Many small-scale farmers in the developing world face significant income uncertainty, and rural farmers who live from harvest to harvest don’t have much room for error. Variables beyond the farmers’ control, such as fluctuating crop prices, can make a significant difference in how much a family earns for the year. Farmers may be unwilling to take on additional risks by borrowing and making long-term investments due this uncertainty. This reluctance is thought to contribute to the decision of many farmers not to invest in technologies such as hybrid seeds, fertilizer, or irrigation that could potentially improve crop yields. Many lenders are also extremely wary of extending credit to farmers, fearful that they will inherit the risks inherent to farming. Crop price insurance could help solve this problem, reducing the risk to farmers and providing them with encouragement to make investments in their farms. Lenders, too, may feel more confident in lending to farmers with greater income certainty, facilitating even more capital investments.
Context of the Evaluation:
In Ghana, 50 percent of the rural population lives in poverty. In the Eastern Region where Mumuadu Rural Bank (MRB) operates, an estimated 70 percent of households make a living in the agricultural sector, but agricultural loans make up only 2 percent of the bank’s loan portfolio. Focus groups with maize and eggplant farmers in the area revealed that farmers were hesitant to borrow for fear that fluctuations in crop prices could force them to default. Rainfall fluctuations, typically an important source of risk for farmers, are not a great concern in this part of Ghana. The prices offered for traded crops, however, do fluctuate greatly. Information gathered in baseline surveys suggested that there was a potential but untapped market for crop price insurance: farmers in the area served by MRB expressed that they would be willing to pay to guarantee a certain minimum crop price. Despite this encouraging baseline finding, banks and insurance providers face the challenge that insurance is not a commonly understood concept among farmers in the region.
Details of Intervention:
Researchers developed an agricultural loan product in coordination with MRB that had an insurance component that partially indemnified farmers against low crop prices. Specifically, if crop prices at harvest dropped below a set price floor (the 10th percentile of historical prices for eggplant and the 7th percentile for historical maize prices), the bank would forgive 50 percent of the loan and interest payments. Borrowers were not required to pay any premium for the insurance product. The goal of incorporating insurance into the loan product was to reduce farmers’ risk in borrowing to invest in agriculture inputs. The intervention targeted maize and eggplant farmers in particular because the crops are both commonly grown in the region and subject to volatile (but historically well documented) prices.
Standard Mumuadu procedure is to invite farmers to meet in a group with Mumuadu employees to discuss the bank’s financial services, and to encourage farmers to come to a branch to apply for a loan. The average loan size is approximately US$159, which represents a significant change in cash flow for the borrower. For this project, Mumuadu employees approached community leaders to obtain a list of all maize and eggplant farmers in the village. The same community leaders then invited farmers to attend one of the bank’s information sessions. Farmers on the list were randomly assigned to one of four groups, each of which received a variation on the Mumuadu marketing pitch. The four groups were:
Farmers who were offered the standard Mumuadu loan product;
Farmers who were offered the Mumuadu loan product with complimentary crop price insurance;
Farmers who received financial literacy training, before being offered the standard Mumuadu loan product;
Farmers who received financial literacy training, before being offered the Mumuadu loan product with complimentary crop price insurance.
Prior to the marketing of the loans, Mumuadu employees conducted a survey of the farmers, gathering information relating to their credit history, risk perception, financial management skills, and cognitive ability. An analysis of baseline data, bank administrative data, and a followup survey that focused on farmer investment decisions allowed researchers to draw conclusions on the effect of crop price insurance on borrower behavior and agricultural investment in Ghana.
Take up of loans among farmers was quite high, with 86 percent of farmers in the comparison groups choosing to borrow and 92 percent of farmers in the treatment groups taking out a loan. This high take up across both treatment and control groups made an analysis of the features that predicted take up difficult. In fact, the researchers found no systematic difference across the treatment and control groups when considering which features predicted borrowing. Overall, those who borrowed tended to be older, with higher scores on tests of cognitive ability. They were also more likely to have a record of previous borrowing.
Apart from predictors of borrowing, researchers were interested in whether crop price insurance changed farmers’ investment behavior. There is evidence that it did, but not overwhelmingly. The small sample and high take up across both groups may have played a role in this outcome. Farmers offered the insurance spent 17.9 percentage points more on agricultural chemicals (mostly fertilizer) than those who had not been offered the product. There was also a trend towards growing more eggplants and less maize among these farmers. Farmers offered the insurance were also between 15 and 25 percent more likely to bring their produce to markets rather than sell to brokers who come to pick up the crop. Anecdotally, it is believed that the so-called “farmgate” sellers offer guaranteed purchase contracts, but at lower prices locked in before harvest. Selling in the market, on the other hand, is a potentially more profitable but riskier option.
