Natural disasters can have lasting impacts that continue to harm communities long after the direct economic effects have dissipated. Droughts in particular have been linked to higher infant mortality and life-long reductions in educational and wage attainment for those born during or directly after a drought.12 Recent research indicates that droughts may also harm farmers’ cognition in the short term through a process known as “tunneling”.3 As water becomes scarcer and the risk of a poor harvest increases, farmers may focus so much attention on the availability of water that they perform worse on other mental tasks. Droughts and other natural disasters may then lead to less than ideal economic choices at exactly the time when it is most crucial for farmers to allocate resources in the most efficient way. If the risk of drought can bring about tunneling, can tools that mitigate the associated economic risk also limit its cognitive effects? Researchers are testing if agricultural insurance can benefit farmers, even before they receive a premium payout, by helping to reduce the cognitive impacts of the threat of drought.
    In Ceará, a poor and drought-prone state in Northeast Brazil, 60 percent of municipalities have received below-normal rainfall over the past four years. Preliminary research seems to indicate that farmers in these areas may indeed be focusing their attention on water scarcity to the detriment of other cognitive tasks. In particular, farmers in areas that received below-normal rainfall overestimated crop prices when primed with an  SMS message about the amount of rainfall their area received, even after being informed of the correct crop prices. Such errors could have serious implications for how households decide to sell their crops and plan their expenses.
    In response to the prevalence of drought, particularly in the Northeast, the Brazilian federal government operates a rainfall insurance program to help farmers in the case of extreme, municipal-wide agricultural losses. The standard insurance plan supplies farmers in municipalities that face agricultural losses of 50 percent or greater with five installments of BRL170 (about US $65) over the five months after the harvest period. The program is well subscribed, with about 90 percent of farmers in the area utilizing the standard insurance plan.
    Description of the Intervention:
    Researchers are partnering with Ceará State’s Foundation for Meteorology and Water Resources and the Rural Development Secretariat of Ceará to evaluate the cognitive impacts of a supplemental state insurance program that provides additional help to farmers. The product pays out an additional BRL 170 to farmers, on top of the payments they receive from the existing public insurance program, in municipalities that suffer greater than 70 percent losses from drought. In 2013, the municipalities in three out of the 12 regions in Ceará met this criterion, with a similar forecast in the study year. 
    The study recruited 4,085 farmers across 50 municipalities in Ceará to participate in the study. The researchers then randomly selected 1,192 farmers to receive an offer for  the free supplemental insurance program, while the other 2,893 were not offered any additional insurance. All participants are being surveyed six times over the phone through an interactive voice response system. During each call, half of the participants were randomly selected listen to a message that primed them about droughts in their municipality. The other half of participants listened to a neutral message.
    Through a series of monthly phone and in person surveys, the researchers are measuring if the priming elicits reduced performance on standard measures of cognitive function for water- and non-water related mental tasks. If this is the case, they will also be able to measure if the additional insurance product is able to mitigate the loss in performance. The researchers are also measuring if the additional insurance and priming messages affect how farmers perceive the accuracy of different rain forecasting services and how those predictions influence farmers’ expectations and economic decisions. The monthly surveys are being conducted over the course of the five-month growing season in order to measure how the effects of drought, insurance, and priming change as the planning season progresses and people learn if they will face below-average rainfall.
    Results forthcoming.
    1 Shah, Manisha and Bryce Millett Steinberg. 2013. “Drought Of Opportunities: Contemporaneous And Long Term Impacts Of Rainfall Shocks On Human Capital.” Working Paper.
    Rocha, Rudi and Rodrigo R. Soares. 2012. “Water Scarcity and Birth Outcomes in the Brazilian Semiarid.” Working Paper.
    3 Mani, Anandi, Sendhil Mullainathan, Eldar Shafir, and Jiayng Zhao. 2013. “Poverty impedes cognitive function”, Science, 341, 976-980.

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

    With limited income and many demands on their financial resources, it is especially important for poor households in developing countries to allocate their money deliberately across various expenditures. In Malawi, researchers investigated how paying workers in weekly installments versus as a monthly lump sum affected their spending on temptation goods, and if the timing of wage payments changed the impact of the payment structures. The study found that workers who received their income monthly in a lump sum had more cash left the week after payday and were 9.5 percentage points more likely to invest in a risk-free short-term “bond” than workers who received their pay in weekly disbursements. Moreover, when workers received their pay on market day they did not increase wasteful spending relative to those who received it the day before.

    Policy Issue:
    In general, people in developing countries have difficulty saving cash or other liquid assets, limiting their ability to buy desired goods or to take advantage of potentially profitable opportunities for investment. Saving may be especially hard in this setting because poor households face a range of “costs” to saving, such as risk of theft, high transaction costs, and social pressure to share earned income or wealth.1 In addition, people might be “present-biased,” prioritizing current desires over those they have for the future. People in developing countries invest considerable money and effort into receiving income in larger chunks in order to make costlier investments.2 As a result, combining small, frequent income payments into larger, less frequent lump sum payments may help the poor save for these larger purchases. However, in some cases converting regular income payments into a larger sum may lead to increased consumption of temptation goods. This effect of “money burning a hole in your pocket” has been raised in the microfinance industry, where there is concern access to loans may induce temptation spending. This study examined the role of income timing for spending and savings decisions and its interaction with issues of self-control. 
    Context of the Evaluation:
    In 2008, more than half of the adult population in Malawi did not have access to any type of financial service, formal or informal. Of those who had access to a financial service, only 19 percent used a formal bank. The key reasons people reported keeping their money in bank accounts were to keep their money safe from theft (62 percent) or to prevent themselves from spending it (33 percent).3 Without access to formal financial services, the majority of people saved their money in the form of cash.
    This study has particular policy relevance in Malawi as many institutions, including the Ministry of Education, are moving to direct deposit-based payment schemes on an infrequent schedule. These payment schemes bring their employees to major cities on focal dates, potentially triggering temptation issues.
    Description of the Intervention:
    The researchers evaluated whether paying workers on a weekly basis or in one lump sum affected their spending on temptation goods, and how the timing of wage payments changed the impact of both payment structures. The study was conducted in partnership with the Mulanje Mountain Conservation Trust (MMCT), an NGO based in Malawi’s Mulanje District that is focused on environmental protection and sustainability promotion.
    Researchers partnered with MMCT to temporarily hire a pool of workers as part of their Sustainable Livelihoods program. Three-hundred sixty-three workers were hired over the course of three months. Each worker was randomly assigned to one of two payment schedule groups: the “weekly” group or the “monthly” group. Each group received the same total amount in wages (about MK3000, equivalent to US$7.50). Those in the weekly group received their wages on a weekly basis, while those in the monthly group received their wages all at once after four weeks. In addition, individuals were randomly assigned to receive their pay either on a “tempting” date (market day) or a non-temping date (the day before market day), thus creating four treatment groups in total. 
    Researchers selected market days as temptation days because people in the area had reported these days offered the opportunity to overspend. The non-tempting dates were deliberately timed near the tempting dates to keep them as comparable as possible. The day before, rather than the day after, was chosen to ensure that the delay between the non-tempting date and any future savings opportunity is longer than that for the tempting date. This ruled out the possibility that the tempting date could depress savings simply because people have to wait slightly longer before the savings opportunity arises. All payments, on both tempting dates and non-tempting dates, were issued at an office located at the site of the market. In order to isolate the effect on spending of having a larger sum of money on the day of the market from the effect of solely being present at the market to receive the payment, all workers were paid a small incentive to show up at the office on market days even if they were assigned to receive their pay-check on a non-market day.
    In a baseline and endline survey, surveyors collected information on savings and consumption behavior, in particular on spending on "temptation goods." In interviews with participants shortly after each payday, the research team asked them to report spending over the previous few days so that researchers could isolate the impact of receiving the money. 
    Finally, the research team offered a high-return, risk-free “investment opportunity” to participating workers right after the follow-up interview. Workers were able to buy either one or two “shares” from the project that had a risk-free return of 33 percent and were repaid after exactly two weeks. This investment opportunity was offered to test whether the timing of payments affects respondents’ ability to take up profitable investment opportunities that cannot be purchased in small parts.
    Overall, results showed that workers were better able to benefit from high-return investment opportunities when they received their wages in a lump sum versus receiving them in smaller, weekly disbursements, and that the “lump sum” workers had more cash left the week after the last payday than the “weekly” workers. Contrary to the researchers’ hypothesis, however, workers who received their pay on market day (and at the location of the market) did not spend significantly more on temptation goods compared to workers who received their payment the day before.
    Monthly vs. weekly payment: Those in the monthly group spent on average MK 940 less of their total pay at the market (on the day that they received their pay) than those in the weekly group. They also spent a significantly smaller share of their pay on the day they received their pay—24 percentage points less than the weekly-group mean of 63 percent. Wasteful spending was not significantly different for the monthly group, however, suggesting that at least in this context the receipt of cash in one chunk does not lead recipients to overspend on goods they later regret. 
    Friday vs. Saturday payment: Being paid at the site of the local market on Saturday compared to Friday did not significantly increase expenditure levels or temptation spending.
    In short, the findings suggest that it is better for organizations to offer to pay part of wages or cash transfers in lump sums. Likewise, projects designed to generate income for people in developing countries should allow beneficiaries to receive income in strategically-timed lump sums if they want to, in order to maximize benefits to recipients.
    e.g. Jakiela, Pamela, and Owen W. Ozier. "Does africa need a rotten kin theorem? experimental evidence from village economies." Experimental Evidence from Village Economies (June 1, 2012). World Bank Policy Research Working Paper6085 (2012).
    Collins, Daryl, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven. Portfolios of the poor: how the world's poor live on $2 a day. Princeton University Press, 2009.
    FinScope Malawi. 2008. “Demand Side Study of Financial Inclusion in Malawi.”

    Personalizing Information to Improve Retirement Savings

    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? Researchers are partnering with the Superintendencia de Pensiones in Chile to test a new simulator installed on self-service kiosks at government offices that provides simulations of retirement outcomes based on different contribution decisions for low-income Chileans. Using a randomized evaluation, researchers will study how this intervention affects financial knowledge as well as decisions regarding labor and retirement plans, and whether it is more effective than offering users general retirement savings information.
    Policy Issues:
    Defined contribution retirement savings plans, where employees contribute at a minimum amount deducted directly from their salaries, are common in developing countries. However, individuals can make voluntary contributions to the plan, and selecting the most beneficial contribution amount often requires some financial knowledge. Individuals may lack the financial knowledge needed to save adequately for retirement, or may not be aware of the effects that retiring early, failing to formalize their employment, or failing to save more than the required amount will have on their eventual retirement savings. Personalized retirement savings information tailored to each individual’s financial situation may be effective in increasing knowledge and encouraging low-income individuals in the labor force to adopt habits that lead to increased pension contribution.
    Chile requires formally employed workers to contribute approximately 10 percent of their taxable income to a pension account. However, contribution rates remain low; people may not be formally employed, may avoid contributing, may stop contributing whenever unemployed, or fail to contribute enough to retire comfortably. Low-income individuals, who comprise 65 percent of all pension account holders, can be most affected by low contributions. Lack of information and financial knowledge may also be an issue. A 2009 survey indicated that most members of the Chilean national pension system did not know how their pension would be calculated, and many who claimed to know were unable to answer questions about the topic when asked. 
    Description of Intervention:
    Researchers will partner with the Superintendencia de Pensiones in Chile to evaluate the impact of providing personalized retirement savings information on pension contributions of low-income, working-age individuals.
    The Superintendencia de Pensiones in Chile is installing self-service kiosks in eight government offices in the metropolitan region of Santiago. At the kiosk, individuals are prompted to identify themselves with their ID and fingerprint. Based on the RUT (ID number), they are randomly assigned to either receive publicly available, generic information on how to improve their retirement savings, or a personalized simulation session which shows how changing current contribution levels affects expected retirement savings balances.
    The simulation software running on the kiosks can populate some of the individual’s personal financial information based on their RUT, and also asks about a number of other factors, including retirement age and estimated years of contribution towards their retirement fund. Based on this information, the individual is then shown a projection of their post-retirement finances.
    All participants will be surveyed at the kiosk on topics including financial knowledge and retirement fund contribution levels. In addition, government-provided administrative data will allow the researchers to measure impacts on labor force participation and savings behavior over the next five years.
    In order to increase the number of people who participate and complete the module and survey, the research team will randomly assign module assistants across both groups. This will allow researchers to study the separate impacts of introducing module assistants in addition to the self-service kiosk simulations.
    Project ongoing, results forthcoming.

