Text Message Reminders and Incentives to Save in Bolivia

Policy Issue:

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

Context of the Evaluation:

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

Description of Intervention:

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

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

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

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

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

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

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

Results and Policy Lessons:

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



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

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

Policy Issue:

The recent and rapid growth of the microfinance industry in the developing world can be attributed, in large part, to the achievement of impressively high loan repayment rates among microborrowers. However, although final default rates are low amongst microfinance borrowers, late repayment is a much larger issue. While microborrowers have surprised skeptics with their ability to repay loans, microfinance institutions (MFIs) and commercial banks lending to the poor still struggle with relatively high transaction costs and low rates of return. All types of MFIs, from strictly for-profit to mission-oriented, would benefit from inexpensive mechanisms for boosting timely repayment rates and lowering administrative costs per borrower. One such solution may be automated loan repayment reminders sent via text (or SMS) on mobile phones. This study tests the effectiveness of one such intervention in improving repayment and reducing default.

Context of the Evaluation:

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

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

Description of Intervention:

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

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

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

Results and Policy Lessons:

Results forthcoming. 

Saving for Health Expenditures in Kenya

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

Policy Issue

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

Context of the Evaluation

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

Details of the Intervention

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

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

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

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

Results and Policy Lessons

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

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

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

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

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

 

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

    Reducing Barriers to Saving in Malawi

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

    Context:

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

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

    Description of Intervention:

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

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

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

    Results and Policy Lessons:

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

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

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

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

     


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

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

    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.

     

    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
     

    Examining the Effects of Crop Price Insurance for Farmers in Ghana

    Policy Issue:
    Many small-scale farmers in the developing world face significant income uncertainty, and rural farmers who live from harvest to harvest don’t have much room for error. Variables beyond the farmers’ control, such as fluctuating crop prices, can make a significant difference in how much a family earns for the year.  Farmers may be unwilling to take on additional risks by borrowing and making long-term investments due this uncertainty. This reluctance is thought to contribute to the decision of many farmers not to invest in technologies such as hybrid seeds, fertilizer, or irrigation that could potentially improve crop yields. Many lenders are also extremely wary of extending credit to farmers, fearful that they will inherit the risks inherent to farming. Crop price insurance could help solve this problem, reducing the risk to farmers and providing them with encouragement to make investments in their farms. Lenders, too, may feel more confident in lending to farmers with greater income certainty, facilitating even more capital investments.
     
    Context of the Evaluation:
    In Ghana, 50 percent of the rural population lives in poverty. In the Eastern Region where Mumuadu Rural Bank (MRB) operates, an estimated 70 percent of households make a living in the agricultural sector, but agricultural loans make up only 2 percent of the bank’s loan portfolio. Focus groups with maize and eggplant farmers in the area revealed that farmers were hesitant to borrow for fear that fluctuations in crop prices could force them to default. Rainfall fluctuations, typically an important source of risk for farmers, are not a great concern in this part of Ghana. The prices offered for traded crops, however, do fluctuate greatly. Information gathered in baseline surveys suggested that there was a potential but untapped market for crop price insurance: farmers in the area served by MRB expressed that they would be willing to pay to guarantee a certain minimum crop price. Despite this encouraging baseline finding, banks and insurance providers face the challenge that insurance is not a commonly understood concept among farmers in the region.
     
    Details of Intervention:
    Researchers developed an agricultural loan product in coordination with MRB that had an insurance component that partially indemnified farmers against low crop prices. Specifically, if crop prices at harvest dropped below a set price floor (the 10th percentile of historical prices for eggplant and the 7th percentile for historical maize prices), the bank would forgive 50 percent of the loan and interest payments. Borrowers were not required to pay any premium for the insurance product. The goal of incorporating insurance into the loan product was to reduce farmers’ risk in borrowing to invest in agriculture inputs. The intervention targeted maize and eggplant farmers in particular because the crops are both commonly grown in the region and subject to volatile (but historically well documented) prices.
     