    Savings Accounts for Village Micro-entrepreneurs in Kenya

    Many entrepreneurs in developing countries do not have access to even the most basic of financial services. Researchers offered market vendors and bicycle taxi drivers in rural Kenya the opportunity to open a savings account at no cost. The formal savings accounts increased savings, productive investments, and expenditure levels among female micro-entrepreneurs, but not among males.

    Policy Issue:

    Hundreds of millions of people in developing countries earn their living through small-scale businesses with very low levels of working capital. Many of these entrepreneurs do not have access to even the most basic of financial services. Substantial attention has been paid to microcredit as a means of promoting small-scale entrepreneurship. However, the impact of microcredit schemes on business outcomes, especially for the very poor, is still largely unknown, and many banks that target the poor realize low or negative profits. In this context, some have argued that the focus needs to be put on savings instead of credit, since evidence suggests that individuals should be able to save their way out of credit constraints. But this strategy demands accessible opportunities for people to save securely—an uncertain prospect for the vast majority of the poor who still lack access to formal banking services of any kind.

    Context of the Evaluation:

    The Bumala branch of the Financial Services Association (FSA) is a community-owned and operated “village bank” that receives support (in the form of initial physical assets and ongoing audit and training services) from the Kenya Rural Enterprise Development Agency (K-REP). The FSA is the only financial institution present in the Bumala area. The nearest commercial bank branches are in another town about 25 kilometers away. At the time of the study, opening an account at the village bank cost 450 Kenyan shillings (Ksh)(US$6.40). The account did not pay any interest. However, the bank charged a withdrawal fee (US$0.50 for withdrawals less than US$8, US$0.80 for withdrawals between US$8 and US$15, and US$1.50 for larger withdrawals), thus generating a de facto negative interest rate on savings.  

    The FSA opened in Bumala in October 2004. However, prior to the start of the intervention in 2006, only 0.5 percent of the daily income earners around Bumala Town had opened an account. The main reasons given by respondents for why they did not already have an account were inability to pay the account opening fee and lack of information about the village bank and its service.

    Details of the Intervention:

    Working in collaboration with the Bumala FSA, researchers studied the importance of savings constraints for self-employed individuals in rural Kenya. Local research staff identified market vendors and bicycle taxi drivers who did not already have a bank account, but said they were interested in opening one. Of the eligible individuals, 115 were randomly selected to be offered the option to open an account at no cost to themselves—researchers paid the account opening fee and provided the minimum balance of 100Ksh (US$1.43), which individuals were not allowed to withdraw. As mentioned above, these accounts offered no interest and included substantial withdrawal fees, making the de facto interest rate on deposits negative. A comparison group of 135 individuals was not barred from opening an account but was offered no assistance in doing so.

    To test the prevalence and impact of savings constraints, researchers examined 250 self-reported daily logbooks kept by individuals in both the treatment and comparison groups. These logbooks included detailed information on formal and informal savings, business investments and expenditures, making it possible to examine the impact of the savings accounts along a variety of dimensions. Local research staff met with study participants twice per week to verify the logbooks were being filled out correctly, and paid respondents 50Ksh (US$0.71) for each week the logbook was completed correctly. This information was supplemented with administrative data from the village bank on deposits and withdrawals in treatment accounts, and a background survey, which included information on the baseline characteristics, and time and risk preferences of respondents.

    Results and Policy Lessons:

    Impact on Bank Account Take-up: Eighty seven percent of study participants offered a free account agreed to open one, but 40 percent never made a deposit after opening the account. Of the 47 percent who did utilize their account, women (all market vendors) made significantly larger deposits, with a mean total deposit of 2,840Ksh (US$40.57) for women, compared to 1,290Ksh (US$18.42) for men (most of whom were bicycle-taxi drivers).  

    Impact on Savings: Access to a bank account significantly increased savings among market women, but not among male bicycle-taxi drivers. Market women in the treatment group deposited 9.36Ksh per day in their account on average, while bank savings in the comparison group were zero since almost none of them opened an account on their own. Informal savings mechanisms (such as investments in livestock or participation in savings clubs) did not decrease for market women in the treatment group, suggesting a net increase in savings.

    Impact on Business Investment: Access to a bank account increased  how much market women were able to invest in their business, on average.

    Impact on Expenditures: Access to a bank account significantly increased expenditure levels for market women. Food expenditures increased by 13 percent while private expenditures increased by 38 percent.

    Savings Devices and Weather Insurance for Farmers in Senegal and Burkina Faso

    Farmers in Sub-Saharan Africa, especially those in the Sahel region, face a wide range risks to their welfare and livelihoods, such as drought, price fluctuations, and family illness. This study in Burkina Faso and Senegal evaluated the impact of weather insurance and three savings devices on a variety of investment and welfare outcomes, and tested if demand for the products differed among men and women. Farmers who purchased insurance realized higher average yields and were better able to manage food insecurity and shocks than those who used the savings devices offered. Female farmers were less likely to invest in the insurance, however, suggesting that gender differences in demand for financial products may disadvantage women.

    Policy Issue:                                                                                                                       

    Farmers in many developing countries are subject to a multitude of hazards, from droughts, to price dips, to illness. In West Africa, for example, almost every rural household manages farmland and is exposed to the risk of unpredictable rainfall.1 Research indicates that poor, rural households are unable to fully insure against such shocks,2 and that an inability to manage risks have long-run welfare implications.3 While there is a fast-growing policy interest in offering financial products to help rural households manage risk, the evidence is still scant as to which products are the most effective. A combination of financial products may allow households to best manage multiple shocks. While weather insurance may help rural households manage the impact of widespread drought, it will not help a farmer manage losses localized to his fields. Similarly, improved access to savings accounts may allow households to quickly respond to unexpected illness, but it will have little value in helping households manage large or repeated shocks, like drought. This study contributes to a fast-growing body of research on the demand for, and impact of, financial instruments that help households manage risk.  

    Context of the Evaluation:                                                                                                      

    The Sahel, the belt of land that lies along the southern edge of the Sahara desert, is one of the poorest and most vulnerable regions in the world. With low rainfall, frequent droughts, floods, and now, desertification, the region is a very a difficult and risky place to farm. Yet agriculture is the main source of livelihood for the majority of people in the Sahelien countries of Burkina Faso, Chad, Mali, Mauritania, Niger and Senegal. Not surprisingly, farming families in this region are prone to food insecurity and malnutrition.4 Most participants in this study cultivated less than six hectares of land.

    Details of the Intervention:                                                                                                   

    Researchers evaluated and compared the impact of weather insurance and three savings devices on farm inputs, agricultural output, and household welfare, and tested if demand for the products is different among men and women. The randomized evaluation was conducted with approximately 800 individuals in rural areas of Senegal and Burkina, specifically in Kaffrine Region (Senegal) and around Bobo-Dioulasso (Burkina Faso).

    The evaluation was conducted with 14 rotating savings and credit associations (ROSCAs) and 17 farmers’ groups. ROSCAS had to hold regular meetings in order to be eligible for the study. ROSCAS in both countries were only composed of women, while farmers groups were entirely male in Senegal and mixed in Burkina Faso.

    Twenty participants at a time were invited to sessions where they received 6,000 CFA (about $12), information about a certain product or financial device, and the option to allocate some or all of the money to the financial product offered to them.5 At each session, the researchers randomly assigned individuals to be offered one of four products:

    1)    Insurance: An index insurance product that provided protection against too little rainfall for the main crop in the area (groundnuts in Senegal, maize in Burkina Faso).

    2)    Low-commitment savings for inputs: Participants were encouraged to save for agricultural inputs through earmarking. They placed money for agricultural inputs in an envelope labeled “agricultural savings”, kept at home

    3)    High-commitment savings for inputs: Participants placed money for agricultural inputs in an envelope labeled “agricultural savings” and the treasurer of the ROSCA or farmers group kept the envelope. To withdraw money the participant had to go through the treasurer and record the amount of money withdrawn and for what purpose. The treasurer of the group was encouraged not to give out the money until the input fair one month later. Participants earned interest on the savings, with varied interest rates across experimental sessions.

    4)    High-commitment emergency savings: Participants placed money for emergency expenses in an envelope labeled “emergency savings” that was managed by the treasurer of the ROSCA or farmers group. All withdraws took place through the treasurer, who was encouraged to only give out the money for emergency purposes. Participants earned interest on the savings, with varied interest rates across experimental sessions.

    One month after the original experimental session, participants attended fairs where they were given the option of purchasing inputs. Participants in Groups 3 and 4 received the remaining money that had saved with the group treasurer and any interest that was due to them. Participants in Group 4 (savings for emergencies) were offered the opportunity to save again with the group treasurer for further safe keeping over a three-month period at the same interest rate as before. Outcomes were measured one month and six months after offering the insurance and savings devices (during the growing season and after harvest).

    Results and Policy Lessons:                                                                                             

    Demand for the products: Demand for insurance was significantly higher than for the savings devices. A majority of individuals offered the emergency savings product invested more than 4,000FCFA. In Burkina Faso, most participants offered the emergency savings device at the experimental session invested the entire lump sum they received. In contrast, a majority of individuals offered the insurance product invested amounts lower than 1,500 FCFA.

    Farm inputs and output: The average input use and production behavior of those offered insurance and those offered savings treatments were not significantly different on average. However, those who actually purchased insurance invested significantly more in agricultural inputs than those who did not. Higher use of inputs also resulted in higher yields for those who purchased insurance. Investing an additional 1000FCFA (US$1.6) in weather insurance led to a 10 percent increase in yields.

    Household welfare: Individuals offered the insurance product were better able to use their own savings to manage shocks that occurred during the study period (4 percentage points higher), relative to those offered one of the savings products. The savings devices did not produce a significant increase in household savings, food security, or consumption.

    Gender differences: Women invested significantly less in the insurance product, almost 30 percent less. Given the positive impacts of purchasing insurance on agricultural investment, yields, and welfare, the results suggest that this lower take-up of agricultural insurance disadvantages women.

    Researchers hypothesize the gender differences stem from the higher levels of health-related risks women face, such as the risks of childbirth or risks of lost income as a result of caring for sick children. In an environment in which these costs are uninsured and fall primarily on women, a rainfall insurance product carries less value for women than for men.

    Further work is needed to understand whether this is indeed the main factor behind the gender difference in demand and, if it is, to understand how financial products can be better designed to meet the different risk needs of women.

    [1] Karlan, Dean, Isaac Osei-Akoto, Robert Osei, and Chris Udry. "Examining underinvestment in agriculture: Measuring returns to capital and insurance." à paraître (2011).

    [2]Townsend, R.M. 1994. Risk and Insurance in Village India." Econometrica: Journal of the Econometric Society, 62(3): 539-591.

    [3]Dercon, Stefan. "Growth and shocks: evidence from rural Ethiopia." Journal of Development Economics 74, no. 2 (2004): 309-329.

    [4] World Bank. “Transforming Agriculture in the Sahel.” Available at: http://www.worldbank.org/content/dam/Worldbank/document/Africa/transforming-agriculture-in-the-sahel-background-note-english.pdf

    Evaluating the Efficacy of School Based Financial Education Programs

    Could financial literacy training for children lay a foundation for good financial decisions and a better quality of life in adulthood? If so, what type of training works best? In this study, IPA partnered with Aflatoun, a Dutch non-governmental organization, to evaluate the impact of two forms of financial education on primary school children across Ghana. 

    Policy Issue:

    Research on financial knowledge and behavior indicates that individuals in both developed and developing countries around the world lack adequate knowledge to make informed financial decisions. In response to evidence that financial literacy is correlated with well-being, many service providers, donors, and policymakers have begun including financial training and business education as part of their broader anti-poverty strategies. Intuitively, financial education provides useful tools to people of all ages, yet empirical evidence for this impact is meager 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 surveys used are available here in .doc format:

    Baseline Student Survey

    Aptitude Assessment

    Shop Games


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

    Analysis is ongoing, results forthcoming.



    The Real Effects of Electronic Wage Payments in Bangladesh

    Can employers help unbanked individuals enter the formal financial sector by offering their employees electronic wage payments? Researchers are working with a bank, a mobile money operator, and garment manufacturers to help answer this question. This study will randomly assign employees at select factories to either continue collecting their wages in cash, receive them as a mobile money payment, or as a direct deposit payment into a no-frills bank account. The research team will observe the effects of the new payment channels on the financial behavior of the employees. The researchers will also work with the employers to understand how best to transition to electronic wage payments and determine whether the new electronic payroll systems are a worthwhile investment in terms of cost and productivity.

    Policy Issue:
    Around the word, half of the adult population does not have a bank account at a formal financial institution.[1] Most of these people are poor and must rely on cash to manage their day-to-day finances and plan for the future. Even as countries aggressively expand their banking infrastructure, poor households often still choose to save informally and many formal accounts remain dormant, preventing their potential welfare benefits from being realized. Electronic payment and savings systems, which reduce the cost and increase the convenience of formal financial services, are one tool with the potential to boost financial inclusion and encourage formal savings in poor households. This study measures the impact of providing workers in Bangladesh with no-frills bank accounts or mobile money accounts and examines if automatically depositing their wages into these accounts can encourage workers to save. 
    The study takes place in urban Dhaka, Bangladesh, with garment workers in four factories. Few of the factory workers who work on the production line have bank or mobile money accounts, and the use of high cost moneylenders is common. While the workers are currently paid in cash, many do use mobile money platforms for purposes such as transferring money to family members in home villages. However, most workers use vendors’ or other people’s accounts to conduct these transactions, paying high transaction fees in the process.
    Description of Intervention:
    Researchers will study if switching workers currently paid in cash to electronic payroll systems based on either bank or mobile money accounts can encourage the use of formal financial services. For the study, researchers are working with a large commercial bank and one of Bangladesh’s mobile money providers to offer accounts to workers in four garment factories in Dhaka. The bank will install an ATM at each of the factory sites and will train workers on how to use the accounts. The mobile money provider will also offer onsite assistance. To understand the effects of cash versus either account, workers will be randomized into one of four groups:
    Group 1: Workers will receive a traditional no-frills bank account with training on how to use it, and their wages will be electronically deposited into this account.
    Group 2: Workers will receive a mobile money account and training, and their wages will be electronically deposited into this account.
    Group 3: Workers will receive a mobile money account and training, but will continue to receive their wages in cash.
    Group 4: The comparison group, in which workers will continue to receive their wages in cash as they have been, with no additional accounts set up.
    Researchers will survey participants before the accounts are issued and then monthly for the next nine months, followed by a final endline survey. This data will allow researchers to assess how workers’ borrowing, saving, spending, and remittance patterns change when they receive their wages electronically into formal accounts. Researchers will also examine administrative data from the factories at the end of the study to help measure attendance, job performance, and the profitability of switching from cash to electronic payroll.
    Results forthcoming.
    [1] Demirguc-Kunt, A. and L. Klapper (2012). Measuring Financial Inclusion: The Global Findex Database. World Bank Policy Research Working Paper 6025.

    High Hopes: Saving for High School with a Mobile-Money Lock Box in Kenya

    Researchers are partnering with a mobile money operator in Kenya to offer a commitment savings product to parents whose children will soon be making the costly transition to high school. The product is designed to encourage individuals to save for future expenses by offering a higher interest rate on savings that are not withdrawn until a certain date. Using a randomized evaluation, the researchers will assess how this product affects financial decision making as households prepare for the expenses associated with enrolling their children in high school. As households save over the course of the study, researchers will also test if regular text message reminders to save help parents meet their savings goals.

    Policy Issue:
    Saving for long-term goals can be difficult. Many individuals have a tendency to focus their attention and income on immediate demands and temptations while postponing, or simply forgetting, long-term savings goals. This problem may be especially acute for low-income individuals in developing countries, who often lack access to easy-to-use and low-cost banking services. However, recent evidence suggests commitment savings accounts  can be designed with product features that help the poor commit to their savings plans and overcome these barriers. This project builds on this body of evidence and tests whether a commitment savings account can also help clients meet savings goals when offered via a mobile money platform. The study will evaluate if long-term savings can be encouraged by including both a waiting period for early withdrawals and an interest rate bonus on funds saved until the goal date.
    The transition from primary school to high school can be costly for students and their parents in Kenya even when tuition costs are low. Starting high school may require new school supplies, books, uniforms, and even mattresses and other personal items if they are moving to boarding school. However, saving for these expenses can be difficult for parents who have competing demands on their income. Long-term savings goals can often fade from parents’ attention in favor of more immediate spending decisions. 
    At the same time, the introduction of mobile money now allows users to conduct financial transactions and basic banking services on simple cell phones. This technology has greatly expanded access to financial services for the majority of Kenyans and provided an opportunity to create financial products tailored to specific needs. This project leverages a mobile money platform to offer a savings account designed to help individuals save for long-term goals like the transition from primary school to high school.
    Description of the Intervention:
    Researchers are partnering with a telecom operator in Kenya to evaluate a commitment savings account called the “High Hopes” Lock-Savings Account.  The account can be accessed by any customer of the mobile operator, but for this project it is being specifically promoted to parents wishing to save for their children’s high school expenses. It is offered through the telecom provider’s mobile money platform and can be opened directly from a client’s cell phone. To incentivize clients to meet their educational savings goals, the account features an interest rate bonus on savings held until a goal date set by the client. The account also features a 48 hour waiting period before savings are released for withdrawals before the goal date. This waiting period is designed to provide an additional barrier to help reduce spending on temptations. 
    The product will be marketed to parents with children in the last year of primary school. 340 primary schools across three districts in Kenya will be randomly assigned to three groups:
    1)  Commitment Savings group: Parents from schools in this group will be encouraged to open a High-Hopes Lock-Savings Account.
    2)  Regular Savings group: Parents from schools in this group will be encouraged to open a standard mobile phone-based savings account.
    3)  Comparison: Parents from schools in this group will not be encouraged to open either savings product.
    As parents save over the course of the study, half of the participants in all three groups will also be randomly assigned to receive SMS-based messages reminding them to save for their children’s transition to high school. 
    Researchers will survey participants before they are offered an account and again after six months to evaluate if the High-Hopes account helps parents save for their children’s transition to high school compared to a regular mobile-based savings account or traditional savings methods. The surveys will help determine if regular reminders to save can help clients meet their savings goals. Researchers will also collect transaction data from the partnering telecom provider to measure account use, as well as administrative data from the School and Ministry of Educations to track high school enrollment rates.
    Results forthcoming.

    Agricultural Microfinance in Mali

    Evidence suggests additional investments in agriculture could increase income for subsistence farmers, potentially improving the livelihoods of millions of people. In rural Mali, giving some farmers unrestricted cash grants led to significantly higher productivity and profits, suggesting farmers would invest more in their farms if they had more capital. Providing farmers with an innovative loan product also led to a significant increase in farm investments and expenditures, suggesting agricultural loans tailored to farmers’ seasonal cash flow may be an effective way to increase investments in agriculture. In addition, this research suggests farmers vary in the returns they are able to generate from inputs, and agricultural loans attract clients with a better-than-average ability to grow their farms.

    Policy Issue:

    Agricultural productivity in Africa is very low despite the existence of modern agricultural inputs such as improved seeds, fertilizers, and pesticides. As a much of the population works in agriculture, encouraging the adoption of these technologies could raise agricultural productivity and in turn reduce poverty and encourage economic growth. But why do farmers fail to invest in these potentially profitable inputs? One reason may be that they do not have enough cash on hand when they need to purchase inputs and they lack access to credit. Microcredit organizations have attempted to address this problem, but the typical microcredit loan contract—where clients must start repayment after a few weeks—is ill-suited for agriculture. Providing farmers with loans at the beginning of the planting season, to be repaid in a lump sum at the time of harvest, could facilitate investment in inputs and increased profitability. However, there is little evidence on this type of microcredit.

    Context of the Evaluation:

    In Mali, 80 percent of people work in agriculture, most of them in subsistence farming. The sector accounts for about 37 percent of Gross National Product.1 This study takes place in the region of Sikasso, within the areas of Bougouni and Yanfolila, in southern Mali. In these areas, farmers grow cash crops like cotton, maize, sorghum, millet, and groundnuts.

    Soro Yiriwaso, is a microfinance institution in Mali whose mission is to increase economic opportunities for poor Malians, especially women, by offering financial services. Soro Yiriwaso offers a loan product called Prêt de Campagne, or “countryside loan,” to women who join local community associations. Unlike most microloan products, it is designed specifically for farmers. The loans are dispersed at the beginning of the agricultural cycle between May and July and clients must repay loans on one lump sum immediately after the harvest. Soro Yiriwaso issues the loan to groups of women organized into village associations. Each individual woman then establishes a contract with the association for her loan.

    Details of the Intervention:

    To evaluate the impact of the Prêt de Campagne loan product on agricultural productivity and farm profits, researchers partnered with Soro Yiriwaso to conduct a two-stage randomized evaluation in 198 villages in rural Mali.

    In the first stage of the study, Soro Yiriwaso offered their standard agricultural loan in 88 randomly selected villages. In these villages, only women who joined a local community association were eligible to receive loans. In the remaining 110 villages, no loans were offered.

    In a second stage of the study, researchers offered grants in the 88 loan villages to a random subset of the households who chose not to take out loans.  The grants were worth 40,000 FCFA (US$140)— about the size of the average loan provided by Soro Yiriwaso and equivalent to around 70 percent of what average households spent on agricultural inputs. In the 110 villages where no loans were offered, households were also randomly selected to receive the grants. Similar to the loans, these grants were issued directly to a female household member.

    Over a two-year period, researchers measured changes in farmers’ cultivated area, input use, and production output. They also collected data on food and non-food expenses of the household as well as on financial activities (formal and informal loans and savings) and livestock holdings.

    Results and Policy Lessons:

    Take-up and Use of Loans: About 22 percent of the women chose to accept the loan in treatment villages, which is a take-up rate similar to other microcredit products. Households offered loans increased investments and expenditures on agricultural inputs. Households in villages which were offered loans spent on average US$10.35 more on fertilizer and US$5.08 more insecticides and herbicides than the households in villages that did not get loans. Offering loans led to an increase in the value of agricultural output by US$32, and an increase in the value of livestock by US$168. The loans did not have a significant effect on profits, consumption, whether the household has a small business, nor educational expenses.  The return to agricultural investment varied across farmers, with more productive farmers generating higher returns to agricultural inputs.

    Grants: In villages where loans were not offered, providing grants to women in households led to an increase in agricultural investments and, ultimately, profits. Households randomly selected to receive grants cultivated 8 percent more land and invested 14 percent more on inputs than households that did not receive grants. Output and farm profits among women who received grants also increased 13 percent and 12 percent, respectively.  

    Self-Selection: Productive farmers—households that invested more in agriculture, had above-average agricultural output and profits, or had more agricultural assets and livestock than average before the program—were more likely to borrow and demonstrated higher returns to investment. Moreover, in the villages where loans were offered, households who opted not to take out a loan and instead received a grant did not generate the same returns as those in no-loan villages who were offered grants. This suggests that households that applied for loans were those with the high returns to capital.

    Retention and repayment: The repayment rate among women who elected to take out loans was perfect and 50 percent of clients chose to borrow money again, which is on par with typical client retention rates for sustainable, entrepreneurially focused microcredit operations.

    Overall, this research suggests that agricultural lending tailored to the farmers’ seasonal cash flow may be an effective way to increase investments in agriculture and improve yields and profits. Furthermore, the evidence that productive farmers are more likely both to apply for agricultural loans and to generate higher returns on the agricultural investments they make has important implications for credit markets. In short, farmers vary in the returns they are able to generate from inputs, and agricultural loans attract clients with a better-than-average ability to grow their farms. 

    Related Paper Citation:

    Beaman, Lori, Dean Karlan, Bram Thuysbaert, and Christopher Udry. Self-Selection into Credit Markets: Evidence from Agriculture in Mali. No. w20387. National Bureau of Economic Research, 2014.

    [1] International Fund for Agricultural Development (IFAD). “Mali Statistics.” Rural Poverty Portal.  http://www.ruralpovertyportal.org/country/statistics/tags/mali. Accessed: 4 March 2015.