    Standard Mumuadu procedure is to invite farmers to meet in a group with Mumuadu employees to discuss the bank’s financial services, and to encourage farmers to come to a branch to apply for a loan. The average loan size is approximately US$159, which represents a significant change in cash flow for the borrower. For this project, Mumuadu employees approached community leaders to obtain a list of all maize and eggplant farmers in the village. The same community leaders then invited farmers to attend one of the bank’s information sessions. Farmers on the list were randomly assigned to one of four groups, each of which received a variation on the Mumuadu marketing pitch. The four groups were:
    1. Farmers who were offered the standard Mumuadu loan product;
    2. Farmers who were offered the Mumuadu loan product with complimentary crop price insurance;
    3. Farmers who received financial literacy training, before being offered the standard Mumuadu loan product;
    4. Farmers who received financial literacy training, before being offered the Mumuadu loan product with complimentary crop price insurance.
    Prior to the marketing of the loans, Mumuadu employees conducted a survey of the farmers, gathering information relating to their credit history, risk perception, financial management skills, and cognitive ability. An analysis of baseline data, bank administrative data, and a followup survey that focused on farmer investment decisions allowed researchers to draw conclusions on the effect of crop price insurance on borrower behavior and agricultural investment in Ghana.
     
    Results:
    Take up of loans among farmers was quite high, with 86 percent of farmers in the comparison groups choosing to borrow and 92 percent of farmers in the treatment groups taking out a loan.  This high take up across both treatment and control groups made an analysis of the features that predicted take up difficult.  In fact, the researchers found no systematic difference across the treatment and control groups when considering which features predicted borrowing. Overall, those who borrowed tended to be older, with higher scores on tests of cognitive ability.  They were also more likely to have a record of previous borrowing.  
     
    Apart from predictors of borrowing, researchers were interested in whether crop price insurance changed farmers’ investment behavior. There is evidence that it did, but not overwhelmingly. The small sample and high take up across both groups may have played a role in this outcome. Farmers offered the insurance spent 17.9 percentage points more on agricultural chemicals (mostly fertilizer) than those who had not been offered the product. There was also a trend towards growing more eggplants and less maize among these farmers. Farmers offered the insurance were also between 15 and 25 percent more likely to bring their produce to markets rather than sell to brokers who come to pick up the crop. Anecdotally, it is believed that the so-called “farmgate” sellers offer guaranteed purchase contracts, but at lower prices locked in before harvest. Selling in the market, on the other hand, is a potentially more profitable but riskier option.  
     
    There are a number of potential reasons why the researchers did not find large effects of the crop price insurance product on either or take up or investment, and further research in necessary to determine their roles. It is uncertain, for example, whether farmers truly understood the benefits of the insurance. Farmers may also have been reluctant to make long term investments changes before an insurance product demonstrates an established presence in the area. Alternatively, crop price uncertainty may not be as important of an indicator of investment decisions as previously thought. Further research, with a larger sample size, is needed to better understand the roles of risk, financial literacy, and product design in determining microinsurance impact.

    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.

    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.

    Context:

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

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

    Description of the Intervention:

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

    Results and Policy Lessons:

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



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

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

    Group versus Individual Liability for Microfinance Borrowers in the Philippines

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

    Policy Issue:

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

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

    Context:

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

    Description of Intervention:

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

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

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

    Results:

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

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




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

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

     

    Business Education for Microcredit Clients in Peru

     
    Policy Issue:

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

     
    Context of the Evaluation: 

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

     
    Details of the Intervention:

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

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

     
    Results and Policy Lessons:

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

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

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

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

     
    Selected Media Coverage:

    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)

    The Psychology of Debt: An Experiment in the Philippines

    Policy Issue:

    In many developing countries it is common for street vendors or small-scale entrepreneurs to borrow small amounts of money for their working capital at very high rates of interest.  Over time, these interest rate payments can amount to a burdensome proportion of a vendor’s take-home profit. But if vendors saved small amounts of money over time, they may be able to build up a buffer of savings large enough to stop the practice of borrowing money from informal lenders. It is unclear, though, whether vendors may persist in borrowing due to lack of information about the benefits of saving and whether a financial literacy invention could benefit these entrepreneurs.

    Context:

    In urban markets in the Philippines, like the large covered market in Cayagan do Oro, street vendors are prevalent and often borrow from informal moneylenders at high rates of interest. Vendors in this study all ran their own businesses, had a history of indebtedness at interest rates of at least 5% per month over the previous 5 years, and had an outstanding debt of less than 5,000 pesos (US$100). Vendors were included in the study only if they met these conditions and operated a business in or near the public market in Cagayan de Oro.  Vendors most often used their loans to expand or maintain their current businesses.