    Remembering to Save: Timing of SMS Reminders in Ecuador

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

    Policy Issue:

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

    Context of the Evaluation:

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

    Description of the Intervention:

    The study sample of 2,700 clients was drawn from FINCA’s database of existing savings clients with cellular phone information and new clients who opened accounts during the first five months of the study. Baseline data was collected from new clients at the moment they opened the account. The baseline survey collected information such as current financial activity, savings goals, and banking preferences (i.e. preferred banking hours/days). Eligible clients were required to have a cell phone but were not required to have a certain income or savings balance, apart from the minimum balance required by FINCA to open an account. After the baseline data was collected, clients were randomly assigned to a treatment or comparison group. Clients in the treatment group received text message reminders to save via cell phones.  The messages varied across several dimensions, including (a) Frequency: the interval at which messages are sent e.g. weekly vs. monthly (b) Duration: the length of time over which the messages are sent e.g. two months vs. four months (c) Timing: the moment at which the messages are sent e.g. time of day (morning vs. afternoon) or day of the week (Monday, Wednesday, Friday) (d) Content: the substance of the message e.g. phrasing of text. The messaging intervention lasted for eight to ten months depending on the treatment.   Frequency of deposits and average account balances, as well as, bank transaction data during the intervention period was collected for the entire sample.

    Results and Policy Lesson:

    Results forthcoming.

    The Miracle of Microfinance? Evidence from a Randomized Evaluation

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

    Policy Issue: 

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

    Context of the Evaluation: 

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

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

    Details of the Intervention:

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

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

    Results and Policy Lessons:

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

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

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

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

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

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

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


    Limited Insurance within the Household in Kenya

    Policy Issue:

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

    Context of the Evaluation:

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

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

    Description of Intervention:

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

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

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

    Results and Policy Lessons:

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

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

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

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

    Jonathan Robinson

    Identifying Information Asymmetries in a Consumer Credit Market in South Africa

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


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

    Policy Issue:

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

    Context of the Evaluation:

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

    Description of Intervention:

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

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

    Results and Policy Lessons:

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

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

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


    Backing out of Commitment Devices in Malawi

    Commitment savings products are a useful tool to help individuals with self control problems stick to their financial plans, but they are unnecessarily restrictive for individuals who want to back out of their commitments due to an unanticipated change in income or other household shock. To shed light on the mechanisms behind the failure to adhere to financial plans, researchers carried out a lab-like study in Malawi that mimicked real life choices. The study measured how often participants changed their financial plans, and what prompted those changes. When participants back out of financial commitments, is it due to self control problems or other factors such as spousal pressure, household shocks, or a lack of understanding about what the commitment entailed in the first place?

    Policy Issue:

    Commitment savings accounts have been used to increase savings and investment in economies as diverse as the United States, the Philippines, and Malawi.  These accounts are designed for customers who experience self-control problems and have trouble following through on their own plans to save money.  However, if people change their financial plans for other reasons, related to changes in income household needs, for example, then commitment savings accounts may actually make them worse off by reducing their flexibility to cope with shocks or correct mistakes. Therefore, to improve the design and targeting of these products, more evidence is needed on why some individuals do not follow through on their own financial plans.

    This evaluation studied the frequency with which individuals change financial plans made under commitment, and investigated whether revisions are correlated with time inconsistent preferences or other factors, including social or spousal preferences, unexpected changes in finances, or mistakes in planning for the future.  Such information can be used to improve the design and marketing of commitment savings devices as one of a portfolio of products to help people manage their income and consumption.

    Context of the Evaluation:

    Malawi’s economy is heavily dependent on agriculture. Most farmers have one harvest a year, and they need to save in order to smooth consumption over the year as well as invest in agricultural inputs for the next planting season. However, many farmers are unable to achieve their own savings goals and use less fertilizer than they planned.  Research suggests that commitment savings accounts may make it easier for farmers in Malawi to save for the next planting season, and that these accounts can have positive impacts on the amount of planting for the next season, sales from the next harvest, and consumption after harvest. However, more evidence is needed to understand why farmers have trouble following through on their plans, and whether commitment accounts are the most appropriate tool to help them.

    This project took place among Malawian tobacco farmers.  Tobacco is Malawi’s most important cash crop, and the return to investments in fertilizer is high for tobacco farmers.  The median participant was 46 years old, had four years of formal education, and lived in a village with 120 inhabitants. He had zero formal savings, and household assets worth approximately US$30.

    Details of the Intervention:

    Researchers carried out a two-stage field study that mimicked real life choices, using real stakes, to determine what motivates farmers to revise their prior choices and back out of commitments to save. The sample included husband-wife pairs in 1,071 households for a total of 2,142 respondents. Of those, 661 households were randomly selected to participate in stage two of the study.

    In the first stage of the experiment, all respondents made a series of 10 choices about how to allocate money between “sooner” and “later” time periods.  Money allocated to the “later” time period earned interest, which provided an incentive for patience.  Half of the choices pertained to a near-term time horizon:  receiving money one day or one month and one day after the interview.  The other half of the choices were in the “far” horizon and pushed the trade-off into the future:  either two or three months from the interview. 

    Decisions in this stage were used to measure respondents’ tendencies to be more patient about decisions in the future than the present, which is an indication of time-inconsistent preferences.  To give respondents the incentive to take the choices seriously and to set up the second stage of the study, households received vouchers redeemable for cash in accordance with one randomly-selected decision among 20 total (10 each for husband and wife) that the household made.  One voucher was issued for the amount of money that had been allocated to the “sooner” time period and a second voucher was issued for the money that had been reserved for “later.”  Each voucher could be redeemed for cash on or after its maturity date.  The amount of money was substantial, equivalent to about one months’ wages.

    For 661 households, the decision for which the two vouchers were issued was a far-horizon trade-off, with vouchers redeemable two and three months after the initial interview.  While the initial allocation had been made under commitment, households were unexpectedly revisited shortly before the first voucher could be redeemed and given the opportunity to reallocate the money between the two payment periods if they wished. The change between the initial and revised allocation thus measured the tendency to revise financial plans made under commitment.

    Surveys of all respondents at each stage measured household wealth and income.  During the initial survey, additional indicators of financial sophistication and expectations of future income were included.  In the second stage, respondents were asked about any changes in their expected income or unanticipated changes to their financial situations.

    Results and Policy Lessons:

    Eighty-one percent of the decisions made in the first stage were consistent with the law of demand. That is, individuals typically allocated more income to later periods when offered higher rates of return for waiting. This suggests that the majority of respondents understood the tradeoffs they faced.  While respondents were sensitive to interest rates, they also displayed considerable time-inconsistency, making different choices over the near than the far horizon.  While these static preference reversals were frequent, they were only slightly more likely to be present-biased as opposed to future-biased. 

    In the second stage, researchers found that revisions were common, often substantial in size, and that while some participants became more impatient and shifted money forward towards the “sooner” voucher, others became more patient and shifted money backwards towards the “later” period.  The first set of revisions, towards the sooner period, are the classic form of time inconsistent behavior that undermines savings and can be managed through products like commitment savings accounts.  Crucially, these revisions were predicted by present-biased preferences as measured in the first stage of the experiment, but not by other factors like changes in expected income, deaths in the household, financial sophistication (a proxy for mistakes), or pressure from one’s spouse.  People were also more likely to make present-biased revisions when they were revisited closer to the date on which the first voucher could be redeemed.

    Together, these findings are significant because they suggest that many instances of revising financial plans are due to time-inconsistent preferences rather than other factors.  Commitment savings accounts are useful tools for individuals who have present-biased preferences, but may be harmful for people who change plans for other reasons.  This study confirms an important role for commitment savings accounts as one way for people in developing countries to manage their consumption and savings. 

    However, present-bias is far from universal in this population, and policy design must take account of this heterogeneity. Efforts to help some combat temptation must avoid saddling others with commitments they do not need. 

    Access to Credit and the Scale-Up of Biometric Technology in Malawi

    Introducing biometric identification substantially increased repayment rates amongst Malawian farmers with the highest risk of default. Researchers are now examining the large-scale impact of biometric technology on repayment and borrower behavior at microfinance institutions across the country.

    Policy Issue:

    Credit enables small-scale farmers and business owners in developing countries to finance crucial inputs such as fertilizer, improved seeds, and business assets. However, formal lenders may be discouraged from lending to the rural poor due to difficulties in ensuring repayment from borrowers who lack adequate collateral or verifiable credit histories. Obtaining reliable information on individuals’ credit history can be difficult in countries without unique identification systems, like social security numbers or government-issued photo identification. Borrowers can avoid sanction for past default by simply applying for new loans under different names or from different institutions. Biometric identification, such as fingerprints, can help lenders identify unique borrowers, verify credit histories, and enforce loan repayment, which in turn can make it cheaper for banks to extend credit to the poor.

    A previous study among paprika farmers in Malawi showed that fingerprinting substantially increased loan repayment among the riskiest borrowers. Researchers are now scaling up the use of fingerprinting for loan enforcement and examining its effects on borrowing and lending across the country.

    Context of the Evaluation:

    Few rural Malawian households have access to loans for business and agricultural purposes: only 11.7 percent reported taking out a loan in the previous year, and among these loans only 40.3 percent were from formal lenders.1 According to the World Bank’s Doing Business Report, which ranks countries on the ease of owning and operating a local business, Malawi ranked 109 out of 129 countries in terms of the supply of private credit.

    Researchers are partnering with the Malawi Microfinance Network, four microfinance institutions (MFIs), and two credit bureaus, Credit Data Malawi and CRB Africa, to expand the use of fingerprinting and introduce a fingerprint-based credit bureau that would enable information sharing across lenders.

    Details of the Intervention:

    Researchers will measure the large-scale impacts of fingerprinting on lending and borrowing across Malawi in partnership with four MFIs, covering over 50 percent of microfinance borrowers in 27 out of 28 districts.

    Two hundred and thirty-six loan officers from the participating MFIs will be randomly assigned to a treatment or comparison group.  All borrowers managed by loan officers in the treatment group will be fingerprinted in the process of loan application.  Borrowers served by officers in the comparison group will not be fingerprinted. To capture the effects of fingerprinting at different stages in the loan cycle and agricultural season, loan officers in the treatment group will fingerprint their borrowers in phases. 

    Researchers will evaluate the impact of fingerprinting on borrower and lender behavior and levels of agricultural output and business productivity among borrowers. In addition, researchers will evaluate any indirect effects on borrowers and lenders nearby the institutions that fingerprinted clients.

    Results and Policy Lessons:

    Project ongoing, results forthcoming.

    Shopping for Financial Products in Peru

    Financial products have the potential to help the poor, yet most financial institutions are driven by commercial goals, and their staff may not be incentivized to offer products most suitable to low-income clients. In this study in Peru, participants visited banks and pretended to be shopping for financial products in order to gather information on how bank staff treat different types of clients. Policymakers aim to use the information from this study to improve consumer protection policy and practices for financial products and services in Peru.

    Policy Issue:

    Financial institutions, driven by commercial interests, often offer expensive products to clients first, and staff are rarely incentivized to provide information about ways to avoid fees or access cheaper products. Meanwhile, many clients lack the necessary understanding of financial products to engage in sound financial decision-making; it requires a certain level of financial knowledge to avoid paying fees, or to ask if a cheaper product is available, even when it is not offered. Less informed customers may not be able to navigate this territory to find products that best suit their needs.

    Indeed, research suggests that lack of transparency and low quality of information provided by financial institutions has negative consequences for low-income consumers. In a related study, for example, staff at financial institutions failed to voluntarily provide much information about avoidable fees, especially to people lacking financial knowledge, and clients were almost never offered the cheapest product.1

    Many governments around the world have tried to address this problem by introducing legislation to improve customer protection policy and practices related to disclosure and transparency for financial products. This study aims to contribute evidence for such policymaking in Peru and beyond.

    Context of the Evaluation:

    The World Bank and Peru’s banking and insurance supervision agency, Superintendencia de Banca, Seguros, y AFP (SBS), are working to improve consumer protection policy and practices in the Peruvian market for financial products and services. This includes work to improve product disclosure and transparency for credit and savings products.  These institutions are therefore seeking high-quality data on existing practices, notably the quality and type of financial information and advice offered to low-income individuals by Peruvian financial institutions that provide savings, individual term credit products, and credit cards. 

    Details of the intervention:

    To evaluate whether financial institutions provide different treatment to clients based on their profile, and if so, what the differences in information are, researchers carried out an audit study of financial institutions in urban areas of the northern, southern and central regions of Peru, specifically in the cities of Lima, Puno, and Piura.

    The study had two phases. First, low-income individuals carried out 529 visits to financial institutions, which included commercial banks, lending institutions and microfinance institutions, where they pretended to be shopping for different financial products. They either requested a savings account, a term credit product, or a credit card. Prior to conducting the shopping exercises, the participants received two days of training on how to act out their assigned consumer profile. They followed scripts that entailed using language and behaviors that signaled high or low levels of financial experience. 

    After the exercises, the participants completed questionnaires on what information was presented and in which forms, as wells as on their personal impressions of the quality of information, advice and customer service provided by the institutions.

    Mystery shoppers’ visits were intended to determine the types of information—verbal, physical and otherwise—institutions provide to low-income financial consumers. The participants act out the different consumer characteristics to enable researchers to examine any differences in how staff treat clients based on perceptions of the clients’ financial knowledge.

    In the second stage, surveyors carried out interviews with 62 credit officers, at institutions where the exercises had been conducted, to obtain information on the staff members’ socio-demographic characteristics, perception of clients, financial knowledge, and salary and incentives structure.

    Researchers will merge results from this study with findings from related studies in Mexico and Ghana.

    Results and Policy Lessons:

    Results forthcoming.

    [1]Giné, Xavier, Cristina Martinez Cuellar, and Rafael Keenan Mazer. "Financial (dis-) information: evidence from an audit study in Mexico." World Bank Policy Research Working Paper 6902 (2014). Available at:



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

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

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

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

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

    Financial Inclusion for the Rural Poor Using Agent Networks

    Many people in developing countries rely on risky and expensive methods of managing their assets. In this study, researchers are evaluating whether lowering the cost of accessing savings accounts through local point-of-sale enabled agents and providing financial literacy training impacts the saving and consumption patterns of cash transfer beneficiaries in rural Peru.

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

    Challenges in Banking the Poor in Rural Kenya

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


    Mobile Commitment Savings in Rwanda

    This study examines a mobile money product innovation that allows customers to restrict access to a portion of their funds until a pre-specified date in the future. The product, called “Cash Bloqué,” is a commitment savings device that builds on the success of mobile money transfers by offering clients a way to lock away their money for a period of time. Using a randomized evaluation, this study will test the impact of a text-message marketing campaign and financial incentives to encourage take-up and usage of the product.
    Policy Issues:
    Saving money is difficult. Often, for example, individuals may put off saving until a future date. Once that date arrives, however, they may delay saving again in favor of more immediate expenses. For many, such time-inconsistent behavior, along with other factors like forgetfulness and social pressures, present an obstacle to savings.
    Commitment savings accounts are a simple and effective way to help users overcome many of these behavioral and social barriers and stick to their savings plans. By allowing users to restrict access to their funds until they reach a pre-determined savings target, commitment accounts can help individuals save towards life goals and large, lump sum purchases. Can this type of account structure be adapted to a mobile money platform? If so, what is the best way to promote its use? What are the main savings goals of those who use the new product?
    In Sub-Saharan Africa, where 24 percent of individuals don’t have formal bank accounts, mobile money is beginning to provide previously under-banked individuals with access to financial services.1 Mobile money allows users to send, receive, and store money via password-protected accounts on their mobile phones, making it a potentially safe and convenient alternative to many informal financial services. In Rwanda, Millicom, which operates the Tigo mobile network, recently developed a commitment savings product for its mobile money service. The product, called “Cash Bloqué,” allows users to restrict access to a portion of their funds until a user-specified date in the future. Researchers are working with Millicom to develop an SMS marketing campaign and bonus scheme to promote the product in Kigali, where Tigo mobile money agents are especially concentrated.
    Description of Intervention:
    In partnership with Millicom, researchers are testing if the Cash Bloqué product can help users meet their savings goals. Using a randomized evaluation, this study will also help map demand for the product and determine if SMS marketing messages are effective at promoting use of the product. A random subset of active Tigo mobile money subscribers in Kigali will be randomly assigned to one of four marketing categories, each designed to appeal to a different saving motive, or a comparison group:
    1. Saving for investment: Users in this group will receive SMS reminders to save for capital to either start or grow their business, or buy land.
    2. Savings for durable goods: Users in this group will receive SMS reminders to save for home improvement, home repair, or buying furniture.
    3. Savings for shocks: Users in this group will receive SMS reminders to save for financial emergencies.
    4. Savings for regular expenses: Users in this group will receive SMS reminders to save for regular expenses, such as mandatory health insurance, school fees, rent, and foreseeable events like Christmas.
    5. Comparison group: Users in this group will not receive any SMS messages.
    Immediately after the marketing messages are sent to eligible customers, a subset will be randomly chosen to receive a bonus payment related to their Cash Bloqué savings. For half of the bonus recipients, the payment will be added to their account balance when they deposit money into the account. For the other half of recipients, the bonus will be framed as an added return on their savings and will be paid out on top of the customers’ account balances when they receive their money.
    Administrative data on the number, frequency, and size of Cash Bloqué transactions will be combined with data from household surveys to measure participants’ savings and consumption patterns, as well as their ability to meet savings goals. Together, this data will allow researchers to assess which marketing messages and bonus schemes are effective at promoting the use of the Cash Bloqué product and how the product affects savings behavior.
    Results forthcoming.
    1The World Bank Group. 2011. "Global Financial Inclusion (Global Findex) Database." Available at: http://datatopics.worldbank.org/financialinclusion.

    Financial Education vs. Access to Finance in Transnational Households

    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. In an ongoing study in the Philippines, researchers are examining the effects of financial education and access to savings and loan products on remittance flows, savings, and small enterprise development.
    Policy Issue:
    The number of individuals living outside their countries of birth reached 230 million people in 2013, representing over three percent of the world. Many of these migrants send remittances back to their countries of origin. In fact, officially recorded remittances to developing countries exceeded US$400 billion in 2013, with top recipients of India (US$71 billion), China (US$60 billion), the Philippines (US$26 billion), and Mexico (US$22 billion). These remittances are an important but poorly understood type of financial transaction. To date, there is little evidence about how migrants make their remittance-sending decisions.
    Past studies in Mexico and El Salvador have shown that households receiving international remittances have low savings levels. In many remittance-receiving countries, policymakers are creating programs to encourage households to channel more of their remittance income to savings, education, and investment in small businesses. Providing migrant workers and their families with financial literacy training or access to financial services may be one way to improve their welfare. While researchers have studied the impacts of financial education and financial access independently, no study has looked at the possible complementarities between these two types of programs. This study examines how combining financial skills training with access to savings and loan products impacts financial decision-making and savings of transnational migrant households.
    The Philippines is the second largest migrant-sending country and the third largest remittance receiving country in the world. Nearly 90 percent of service sector international migrants from the Philippines in 2010 were women. Among these, 70 percent were domestic workers. The group of recently departed Overseas Filipino Workers (OFWs) and their families left behind in Cabanatuan, Philippines and surrounding localities namely Talavera, Sta. Rosa, Palayan, and Gapan are the primary target group of the study.
    Description of Intervention:
    Researchers are examining the effect of financial education and access on remittances, savings, and small enterprise development. Researchers partnered with the Overseas Workers Welfare Administration (OWWA) to randomly select a sample of 1,800 transnational households from the full population of workers going abroad to work from Cabanatuan, Philippines and surrounding localities. Participants in the program were then randomly assigned to one of four groups:
    1. Financial education only: The families of migrants in this group were invited to attend a workshop on financial education in the Philippines administered by local partner Alalay sa Kaunlaran (ASKI), Inc. The day-long workshop emphasized the importance of remitting into bank accounts in the Philippines to build long-term savings and investment. Migrants in Singapore or Hong Kong, countries where ASKI is present, from households belonging to the financial education treatment group will also be invited to a financial education workshop. 
    2. Financial services and products only: Migrants and their families in this group were invited to open bank accounts through local partner, the Bank of the Philippine Islands (BPI). Migrant families in the Philippines were also offered microloans for small enterprise investments via ASKI.
    3. Financial education + financial services and products: Migrants’ families and migrants in Singapore or Hong Kong were invited to attend the financial education workshops. They were also offered the savings and loans products by BPI and ASKI at the end of the training. 
    4. Comparison Group: Individuals received no financial training and were not offered financial services or products.
    Researchers will conduct follow-up surveys twelve months after the financial education workshops and product offerings to measure their impact on savings, remittances, and small enterprise investment.
    Results forthcoming.

    Changing Behavior to Improve Household Financial Management in Malawi

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

    The Economic Consequences of Brain Drain from Ghana, Tonga, Micronesia, Papua New Guinea, and New Zealand

    Does the migration of highly educated people from developing countries hurt local economies, decimating their human capital and fiscal revenue? Or does a highly educated diaspora serve to develop economies through remittances, trade, foreign direct investment and knowledge transfers? Researchers tracked academic high achievers from five countries and found large positive benefits of high-skilled migration for citizens of high emigration countries. The largest benefits were to the migrants themselves, who benefit through massive gains in income and through greater human capital. Meanwhile, while most high-skilled migrants from poorer countries remitted, involvement in trade and foreign direct investment was rare. Fiscal costs to the countries of origin varied widely but were much less than the benefits to the migrants themselves.

    Policy Issue:

    The number of highly educated emigrants from developing countries living in developed countries doubled between 1990 and 2000, and has continued to grow over the past decade.1 As policymakers in high emigration countries watch the departure of many of their most talented citizens, they both worry about the potential costs of this “brain drain” for development in their country and wonder about the possibilities offered by having a diaspora of the elite who can send remittances home, and facilitate trade, investment and knowledge exchanges. What has been sorely lacking is empirical evidence on how migration impacts the countries facing high rates of high-skilled emigration. The goal of this research was to provide the first systematic microeconomic empirical evidence on what the economic costs and benefits appear to be in practice.

    [Note: IPA managed the research for this study in Ghana only.]

    Context of the Evaluation:

    The study originated in five countries, which represent a range of the types of countries experiencing very high rates of high-skilled emigration: Tonga, Micronesia, Papua New Guinea, Ghana and New Zealand. Tonga and the Federated States of Micronesia are small island states, which have the highest brain drain rates in the world.2 Papua New Guinea, a larger developing country in the Pacific, has much lower overall levels of migration but also a high brain drain rate. Ghana was chosen as one of the best-known examples of a Sub-Saharan African country grappling with high brain drain, and New Zealand as the Organization for Economic Cooperation and Development (OECD) country with the highest brain drain rate.

    Details of the Intervention:

    To measure quantify for the first time a number of the key economic effects of high-skilled emigration, researchers pursued an innovative survey methodology. First, they identified a well-defined target sample frame of interest – individuals who were the top academic performers in the country at the time of their high school graduation – and then tracked down these individuals wherever they were currently living in the world and surveyed them. In each country the research team assembled a sample of the top academic achievers in the country, for individuals graduating high school between 1976 and 2004, using a mixture of government and school records.

    The total sample frame consisted of 4,131 individuals from the five countries. Surveyors then tracked the individuals to the countries to which they migrated. Altogether this involved collecting data on individuals living in 45 different countries, and asking them detailed questions about their migration and educational histories, and the channels through which they interact with their home countries while abroad. Surveyors were able to interview 1,240 (30 percent). Researchers then formed counterfactuals for what these individuals would be doing at home through also surveying academically similar non-migrants and return migrants, and through direct elicitation. The survey efforts began with the Tongan sample in late 2007, and finished with the Ghanaian sample in late 2009. IPA managed the research for the study in Ghana.

    Results and Policy Lessons:

    Results showed large positive benefits of high-skilled migration for citizens of high emigration countries. The largest benefits are to the migrants themselves, who benefit through massive gains in income and through greater human capital. Researchers estimate that the best and the brightest stand to gain $40,000–75,000 per year from emigrating from the five countries studied.

    High-skilled individuals from poorer countries typically remit but it is rare for them to engage in trade or FDI. Adding together the monetary and goods remittances gives a total impact of $5,000 annual remittances for Ghanaians, $2,100 for Micronesians, $625 for New Zealanders (monetary remittances data only), $7,232 for Papua New Guineans and $4,300 for Tongans. These amounts are significant relative to the per capita incomes of the developing countries, with Ghanaian and Papua New Guinean remittances equivalent to about seven times per capita GDP. Nevertheless, the amounts remitted are only a fraction of what the migrants would have been earning at home.

    The migrants engage in plenty of knowledge transfer in terms of helping others to learn about study and work opportunities abroad but do not frequently advise their local governments or businesses in their home countries. Return migration is common and researchers find return migrants more likely to be engaging in knowledge transfer than non-migrants but not to have higher levels of productivity.