    Description of Intervention:

    Researchers tested two interventions to help break the cycle of debt. After an initial baseline survey to gather information on history of debt, household consumption and financial literacy, 250 vendors were randomly assigned to one of four groups. They either (1) had their outstanding debt paid off, (2) were given financial literacy training, (3) received both, or (4) received nothing (comparison).

    For the debt payoff intervention, researchers gave respondents money equal to their previously reported debt and had them payoff their outstanding balances (an average of about $47). For the financial literacy intervention, researchers developed a script modeled after Freedom from Hunger’s financial literacy module. Partner staff conducted a single financial literacy session with respondents in small groups of about 16 people that focused on the benefits of savings, the long-term costs of repeated borrowing from moneylenders, the value of planning in advance and saving for large expenses, and the advantages of borrowing from formal lenders (like microfinance institutions or banks) at lower interest rates.

    A set of follow-up surveys were administered after 1 month, 2 months and 3 months and an endline survey was administered between 19 and 21 months after the baseline survey.  The baseline survey was administered in early July 2007 and the endline survey was administered between February and April 2009.

    Results:

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

    See here for a similar study in Chennai, India.

    Savings Account Labeling for Susu Customers in Ghana

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

    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.

    Results:

    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.

    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. 

    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:
    Employee contribution retirement savings plans are common in developing countries, but 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.
     
    Context:
    Chile requires formally employed members of the workforce to contribute approximately 10 percent of their income to a pension account. However, contribution rates remain low; people may not be formally employed, may avoid contributing, 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. Researchers will be working with the Superintendencia de Pensiones in Chile to implement an intervention in the metropolitan region of Santiago targeting low-income, working-age individuals.
     
    Description of Intervention:
    The Superintendencia de Pensiones in Chile is installing self-service kiosks in eight government offices in the country’s Metropolitan Region. 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 about account balances, transaction records, and other information will allow the researchers to measure impacts on labor force participation and savings behavior over the next five years.
     
    Results:
    Forthcoming.
     

    Developing Sustainable Products for the Financially Underserved

    Americans who have difficulty formally accessing credit from conventional financial institutions often turn to costly products such as high-interest pawn and payday loans or bank account overdrafts. Researchers in this study have partnered with a community development credit union to evaluate the demand for safe, affordable, and transparent small dollar loans , and the impact of behaviorally-informed product features on the financial capability of credit union members.

    Policy Issue:

    Many individuals in the United States have difficulty accessing credit from conventional financial institutions, or find that existing product offerings do not adequately meet their needs. Some turn to costly alternative forms of credit – including high-interest pawn and payday loans or bank account overdrafts – witheffective annual interest rates frequently exceeding 300 percent.1  Community development credit unions have a strong interest in meeting the demand for affordable small personal loans with products that are financially sustainable for borrowers and lenders alike.

    This research seeks to advance the field of financial capability and provide insights for practitioners and researchers seekingsustainable and responsible methods of extending credit to low-income individuals looking to borrow in small amounts.

    Context of the Evaluation:

    Twenty-six percent of California’s population conducts some or all financial transactions outside of the mainstream banking system, according to the FDIC, and California’s concentration of alternative financial service providers (e.g. check cashers, payday lenders, and pawn shops) is approximately double the US average.2 Classified as a “permissive state” for payday lending by the Pew Charitable Trust, California permits effective annualized interest rates as high as 459 percent, with an estimated 5 percent of its population using payday loans. 3 4

    Self-Help Federal Credit Union, the partner in this study, is a California-based community development credit union offering loans and financial services to underserved communities.5 Self-Help estimates that 75 percent of borrowers in this study will be Latino and 75 percent will earn less than 80 percent of the median income of California’s Bay Area and Central Valley.

    Details of the Intervention:

    The study will rigorously evaluate whether behaviorally-informed savings and repayment features can nudge low-income borrowers to pay down their loan balances more quickly, make a transition towards saving, and improve their financial well-being. This study focuses on two new products targeted at advancing financial capability: the Just Right $300-$1000 loan, and the Just Right $300-$500 line of credit, both of which Self-Help launched in March 2014.

    The study will take place in Self-Help’s 17 branches in California and three branches in Chicago. The new products will be marketed to Self-Help’s Community Trust division credit union members and the check cashing clients of Self-Help’s Prospera branches. Self-Help aims to open 2,000 loans and lines of credit during the 15-month enrollment period.

    The study will consist of two key components: a non-randomized evaluation of alternative underwriting strategies and loan sustainability, and a randomized evaluation of add-on savings and payment features.