    The main cost researchers measured was the fiscal cost of emigration. This cost varies significantly depending on the progressivity of the tax system and size of government expenditure, with minimal tax implications in Tonga and Micronesia and possible fiscal losses from high-skilled emigration of $6,300 per high-skilled migrant per year for Ghana, $10,000 for New Zealand and $16,900 for Papua New Guinea. The measured benefits greatly exceed the measured costs, however, suggesting that on balance high-skilled migration is improving the living standards of individuals born in countries with high levels of emigration.

    [1]Docquier, Frédéric, and Addeslam Marfouk. "International migration by educational attainment, 1990-2000." (2006).

    [2]Beine, Michel, Frederic Docquier, and Maurice Schiff. Brain Drain and its Determinants: A Major Issue for small states. No. 3398. IZA Discussion Papers, 2008.

    The Impact of Formal Savings on Salaried Workers’ Spending and Borrowing in Eastern Ghana

    Commitment savings products are designed to help people overcome social and behavioral barriers to saving money, but many questions remain about how, and in which cases, these products work. We are using a randomized evaluation to test the impacts of a commitment savings product, which pulls savings directly from electronically deposited salary payments, on various financial and behavioral outcomes in Ghana. To the knowledge of the research team, this is the first study on salary withdrawal savings plans in a developing country context.

    Policy Issue:

    A growing body of literature suggests that commitment savings products—voluntary arrangements designed to help individuals overcome social and behavioral barriers to savings—are very effective in increasing savings. However, there are several open questions regarding how these commitment devices work. For example, where does the savings come from? Do people reduce savings elsewhere, reduce their loans and transfers to others, or reduce spending on luxuries or basic necessities? Once the lump sum within the commitment savings device is released, how is it used? Are there any long-term impacts of having participated in the commitment savings program on economic activities, income, savings, debt, or spending behavior? Is the answer different for men and women? This study aims to address these issues.

    Additionally, this research will provide much-needed evidence on commitment savings devices from the deposit side, as compared to the withdrawal side, and it will provide evidence from a developing country context on salary withdrawal savings plans. This research is also unique in that it focuses on relatively better-off, higher status individuals.

    Context of the Evaluation:

    The Government of Ghana has begun paying its employees electronically, with individuals’ salaries paid directly into their bank accounts. These salaried workers tend to be more educated and have higher and more stable incomes than the average Ghanaian, and are often seen as providers within their households and communities.

    North Volta Rural Bank (NVRB) is a rural bank located in the North Volta Region in Eastern Ghana. The bank offers customers whose salaries are electronically deposited by their employer the opportunity to take out high interest payday loans (temporary overdrafts) against their incoming salary. The majority of the bank’s salaried customers have taken these payday loans at least once, and many customers have taken out these loans repeatedly.

    In an effort to keep customers from falling into a situation in which they are unable to meet their financial commitments, North Volta Rural Bank created a product, called “Salary Susu Plus,” in which customers commit to having a fixed amount taken directly from their salary and put in a commitment savings account for an 18-month period.

    Details of the Intervention:

    We are testing the impact of the Salary Susu Plus (SSP) product on study participants’ economic activities, spending and savings behavior, and amount of debt during, immediately after, and six months after the commitment period, and whether the impact differs across gender.

    All North Volta Rural Bank customers with salaried accounts are being invited to participate in this study. For the 320 individuals (245 men and 75 women) who agreed, the bank randomly assigned half to a treatment group. Clients in the treatment group are being offered an opportunity to sign up for the SSP program, and of these, 71 percent joined the program. Those not offered the product served as the comparison group.

    Participation in SSP involves committing to automatically transfer a fixed amount of one’s directly deposited monthly salary into an SSP account every month for a period of 18 months. The automatic transfer has to be at least 30 Ghana cedis (approximately US$10) per month. In practice, the mean monthly contribution amount is 43 Ghanaian cedis, which is equivalent to 9 percent of the average study participants’ monthly salary. At the end of the 18 months commitment period, the customer is able to withdraw all savings in the SSP account, along with a bonus equal to one month’s contribution. While clients can withdraw funds from their SSP accounts before the commitment period ends, they can only do so by leaving the SSP program, which means they forfeit the bonus payment and must also pay a penalty equal to one month’s contribution.

    The bonus amount is designed to give customers a return on their investment that is more than double the return they would receive on a normal savings account. The minimum monthly contribution amount is set to be one-eighteenth of the average payday loan size so that the accumulated lump sum would be equivalent to the average size of a payday loan.

    Study participants are being be surveyed before, during, and after the 18-month commitment period.

    Results and Policy Lessons:

    Results forthcoming.

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

    Policy Issue:

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

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

    Context of the Evaluation:

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

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

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

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

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

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

    Description of Intervention:

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

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

    Results and Policy Lessons:

    Results forthcoming. 


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

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

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

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

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

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

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

    Evaluating Village Savings and Loan Associations in Malawi

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

    Policy Issue:

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

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

    Context of the Evaluation:

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

    Description of the Intervention:

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

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

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

    Results and Policy Lessons:

    Results forthcoming.  

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

    Mobile-izing Savings: Defined-Contribution Savings on a Mobile Money Platform in Afghanistan

    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. Researchers are partnering with a mobile money provider to see if offering employees the opportunity to automatically contribute a portion of their paycheck increases their long-term savings.

    Policy Issue: 
    Savings enable people to accumulate smaller sums over time for large purchases, emergencies, and investments. In countries with no health insurance or social security, savings are all the more critical for the well-being of the poor, but people face several barriers to saving. Behavioral research suggests that lack of self-control, procrastination, and inattention are important barriers to developing healthy financial behaviors. These barriers, exacerbated by lack of access to appropriate financial services and information, may lead individuals to save less than they would like. The rapid proliferation of mobile money is paving the way for the delivery of financial services that are designed to meet the financial needs of low- and moderate-income individuals in developing countries. Increasingly, financial institutions and employers have the opportunity to develop products to help individuals save more and develop healthy financial behaviors. 
    Research from developed countries shows that automatically transferring a default amount into long term and retirement savings accounts can be very effective at increasing deposits. With the expansion of a new mobile financial services infrastructure, these insights can now be tested in a developing country context. 
    Evaluation Context:
    This project is being implemented in Afghanistan, which has one of the lowest bank account penetration rates in the world. An estimated 91% of the adult population does not have an account at a formal financial institution. The savings rate is also very low, with only one in seven adults estimated having saved any money. Mobile phone penetration rates, on the other hand, are quite high, with an estimated 54% of the population using mobile phones. In this context, Roshan, Afghanistan’s leading mobile communication provider, launched M-Paisa, a mobile payments system with great potential to improve the country’s financial landscape. M-Paisa currently has approximately 1 million registered users, and around 50,000 people receive their salaries via mobile money.
    This study targets approximately 1,200 employees of Roshan located across seven field offices, in both rural and urban locations around the country. With a median monthly salary of $450 the study sample is diverse, including a large group of moderate-income individuals, who, due to their close association with Roshan, are often the “early adopters” of innovative mobile money products.
    Intervention Description: 
    The proposed intervention will make a mobile savings account available to all Roshan employees. This account, called M-Pasandaaz, is linked to each employee’s existing M-Paisa mobile money account, so that employees may deposit and withdraw funds to the M-Pasandaaz account using the nationwide network of M-Paisa agents.
    Researchers will randomly assign employees to groups to test the impact of three different treatments.
    1. Default contribution: M-Pasandaaz accounts can be categorized under two broad headings, “5% Default Contribution” and “No Default Contribution.” Employees in the “5% Default Contribution” group will be automatically enrolled to contribute 5% of their salary to savings, whereas employees in “No Default Contribution” will be given access to the M-Pasandaaz account with no automatic contribution. Employees are allowed to change their automatic contribution levels or opt-out of any of the automatic contribution plans at any point.
    2. Employer savings-match incentive: Each group mentioned above will be further divided into 2 sub-groups. In one of the sub-groups, employees who make regular contributions to their M-Pasandaaz account for at least 6 months, without making any withdrawals, will receive a 50% match from the employer on their contributions of up to 10% of their salary. The other sub-group will not be eligible for this incentive.
    3. SMS messaging: Researchers will randomly vary the information provided to employees about M-Pasandaaz through text messages, which will be sent directly to employees by Roshan’s HR office each month, for a period of six months. One third of the sample will not receive any information, while the remaining two thirds will receive one of two types of messages: one group will receive simple reminder messages detailing enrollment status and providing instructions for how to switch plans, and the other will receive the simple reminder combined with a breakdown of their savings account balance.
    Results forthcoming. 

    Alarm Boxes: Combining Commitment and Reminders

    Products that remind people to save may improve individuals' ability to take future needs into account, stall unnecessary consumption in the present, and change savings behavior. Working with Ecofuturo, a for-profit bank in Bolivia, IPA developed an innovative lockbox with a daily alarm that could only be turned off by depositing money. IPA tested the impact of the alarm box technology on a the clients' savings behavior over a one-year period.

    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

    Introducing Financial Services to Newly Monetized Native Amazonians

    Many isolated indigenous communities in Latin America are getting increasing exposure and access to money. Villagers, such as those in the Amazonian basin where this study is being conducted, may be better able to save money by using a simple product like a savings lockbox. Partnering with a Bolivian non-profit, researchers are evaluating the impact of such products on the savings habits of the Tsimane’, an Amazonian society that, research shows, has very high rates of impulsivity. What happens when recipients are given a lock box with a key compared to those who, to access their savings, have to travel to the nearest town to get the key? How do the savings habits of these groups compare to those not given a lock box at all? 
    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 indigenouse 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 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 that they 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 1,100 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, wage 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.


    Moving Beyond Conditional Cash Transfers in the Dominican Republic

    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.

    Policy Issue:
    Cash transfer programs are increasingly common across developing countries. These programs provide income support to those living in extreme poverty, and in the case of conditional cash transfer (CCT) programs, provide incentives for parents to invest in the human capital of their children by making the transfers conditional on certain behaviors, like attending school or visiting a health clinic. Despite their established benefits in terms of improving health and educational achievement, many policymakers and development practitioners remain concerned about the extent to which households may become dependent on cash transfers to maintain their living standards. Even with greater access to healthcare and education, it can be difficult for beneficiary households to manage their personal finances, find and maintain a stable job, or start a new business. It is not clear whether families will revert to pre-program poverty levels when the transfers are no longer provided, or whether the transfers enable more permanent changes in household and business finances, ultimately allowing beneficiaries to graduate from the program.
    Context of the Evaluation:
    Solidaridad is a CCT program in the Dominican Republic that provides cash transfers to poor households if they invest more in education, health, and nutrition. Eligible families receive around US$75 every three months if they comply with certain conditions, including the school enrollment and attendance of all household children, and regular health check-ups for children under the age of five years old. Approximately 20 percent of the Dominican population lives in moderate or extreme poverty, and are eligible to receive trimonthly transfers from the program.[1] The beneficiaries receive these transfers via a debit card to be used to purchase basic food products at authorized stores, and meet every three months in community groups (núcleos) to receive training in nutrition and preventive health. However, Solidaridad does not currently have a graduation strategy to encourage beneficiaries to improve their household financial management and develop stable income sources from jobs or small business creation.
    Description of the Intervention:
    Researchers are using a randomized evaluation to assess whether providing financial literacy and business training to CCT beneficiaries can help them graduate from the program, and what type of training is most beneficial.
    Two hundred and forty núcleos, with a total of 3,600 individuals, will be selected from government administrative data and randomly assigned to either the treatment or comparison group. All members of the treatment group will receive financial literacy training intended to improve household financial management skills. In addition, núcleos in the treatment group will also be randomly selected to receive one or more of the following:
    • Professional vs. peer trainers. Of the 120 núcleos in the treatment group, half will receive financial literacy training from professional trainers, while the other half will receive the training from their peers.
    • Business vs. job skills training.In addition to the financial literacy training, half of the núcleos in this treatment group will receive an additional training session on financial management for businesses, while the other half will receive additional training on job skills (finding, acquiring, and maintaining employment).
    • Budgeting notebooks. Within each núcleo, a random subset of beneficiaries will be selected to receive notebooks that can be used to maintain household and/or business budgets to test whether the notebooks increases the impact of the training.
    • Access to formal financial services. Of the beneficiaries who already own a business and are interested in and eligible to receive a loan, a random subset will be offered a loan and an accompanying savings account from a local commercial bank.
    Key outcome measures include knowledge and management of household and business finances, household and business assets, and the employment status and conditions of household members.
    Results and Policy Lessons:
    Results forthcoming

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

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

    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.

    Policy Issue:

    Promoting financial literacy and providing access to bank accounts have become popular approaches to help the poor save. Increased savings may help individuals meet day-to-day financial demands and invest in their futures. Furthermore, increasing the savings rate in the general population may help promote large-scale changes in a country’s economy by allowing increased investment in productive resources. In order to maximize the benefits of increased savings at both the individual and country level, it may be most effective to encourage youth to save. Young people may be more likely to adopt new habits, and they have many working years ahead of them. A growing body of literature investigates whether either financial education or bank access affect savings behavior. 

    Context of the Evaluation:

    Uganda has a very young population: in 2006, 52 percent of the country’s population was under 15 years old and 29 percent of the country’s adult population was between 15 and 34.1 In addition, Uganda has extremely low savings rates, even relative to its neighbors. Between 2001 and 2003, the average savings rate among Ugandan households was 5.2 percent, compared with an average rate of 12.7 percent in neighboring Kenya.2

    Researchers partnered with the Foundation for International Community Assistance (FINCA) and the Church of Uganda in this evaluation. FINCA, whose mission is to provide financial services to the world’s lowest-income entrepreneurs, has worked in Uganda since 1992. The Church of Uganda is an Anglican church, representing the second largest religious group in the country. As of the 2002 census, 36 percent of the population considered themselves affiliated with the church. The Church maintains a large network of youth fellowship groups, based at village churches around the country. The youth groups participating in this study had an average of 40 members. The average age was 24.5 and 40 percent of members were female.

    Details of the Intervention:

    Researchers evaluated whether offering financial education or group savings accounts to Ugandan youth groups increased savings. The study involved 240 Church of Uganda youth groups, which were randomly assigned to receive financial education, a group savings account, both financial education and a savings account, or neither intervention. There were 60 youth groups in each arm of the study.

    The curriculum for the financial education intervention was designed in partnership with Straight Talk Foundation and Freedom from Hunger. The ten-session, fifteen-hour curriculum taught concepts and skills for improving savings behavior, including role-playing the differences between saving and borrowing to achieve a goal, how to keep a budget, and strategies for successfully discussing sensitive topics around money.

    Researchers partnered with FINCA to design a group savings account without fees and with simple account-opening procedures, which minimized common barriers to opening accounts. Each club had only one account and was responsible for maintaining a ledger with individual members’ savings. Clubs were also required to make a deposit within thirty days of opening the account and to maintain a minimum balance of 50,000 UGX (US$20).

    Results and Policy Lessons:

    Financial literacy: Members of youth groups receiving financial education had higher levels of financial knowledge, awareness, and numeracy. Youth in groups receiving financial education only scored 0.04 standard deviations higher than the comparison group on an index combining questions relating to financial literacy. Youth in groups receiving both financial education and group accounts scored 0.06 standard deviations higher than the comparison group. Youth in groups receiving account access only did not score any better than the comparison group.

    Bank savings: Using administrative bank data on the group accounts offered in the intervention, researchers found that offering financial education in addition to account access increased savings more than offering the account alone. Averaging across groups receiving account access only and groups receiving account access plus financial education, only 14 percent of members used the account. However, those who did use the accounts saved non-trivial amounts: an average of 15,000 UGX  (US$6) in the account-only group and an additional 4,000-7,000 UGX (US$1.60-2.80) among those who also received financial education.

    Total savings: All three interventions designed to promote savings increased participants’ total savings. This measure included saving by storing at home, by having another person hold the money, or by buying durable goods that could later be sold, in addition to savings held at a formal bank. In contrast to the administrative bank data, these results did not show that financial education and account access work together to promote savings, but rather that each approach can encourage increased savings on its own.

    Income: Individuals in all three treatment groups reported earning 10-15 percent more income than individuals in the comparison group. However, researchers were unable to determine whether this effect resulted from individuals working more in order to increase their savings or from individuals using savings to make investments that generated income.

    Are financial education and formal savings accounts complements or substitutes in the medium to long-term? Do the impacts on behavior and income persist over time? What are the mechanisms underlying the increase in earned income? To answer these questions, a follow-up of this evaluation three years after the commencement of the intervention is currently being conducted by IPA in Uganda, under the Financial Capability Research Fund. Results forthcoming.


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

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

    Informative vs. Persuasive Advertising of Savings Products

    Policy Issue:

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

    Context of the Evaluation:

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

    Description of Intervention:

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

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

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

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

    Results and Policy Lessons:

    Results forthcoming. 

    Smoothing the Cost of Education: Primary School Saving in Uganda

    Even when there are no official school fees, the financial burden of purchasing uniforms, books, and other school supplies prevents low-income students from remaining in school. In Uganda, researchers tested whether a school-based savings program improved academic performance and reduced dropout rates by enabling students and their families to save for school-related expenses. A version of the program that labeled savings for educational purposes, rather than fully committing money to educational expenses, increased the amount students saved, expenditures on educational supplies, and test scores.
    Policy Issue:
    Although many countries in Sub-Saharan Africa have close to universal primary school enrollment, many students drop out before completing primary school or fail to continue to secondary school. While children drop out for a number of reasons, financial concerns are often an important factor. Even when governments eliminate school fees, there are still many costs associated with attending school. Providing basic school supplies such as uniforms, pens, pencils, and workbooks is often a significant challenge for low-income families. Furthermore, these families may lack access to formal savings services, making it difficult to set aside money for education. Even when families do have some savings, there is no guarantee they will use the money for educational expenditures. This evaluation assesses the impact of a school-based savings program that aims to encourage students and their parents to save for educational expenses.
    Context of the Evaluation:
    Uganda’s primary school enrollment rates have greatly increased since the government began providing free universal primary education. Retaining pupils, however, is more difficult and as few as 32 percent of children entering primary school complete all seven grades. While the government covers the cost of teachers and schools, many Ugandan primary schools require uniforms, and families are responsible for providing school supplies such as stationary and workbooks. The financial strain of buying these supplies is often too high for the family to sustain, and is cited as a major reason for children dropping out of school.
    Description of the Intervention:
    Researchers partnered with the Private Education Development Network (PEDN) and FINCA Uganda to implement and test the “Super Savers” program in public primary schools. Children in grades five through seven, the final three years of primary school, were given the opportunity to deposit money into lockboxes on a daily or weekly basis. The money was deposited into the school’s bank account at the end of each trimester. The bank accounts did not earn interest. At the beginning of the next trimester, bank representatives returned to the school to disburse the funds. On the day the funds were paid out, PEDN organized a small market at each school where students could purchase school supplies or school services such as practice exams or tutoring sessions.
    Schools were randomly assigned to have students’ savings returned in one of two ways:
    • Voucher payout: students received their savings in the form of a voucher that could only be used to buy supplies or school services at the market set up at the school. This created a binding commitment to spend savings on educational expenditures.
    • Cash payout: students received their savings in cash, which meant they could spend the funds either at the market set up at the school or however else they chose. 
    Students were notified of the kind of payout they would receive at the beginning of the program. There were 39 schools in each group, and an additional 58 schools served as a comparison group  received no savings account.
    Half of the schools in each payout group were also randomly assigned to receive parent outreach, in which workers from PEDN hosted a workshop for sixth- and seventh-grade parents to describe the various ways they could support their children’s education and to promote the savings program as a tool to help families finance school expenditures.
    Results and Policy Lessons:
    Researchers found that students deposited significantly more when their savings were returned in cash, rather than vouchers. On average, students in schools that received cash payouts deposited between 2,200 and 2,340 Ugandan shillings, while the average student who received voucher payouts deposited between 1,120 and 1,180 shillings.
    The purpose of the voucher payouts was to commit students to spend their savings on educational expenses. Cash payouts, on the other hand, imposed no restrictions on the use of savings, but did provide a weak commitment to spend savings on educational expenses by basing the savings program in schools and timing payouts to correspond with markets for school supplies. This weaker commitment may have appealed to students who value flexibility on how to spend their savings, while the voucher treatment’s stronger commitment may have discouraged them from saving.
    When combined with parent outreach, students who received cash payouts were significantly more likely to have a complete set of school supplies. They also had test scores that were 0.11 standard deviations higher than the comparison group. There were no significant positive effects on school supplies or test scores among students who received cash payouts without parent outreach or among students who received vouchers, with or without parent outreach. These results suggest that combining cash payouts from savings accounts with parental outreach can lead households to spend savings on education and improve student learning.

    Psychology of Savings: Commitment Savings Programs in the Philippines

    Researchers asked if sending regular text messages to clients reminding them to save encouraged Filipino account holders to increase their balances.

    Policy Issue

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


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

    Description of Intervention

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

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

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


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

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

    The Impact of Smartcard Electronic Transfers on Public Distribution

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

    Motivating Take Up of Formal Savings

    Policy Issue:

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

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

    Context of the Evaluation:

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

    Details of the Intervention:

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

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

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

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


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

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

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

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

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

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

    Poor people in low-income countries often exhibit a low demand for formal financial services. Is that due to limited financial literacy, or to the high cost of accessing such services? In this study in Indonesia, researchers measured household financial literacy and its impact on demand for financial services. Participants who had received a standard financial literacy training program were no more likely to open a bank account than those who were not offered the program. In contrast, small financial subsidies worked: an offer of a $14 reward (relative to a $3 reward) significantly increased the share of households opening a formal savings account.

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


    Financial Literacy and Privatized Social Security in Mexico

    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.

    Savings, Subsidies and Sustainable Food Security in Mozambique

    When smallholder farmers see how fertilizer increases their yields, they may continue using it. In this study in Mozambique, where very few farmers use agricultural inputs, researchers evaluate if giving farmers fertilizer subsidies encourages them to continue using fertilizer when subsidies run out. This study also measures the impact of coupling the subsidies with different types of savings accounts. Do subsidies, savings accounts, a combination of both, or none of the above, lead farmers to invest in their farms, grow more food, and earn more income?

    Policy Issue:

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


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

    Description of Intervention:

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

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

    Treatment Groups:


    No savings offered

    Offered regular interest rates

    Offered individual savings with 50% match

    Offered group savings with match

    Received voucher for fertilizer

    Treatment Y-0

    Treatment Y-1

    Treatment Y-2

    Treatment Y-3

    Did not receive voucher for fertilizer

    Treatment N-0

    Treatment N-1

    Treatment N-2

    Treatment N-3

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

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

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


    Results forthcoming.

    For more on Michael Carter's research, click here.

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

    Policy Issue:

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

    Context of the Intervention:

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

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

    Description of the Intervention:

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

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

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

    Results and Policy Lessons:

    Results forthcoming.

    Strategic Household Savings in Kenya

    How important are differences of opinion within the household for making financial decisions? In this study, married couples in rural Kenya were given the opportunity to open joint and individual bank accounts at randomly assigned interest rates. Researchers assessed if couples with different preferences worked together to save in the highest return account, or if these differences led to poor financial choices. Results indicated when savings preferences in the household diverged, individuals were more likely to prefer individual accounts, and made less efficient financial decisions. 

    Policy Issue:

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


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

    Description of Intervention:

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

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

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


    Responses to Experimental Interest Rates

    All couples responded robustly to the experimental interest rates. However, those couples with badly aligned savings preferences (the “poorly matched”) were more than twice as likely to save in individual accounts and 34 percent less likely to save in joint accounts. Furthermore, poorly matched couples were insensitive to relative rates of return between the three different accounts on offer. In contrast, those couples who were well matched on savings preferences responded robustly to relative rates of return. Consequently, poorly matched couples sacrificed at least 52 percent more potential interest rate earnings when compared to their well-matched peers.

    Responses to the Information Sharing Intervention

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

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

    To learn more about this Simone Schaner's research, click here

    Simone Schaner

    Microfinance Repayment Schedules in West Bengal, India

    Most microfinance institutions follow a rigid contract model: clients repay loans in weekly installments beginning shortly after disbursement. Researchers tested two features of these contracts, repayment frequency and the time of the first repayment, to determine if characteristics of the loan contract affect borrowers’ repayment behavior and the types of investments they make. They found that less frequent repayments did not increase defaults. A two-month grace period before beginning repayment raised the default rate slightly, but allowed entrepreneurs to invest more in their businesses, resulting in long term economic gains.