    The randomized component of the study will evaluate three new product features that accompany the loan and the line of credit:

    1)    Savings Plus, an offset savings feature added to Just Right loans to encourage saving while borrowing in exchange for an interest rate rebate on deposits;

    2)    Pay Yourself Back,a savings feature added to Just Right loans to encourage saving after borrowing;

    3)    FastPay, an accelerated repayment feature added to Just Right lines of credit to allow borrowers to raise their minimum monthly payment in order to pay down their balance at an accelerated rate.

    The features are designed to build trust, promote success, and create opportunity by helping consumers use credit products safely; specifically, they leverage behavioral tools such as habit formation and pre-commitment to help clients improve their financial health. All customers who sign up for a Just Right loan or line of credit will be randomly assigned to either a feature or comparison group, with approximately 333 clients per group.

    Researchers will evaluate the impact of the products on loan repayment rates, household savings rates, and credit report indicators over a 1- to 2-year time horizon. Additionally, data on baseline behavioral characteristics of borrowers will be used to assess whether borrowers with certain traits – such as a high level of present bias or a tendency towards procrastination – benefit differentially from the add-on features.

    Results and Policy Lessons:

    Results forthcoming. 



    [1] Center for Responsible Lending (2012).  “Fast Facts – Payday Loans.” http://www.responsiblelending.org/payday-lending/tools-resources/fast-facts.html

    [2] Federal Deposit Insurance Corporation (2012). “FDIC 2011 National Survey of Unbanked and Underbanked Households.” https://www.fdic.gov/householdsurvey/2012_unbankedreport.pdf

    [3]The Pew Charitable Trusts (2014). “State Payday Loan Regulation and Usage Rates.”

    [4] Consumer Federation of America. “California State Information.”

    [5] Self-Help Federal Credit Union (2012). “Who Are We?”

    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.

     


    [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. 

    Evaluating the Impact of Business Registration in Malawi

    Millions of people in developing countries work in the informal sector, and in many countries there are significant barriers to registering one’s business and entering the formal sector. In this study, researchers are carrying out a randomized evaluation in Malawi to measure the impact of formalization on the business performance of micro-, small and medium enterprises (MSMEs).

    Policy Issue:

    Businesses in the informal sector typically grow more slowly, have poorer access to credit, and employ fewer workers than those in the formal sector.Household and business resources also tend to be strongly intertwined for those in the informal sector, resulting in the depletion of working capital. Bringing more businesses into the formal sector, which begins with business registration, may have numerous benefits, such as the ability to open a business bank account, acquire an export license, access business bank loans, and become eligible for government programs. This study assesseswhether becoming formal improves enterprise performance. It aims to determine if the benefits of business registration outweigh the costs, if both male and female-owned enterprises gain equally from registration, and if business bank accounts add value to formalization by helping business owners separate business from household money.

    Context of the Evaluation:

    In Malawi, the informal sector represents 93 percent of the non-farm small-scale enterprises.[1] Businesses in Malawi have faced significant barriers to formalization in the past. Malawi is streamlining its registration process to increase the registration rate amongst MSMEs. The Business Registration Impact Evaluation (BRIE) is a direct response to the interest of the Government of Malawi in evaluating whether or not business registration improves business performance. If a positive impact is detected in this study, the government plans to use the results of this study to promote registration. If no impact is identified, it plans to identify the corresponding bottlenecks that affect enterprise performance.

    Details of the Intervention:

    This study evaluates the impact of formalization—through business registration, tax registration, and business savings accounts—on enterprise performance.Participants consist of 3,000 informal MSMEs located in Blantyre and Lilongwe, the major commercial cities in Malawi. The study is being conducted over a four year period.

    All 2,250 firms in the treatment groups are being offered free registration with the Department of the Registrar General (DRG) – which is the main step to firm formalization in Malawi. A random group of 300 firms is also being offered to register for taxes and obtain a tax identification number from the Malawian Tax Authority, allowing the researchers to test the additional value, if any, of this step in the formalization process. The remaining 1,200 firms in the treatment group were invited to information sessions by a local bank on the benefits of separating business from household money and offered business savings accounts. In short, the firms were randomly assigned to one of the following groups:

    1)    Offered free business registration only (750 firms)

    2)    Offered free business registration and tax registration (300 firms)

    3)    Offered free business registration, invited to information sessions, and offered business savings accounts (1,200 firms)

    4)    Comparison group – no intervention (750 firms)

    The team is collecting extensive data over a four-year period to estimate the impact of the various interventions on business expansion, access to finance, and productivity of MSMEs. The outcomes of interest include measures of firms’ financial performance, investments in the business, survival rates, number and skill composition of employees, access to finance, number of customers, and harassment levels.