    Policy Issue: 

    Most microfinance institutions (MFIs) structure their credit contracts in a similar way: clients meet in groups and repay loans in weekly installments beginning shortly after disbursement. The Grameen Bank, one of the first and best-known MFIs, established this model in Bangladesh in the 1970s, and it has since become the classic model of micro-lending in many countries. Group lending and weekly collection of repayment installments are widely seen as the key features of microfinance that reduce default risk, making lending to the poor financially viable. Repayment at weekly meetings, MFIs argue, imposes fiscal discipline, helping clients form repayment and savings habits. Initiating repayments immediately likewise imposes discipline and reduces the likelihood that a client will take the money and run. In addition, the classic repayment schedule increases interactions with loan officers, which may help build trust between clients and banks.

    Yet, there may be advantages to offering more flexible repayment schedules for the lenders as well as the borrowers. Collecting weekly installments is costly for MFIs. If MFIs can lower costs by reducing the frequency of repayments, they may be able to lower interest rates, scale up operations, and reach additional clients in remote or previously underserved locations. Early initiation of repayment may reduce the amount entrepreneurs invest in their businesses, since they often set aside a portion of the loan for immediate repayment. As a result, they may be less likely to invest in raw materials or inventory, purchases that have high returns in the long run but are risky because they tie up cash in the short run. Despite the potential to better meet the needs of MFIs and their clients, there is limited evidence on the effects of deviating from the traditional microfinance contract design.

    Context of the Evaluation: 

    Village Financial Services (VFS) is an MFI operating in peri-urban neighborhoods of Kolkata, India. Most of the loans VFS offers resemble traditional micro-credit contracts, made to groups of women and repaid weekly. Access to credit or savings, both formal and informal, is limited in these neighborhoods, and VFS faces almost no competition from other lenders. VFS works exclusively with women, most of whom have a household income of less than two dollars a day. There is a high rate of business ownership, and selling and tailoring saris are common occupations.

    Details of the Intervention: 

    Researchers examined variations microfinance contract design in partnership with VFS. They compared weekly and monthly repayments in one evaluation, tested a two-month grace period before initiating repayment in another, and expanded the repayment frequency experiment to evaluate the effect on financial stress in a third.

    Monthly repayments: Researchers examined how repayment frequency affected default and late payment rates. VFS offered loans of Rs. 4000 (about US$100) with a fixed Rs. 400 interest payment to 1026 first-time borrowers in 100 groups. These were randomly assigned to one of three different repayment schedules: 

    1. Standard weekly repayment: 30 groups repaid Rs. 100 every week for 44 weeks

    2. Monthly repayment: 38 groups repaid Rs. 400 every month for 11 months

    3. Monthly repayment with weekly meetings: 32 groups repaid monthly, but met with a loan officer every week for the first three months

    Two-month grace period: Researchers examined how delaying the first payment until two months after disbursing the loan affected investment in businesses and loan repayment. Eight hundred and forty-five clients in 169 loan groups received loans ranging from Rs. 4000 (about US$90) to Rs. 10,000 (about US$225). The groups paid the same amount in interest but were assigned to two different repayment schedules:

    1. Standard schedule: 85 groups began repayment two weeks after receiving the loan

    2. Grace period: 84 groups began repayment two months after receiving the loan

    Monthly repayments with a focus on financial stress: Researchers replicated the repayment frequency experiment and included additional questions on levels of financial stress. Seven hundred and forty clients in 148 groups were assigned to weekly or monthly repayment frequencies. A subgroup of 213 clients was surveyed by cell phone every 48 hours for seven weeks, and they were asked questions about their confidence in their ability to repay the loan, their anxiety about loan repayment, arguments with their spouse about finances, and the amount of time they spent thinking about loan repayment.

    Results and Policy Lessons: 

    Taken together, the results from these evaluations indicate that MFIs can improve upon the standard contract model that uses weekly repayment beginning shortly after disbursal.

    Monthly repayments: Switching from weekly to monthly repayments did not affect the repayment rate. There was no difference in the default rate or the frequency of late payments between groups.

    Two-month grace period: The grace period increased clients’ economic activity. Grace period clients invested Rs. 364.9 (roughly 6 percent) more in their businesses compared to regular clients and were twice as likely to start a new business. After three years, these clients reported weekly profits that were 57.1 percent higher than the comparison group mean of Rs. 1,587 per week and household incomes that were 19.5 percent higher than the comparison group mean of just over Rs 20,000 per week. Grace period clients also reported roughly 80 percent more business capital. However, grace period clients were more than three times more likely to default than regular clients, which is consistent with the theory that the grace period allows for riskier investments that, if successful, have a higher rate of return.

    Monthly repayments with a focus on financial stress: Clients with monthly repayments were no more likely to default in the short term, and they scored 45 percent lower on an index of financial stress than clients with weekly repayments. Compared to weekly clients, monthly clients worried about repayment 51 percent less often, they were 54 percent less likely to lack confidence in their ability to repay, and were 60 percent less likely to spend significant time thinking about repayment. Monthly clients also reported investing more in their businesses and having higher income, which suggests that the flexibility encouraged more profitable investments.

    These results suggest that the microfinance sector can gain by moving away from the traditional contract model. Switching to lower frequency repayment schedules could allow MFIs to save on the costs of repayment collection, with no added risk of default, while also reducing clients’ stress levels. Although offering a grace period before beginning repayment increased the default rate, it allowed entrepreneurs to make larger investments in their businesses, resulting in longer term economic gains. This is an area with large potential for further research, and the researchers are planning to conduct follow-up surveys to determine the long term effects of these contract modifications on participants’ business outcomes.

    Voluntary Financial Education in Mexico: Evidence on Limitations and Effects

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

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

    Policy Issue:

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

    Context of Evaluation:

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

    Description of Intervention:

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

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

    Results and Policy Lessons:

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

    Incentives to Save in Ghana

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

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

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

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

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

    Responses to Degree of Control over Remittances in El Salvador

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

    Policy Issue:

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

    Context of the Evaluation: 

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

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

    Details of the Intervention:

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

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

    Results and Policy Lessons:

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

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

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


    Improving Loan Repayment through Positive Incentives in Uganda

    Policy Issue: 

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

    Context of the Evaluation: 

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

    Details of the Intervention: 

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

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

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

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

    Results and Policy Lessons: 

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

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

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

    Informal Finance - Mapping Global Savings and Lending Practices

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

    Policy Issues:

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

    Informal Moneylending

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

    Informal Savings

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

    Context of the Evaluation:

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

    Details of the Intervention:  

    Informal Moneylending

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

    Informal Savings

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

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

    Results and Policy Lessons:

    Results Forthcoming.

    Group vs. Individual Micro-Lending in Peru

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

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

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

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

    Evaluating Village Savings and Loan Associations in Uganda

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

    Policy Issue:

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

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

    Context of the Evaluation:

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

    Description of the Intervention:

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

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

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

    Results and Policy Lessons:

    Results forthcoming.  

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

    Microcredit for Women in Mexico

    Few studies have rigorously quantified the impact of microcredit loans. IPA partnered with Compartamos Banco to evaluate the social and economic impact of their principal village banking loan product by randomizing which new communities the bank entered. After an average of 26 months later, economic impacts were modest, with increases in business activity but not in profits or household income. The data show few negative economic effects, and increased happiness and well-being for the group with access to loans. However, lower income individuals and first-time borrowers reported lower well-being outcomes, including higher stress. Future research and policy would benefit from better understanding the particular effects of access to credit for these individuals.
    See the full results in an executive summary here and the full paper here (PDFs).
    Policy Issue:
    Microcredit is one of the most visible innovations in poverty alleviation programming in the last half-century, and in three decades it has grown dramatically. Now with more than 200 million borrowers,1 microcredit has been successful in bringing formal financial services to the poor. While microcredit has received praise for its potential to lift clients out of poverty, this recognition is often based on generalizations about the microfinance movement or on simple comparisons of borrowers and non-borrowers. Attempts to determine the true impact of microcredit programs are complicated by the fact that the choice to become a microfinance borrower may itself be a sign of increased ambition and ability to improve one’s economic situation. To date, few studies have rigorously quantified the impacts of microcredit loans on the beneficiaries and their communities. 
    Context of the Evaluation:
    The study took place in the northern Mexican state of Sonora in the cities of Nogales, Caborca, and Agua Prieta, as well as surrounding towns. Although agriculture, mining, and wage labor in factories along the U.S. border provide some employment opportunities, most people are underemployed and strive to make ends meet through various informal employment opportunities. Many residents lack the income or collateral to qualify for loans from traditional bank services.
    In 1990, Compartamos Banco began offering credit in an effort to promote economic development by spurring the growth of micro-businesses. It converted to a commercial bank in 2006 and became a publicly traded company in 2007. Today, Compartamos Banco is the largest microfinance institution in Mexico with branches in every state and over two million borrowers. Crédito Mujer, the principal village banking product of Compartamos is offered to groups of 10 to 50 Mexican women over the age of 18 who either have some kind of business or would like to use the loan money to start one. Compartamos does not verify whether individuals are currently engaged in an income-generating activity or planning to start one once given the loan, instead they depend on other group members to screen out uncreditworthy women.
    Description of the Intervention:
    This project evaluates the social and economic impact of access to credit, taking advantage of Compartamos’ decision to offer Crédito Mujer in the north of Sonora, where it had not previously offered loans. Researchers divided the study region into 250 geographic clusters and then randomly assigned half to a treatment group and the other half to a comparison group.  In treatment clusters, Compartamos began offering loans in April 2009: loan officers targeted self-reported female entrepreneurs and used a variety of channels, including door-to-door promotion, radio ads, promotional events, and distributing fliers, to promote the Crédito Mujer product. Crédito Mujer loans in the sample ranged from 1,500 pesos to 27,000 pesos (US$125 to US$2,250), with first-time borrowers qualifying for lower amounts. The annualized interest rate for Crédito Mujer was approximately 110 percent in 2009 and borrowers repaid the loans over 16 weekly payments. In comparison group areas, Compartamos did not begin offering credit until almost 3 years later. 
    Baseline and endline data is from socioeconomic surveys administered to women 18-60 who had or were likely to start a business in both treatment and comparison areas. Researchers conducted follow-up surveys between 2011 and 2012, an average of 26 months after Compartamos entered the treatment areas.
    Impact on Loan Take-Up and Financial Access: Women in treatment areas reported taking out more loans and borrowing more from Compartamos than their peers in comparison areas. Around 17 percent of women in treatment areas borrowed from Compartamos, compared to 5.8 percent of women in comparison areas. There was no evidence that increases in borrowing from Compartamos was offset by decreases in borrowing from other lenders.
    In areas where Compartamos offered Crédito Mujer, participation in informal savings groups expanded to 6.2 percent of the treatment group, a 1.1 percentage point increase over those who did not receive a microcredit offer. Researchers theorized that this may be due to Compartamos loans not fully meeting credit demands, or potentially a result of some borrowers needing to find credit elsewhere to pay off Compartamos debt. 
    Impact on Business Outcomes: Expanded credit access increased the size of some existing businesses: in the treatment areas, there was a 0.08 percentage point increase in using loans to grow an existing business, and in the two weeks before the household survey these businesses saw a 27 percent increase in revenue and a 36 percent increase in expenditures, respectively. However, there were no increases in new business ownership or profits.
    Impact on Household Finances and Well-Being: While there were no significant changes in household income, households in treatment villages were able to avoid selling assets in order to pay down debt more than their peers in comparison villages, maintaining a more stable level of economic well-being. Expanded credit access had generally positive effects on well-being: depression fell, trust in others rose, and female household decision power increased.
    There was no strong evidence that credit expansion caused a significant number of people to experience negative microcredit effects, such as asset sales to counter debt traps.While researchers found little evidence to support microcredit’s negative effects, they did observe that microcredit generally had a larger effect on households that already enjoyed relatively high business revenues, profits, and household decision-making. Microcredit offers also improved happiness and increased trust in people more for women who already reported higher levels of happiness and trust. 
    Overall, increased access to microcredit allowed some existing businesses to expand, and enabled customers to use formal financial services to manage their cash flows over time, although it did not increase their business profits or prompt people to start new businesses. Further research is needed to explore potential screening criteria or effective guidance to first-time borrowers.
    [1] CGAP. “Financial Inclusion” http://www.cgap.org/topics/financial-inclusion. Accessed: 2015. 01.20
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