     
    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.
     

    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.

    Results:

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

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

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

    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.
     
    Results:
    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 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. 
     
    Context:
    The Peruvian Ministry of Development and Social Inclusion operates a conditional cash transfer program called JUNTOS. The program provides a bi-monthly transfer of 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 1 percent of beneficiaries do so through their JUNTOS account. 
     
    Description of Intervention:
    Researchers are conducting a randomized evaluation to explore the impact of allowing JUNTOS beneficiaries to collect their payments though branchless banking agents. In the branchless banking system, local bank agents, typically shopkeepers, serve as deposit and withdrawal points for account holders to access their funds with debit cards. The agent based network will allow the national bank to increase the number of withdrawal points for JUNTOS users, reducing transportation costs and potentially giving users a greater degree of access to their accounts. If this is the case, users may begin to use their account to save more of their JUNTOS payments, making smaller and more frequent withdrawals. 
     
    In order to evaluate the effect of branchless banking, a sample of 60 sub-regional districts, each with approximately 300 JUNTOS beneficiaries, will be randomly assigned to one of three groups. In the first group, branchless banking agents will be established in each district, allowing beneficiaries to access and withdraw funds from their JUNTOS accounts. In the second group, branchless banking agents will be introduced and users will also receive basic financial literacy education and training on accessing their accounts through branchless banking agents. The third group will serve as a comparison group, where branchless banking agents will be introduced only after the twelve-month evaluation period. One year after banking agents are introduced, the researchers will collect information on savings and consumption behavior from household surveys. The study will also incorporate administrative account usage data from Banco de la Nación and the JUNTOS program to examine how beneficiaries use their accounts when they can access them through branchless banking agents.
     
    Results:
    Results forthcoming.

    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. In a broader scope, these institutions aim to improve consumer protection policy and practices in the Peruvian market for financial products and services, particularly by enhancing product disclosure and transparency for credit and savings products.

    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 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. When they visited the institutions­­—which included commercial banks, lending institutions and microfinance institutions.

    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:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2445748

     

    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.

    Surveys: 

    The surveys used are available here in .doc format:

    Baseline Student Survey

    Endline Student Survey

    Aptitude Assessment

    Shop Games

    Results:

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

    Analysis is ongoing, results forthcoming.

     

     

    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.[i][ii] 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.[i] 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 evaluates 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.[iv] From 1981 to 2011, approximately 1.8 million Filipinos migrated overseas—an average of 60,000 departures every year.[v] 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.


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

    [ii]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.

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

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

     

    Dean Yang

    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.
     
    Context:
    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:
    Results forthcoming.

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

    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:
    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/

    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.

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

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

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

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

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

    Using Behavioral Economics to Help Households Reduce Debt

    Researchers designed and piloted a program called Borrow Less Tomorrow (BoLT) that took a behavioral approach to debt reduction, combining an accelerated loan repayment schedule with peer support and reminders. Results from a sample of free tax-preparation clients in Tulsa, United States suggest a strong demand for debt reduction: 41 percent of those offered BoLT used it to make a plan to accelerate debt repayment. The results also offer suggestive evidence that the BoLT package reduced credit card debt.
     
    Policy Issue: 
    A mounting body of evidence suggests that behavioral factors, such as lack of self-control and an inability to remain focused on achieving a financial goal, impede individuals’ ability to accumulate wealth. Most financial products and policy instruments developed to overcome these behavioral issues focus on asset accumulation, such as retirement planning. For many households, however, debt reduction offers a more efficient path than asset accumulation to achieving greater wealth. Nevertheless, the availability of behaviorally-oriented financial interventions to reduce debt is far more limited, and additional research is needed to understand how such debt reduction programs should be structured and how they affect individuals’ financial health. This study is the first known evaluation to apply behavioral economics to debt reduction services.  
     
    Context of the Evaluation: 
    This study took place in 2010 in Tulsa, Oklahoma, a city located in the southern United States. Researchers partnered with the Community Action Project of Tulsa (CAP), an anti-poverty agency that provides a range of social services—including early childhood education, first-time homebuyer’s assistance, and free tax preparation—to low- and moderate-income individuals. The 465 participants of this study comprise individuals who sought tax preparation services from CAP under its Volunteer Income Tax Assistance program. 
     
    The majority of participants in the sample were low-income, with 75 percent reporting a total annual household income of less than US$30,000, which is equivalent to the bottom 31 percent of the national income distribution1. The average individual credit card and auto loan debt of the sample was US$2,447 and US$5,546, respectively, which was low relative to U.S. averages. The mean age of the sample was 44 years and 74 percent was female.
     
    Details of the Intervention: 
    In 2010, researchers developed and piloted a program called Borrow Less Tomorrow (BoLT) to help CAP clients reduce their debt. During tax season (January-April), researchers and CAP staff asked tax preparation clients if they would be willing to complete a financial and behavioral survey in exchange for a US$5 gift card to a local gas station. Among the group that completed the survey, a total of 465 individuals were eligible to participate in the study because they had a positive balance on auto or credit card debt and had expressed interest in reducing their debt. All participants also granted permission for researchers to pull their credit reports on a regular basis to monitor debt payments and financial status. 
     
    Researchers randomly assigned 238 individuals to be offered BoLT (the treatment group), and 227 individuals to not be offered BoLT (the comparison group). For those offered BoLT, the research team explained the program components to the participant and worked to identify a single, suitable debt on which to focus effort (e.g. a debt with a substantial balance and a high interest rate).
     
    BoLT comprised three separate interventions:
    • Planning/Goal Setting: The surveyor used a simple repayment schedule calculator to show the participant how small increases in monthly payments could help dramatically reduce the time and cost to pay off their debt. The participant and surveyor would then establish a realistic repayment plan. In addition to an overall acceleration in repayment, participants were also offered the option to escalate payments every month. For example, a participant could commit to paying US$25 in month 1, US$35 in month 2, and so on to pay off debt at an even lower cost and faster pace.
    • Peer Support: For those participants who agreed on an accelerated repayment plan, surveyors offered the participant the option of selecting one or more peers to be notified if she fell off-track with her repayment commitment. The peer could then offer encouragement (but not financial support) to help the participant regain momentum and reach her repayment goal.
    • Reminder Notices: As a tool to focus participants’ attention on their debt reduction goals, those who agreed on an accelerated repayment plan were also offered the option of receiving a monthly reminder by email or phone to stay on track with their commitments.
    Results and Policy Lessons: 
    Demand for debt reduction support: Overall, researchers found strong demand for behaviorally-motivated debt reduction support. Among those randomly assigned to receive the offer to participate in BoLT, 41 percent signed up for an accelerated repayment plan. Of those who signed up for the plan, 41 percent signed up to escalate payments every month. Conditional on take-up of BoLT, 27 percent accepted the offer to receive peer support and 81 percent accepted the offer to receive monthly reminder notices. Households living in extreme poverty (i.e. incomes less than US$10,000 per year) were less likely to sign up for BoLT, but there is no evidence that take up differed by whether a participant demonstrated more or less self-control or attention paid to her finances.
     
    BoLT Performance: By monitoring credit reports, researchers found that 51 percent of BoLT participants were on-schedule with their repayment plan after 12 months in the program. The study demonstrated weak evidence that those who were offered the opportunity to participate in BoLT achieved a lower overall level of debt after one year than the comparison group, which did not receive the BoLT offer. However, many of the estimated differences in debt reduction between the treatment and comparison groups were not statistically significant. The researchers found no evidence of a difference in credit scores, payment delinquencies, or credit line use between the treatment and comparison groups.
     
    While noting that these pilot results should be considered with caution due to limited sample size and the use of just a single program design, the researchers found strong demand for debt reduction products and services, but only suggestive evidence that this product led to improved financial well-being for participants. They posit that debt reduction products and services could be used by businesses and financial advisors to enable employees and clients to achieve their financial goals. 
     
    [1] U.S. Census Bureau. http://www.census.gov/hhes/www/cpstables/032011/hhinc/hinc01_000.htm Accessed 1 July 2013.
     

    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.

    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.

    Alarm Boxes: Combining Commitment and Reminders

    Policy Issue: 

    In addition to the lack of banking infrastructure, many other constraints limit the availability and effectiveness of savings services for the poor. There has been very little research to map the demand for services so that products can be designed with clients’ needs and cash-flow in mind. These constraints in the supply and demand for savings service point to the need for specialized market research and product development efforts.  Efforts to unveil the actual needs and perceptions of low-income clients to better devise products and incentives for them may result in more rigorous savings behavior.  

    The proposed intervention is based on the idea that individuals do not foresee events in the future and thus do not save for those unexpected needs in the present. Furthermore, individuals lack a safe place to save money temporarily and require a means to curb impulsivity. As a result, mechanisms to remind clients in a frequent and timely manner to save now, such as programmed alarms and lockboxes that do not allow for easy access to these savings, may improve the ability of clients to take future needs into account, stall unnecessary consumption in the present, and consequently change savings behavior.

     
    Context of the Evaluation: 

    Although the gross domestic savings rate in Bolivia in 2009 averaged about 20 percent of the country's GDP, on par with its neighbors (Peru at 26 percent and Ecuador at 21 percent), Bolivia’s savings rate has been historically much lower than those of other countries in Latin America, and access to savings services is severely constrained among the poor.1 Given the predominance of microfinance institutions (MFI) in the financial services sector in Bolivia, the responsibility of generating savings products and services for the poor generally falls on these institutions. Increasingly, due to the commercialization of the sector in Bolivia, the capturing of savings has become a major driving force behind MFI sustainability and growth.

    Ecofuturo is a for-profit Bolivian microfinance institution that operates in many regions of Bolivia. Ecofuturo offers an array of individual credit, insurance, and savings products. These savings products range from basic non-programmed accounts to more complex commitment accounts that require the client to meet deposit quotas in order to qualify for rewards, such as higher interest rates. Working with Ecofuturo, IPA developed an innovative lockbox with a daily alarm that can only be turned off by depositing money. The lockbox acts as a psychological barrier to impulsivity by requiring its owner to visit the local bank branch where designated bank staff keep the key. By incorporating the use of alarms to the already familiar concept of lockboxes (i.e. piggy banks), IPA will test the impact of a technology that is both simple and cost-effective. The alarm acts like a reminder, not unlike a text message reminder to a cell phone, but over a period of time could prove to be more cost-effective and relevant for those who do not have access to a cell phone.

     
    Details of the Intervention: 

    IPA first tested the alarm box with a small pilot sample with plans to launch the product to approximately 800 Ecofuturo clients to evaluate its impact on savings behavior. In total, IPA will work with 2400 existing savings account holders. Two-thirds of the clients will be randomly selected to get an offer of a lockbox, and of those clients, half will be offered boxes with alarms. The remaining group of clients will serve as a comparison group. The impact of an information wheel that clients can use to determine daily savings amounts required to ascertain a goal in a given time will also be assessed. Within each of the three groups (comparison, lockbox, lockbox with alarm), half of the clients will be randomly selected to receive the wheel. Savings rates and frequencies will be measured amongst treatment and comparison groups after approximately one year.

     
    Results and Policy Lessons: 

    Results forthcoming.

     

    1 The World Bank Group. http://data.worldbank.org/indicator/NY.GDS.TOTL.ZS

    Increasing Savings and Reducing Reliance on Credit Card Debt for Low-Income Individuals in Washington DC

    This project will evaluate the impact of commitment contracts and reminder messaging on savings behaviors among low- and medium-income credit union members in Washington DC.  Traditional financial products which dominate the consumer finance market tend to operate under the assumption that consumers act in a rational manner and fail to take into account cognitive biases which can impede the realization of financial goals. Here we test a savings product that includes two features designed to overcome these biases. A built-in commitment contract attempts to encourage consumers to forego present expenditures in lieu of future payoffs.  Regular messaging attempts to overcome limited attention, which may result in an inability to stick to a budget or savings plan.

    Financial Education and Commitment Savings Contracts to Reduce Credit Card Reliance and Mobilize Savings among Low-Income U.S. Households

    This project will evaluate the effectiveness of financial education and commitment contracts in promoting higher levels of saving, reduced reliance on credit card debt and healthier financial portfolios among low-income individuals in the United States.  U.S. households in the bottom quartile of wealth spend, on average, more than they earn, and many low-income consumers lack formal savings accounts. Consumers tend to have time-inconsistent preferences for savings and consumption; they tend to be more impatient in the near-term than in the long-term and thus have a propensity to make purchases that are later regretted.  This project will evaluate the impact of commitment devices as a mechanism for mitigating time-inconsistent tendencies in spending, borrowing and saving. 

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