There are a number of potential reasons why the researchers did not find large effects of the crop price insurance product on either or take up or investment, and further research in necessary to determine their roles. It is uncertain, for example, whether farmers truly understood the benefits of the insurance. Farmers may also have been reluctant to make long term investments changes before an insurance product demonstrates an established presence in the area. Alternatively, crop price uncertainty may not be as important of an indicator of investment decisions as previously thought. Further research, with a larger sample size, is needed to better understand the roles of risk, financial literacy, and product design in determining microinsurance impact.
Previous research suggests that many people lack the skills needed to calculate expected returns or present discounted values, which may cause them to make suboptimal financial decisions. Previous work by Hastings and Tejeda-Ashton in Mexico showed that the way that returns to a pension program were presented (in pesos versus as an annual percentage) affected price sensitivity. Another explanation offered for sub optimal financial decisions is the present bias of many decision makers, who are impatient and consistently choose immediate gratification instead of a more measured approach that allows for optimal saving for future consumption.
This project makes use of the biannual Encuesta de Protección Social (Social Protection Survey, EPS), a nationally representative panel survey of 17,000 households, to undertake two experiments that seek to better understand the determinants of saving and financial management decisions.
Chile has had a privatized national defined contribution system since 1981, in which participants can select which of five fund managers will handle their retirement accruals. Workers select the fund in which to place their money, and the government provides published statistics on load fees and past returns. In the first experiment, we will provide information on returns net of fees to individuals in one of these randomly-assigned formats: either expected pension account gains or expected pension account costs over a ten year period, and either presented in Chilean pesos or in Annual Percentage Rates. Participants will view the information and be asked to indicate how they would rank the funds. They will then be given the information sheet to keep. Using dministrative data in the Chilean pension system, we will track the impact this information has on the fund people choose.
The second experiment will allow researchers to create a measurement for the participants' ability to delay gratification. We will use this measure to examine how well this ability to forgo current gratification to gain higher returns later explains pension investment decisions, weight and health investments, and propensity to spend on impulse products and carry credit card debt. At the end of each survey, the participant will be asked to participate in an additional survey that will earn them a git certificate to the largest grocery store chain in Chile. They can choose to do the survey now for a set amount reward, or do the survey within the following month, and upon mailing it back receive a higher credit to the card. The difference between immediate payment and future payment will be randomized so that the return on waiting ranges from 20 to 60 percent. Links to both EPS and grocery store data (including store credit cards) will allow us to track future pension and consumption decisions and draw conclusions based on revealed ability to delay gratification.
In many developing countries it is common for street vendors or small-scale entrepreneurs to borrow small amounts of money for their working capital at very high rates of interest. Over time, these interest rate payments can amount to a burdensome proportion of a vendor’s take-home profit. But if vendors saved small amounts of money over time, they may be able to build up a buffer of savings large enough to stop the practice of borrowing money from informal lenders. It is unclear, though, whether vendors may persist in borrowing due to lack of information about the benefits of saving and whether a financial literacy invention could benefit these entrepreneurs.
In urban markets in the Philippines, like the large covered market in Cayagan do Oro, street vendors are prevalent and often borrow from informal moneylenders at high rates of interest. Vendors in this study all ran their own businesses, had a history of indebtedness at interest rates of at least 5% per month over the previous 5 years, and had an outstanding debt of less than 5,000 pesos (US$100). Vendors were included in the study only if they met these conditions and operated a business in or near the public market in Cagayan de Oro. Vendors most often used their loans to expand or maintain their current businesses.
Description of Intervention:
Researchers tested two interventions to help break the cycle of debt. After an initial baseline survey to gather information on history of debt, household consumption and financial literacy, 250 vendors were randomly assigned to one of four groups. They either (1) had their outstanding debt paid off, (2) were given financial literacy training, (3) received both, or (4) received nothing (comparison).
For the debt payoff intervention, researchers gave respondents money equal to their previously reported debt and had them payoff their outstanding balances (an average of about $47). For the financial literacy intervention, researchers developed a script modeled after Freedom from Hunger’s financial literacy module. Partner staff conducted a single financial literacy session with respondents in small groups of about 16 people that focused on the benefits of savings, the long-term costs of repeated borrowing from moneylenders, the value of planning in advance and saving for large expenses, and the advantages of borrowing from formal lenders (like microfinance institutions or banks) at lower interest rates.
A set of follow-up surveys were administered after 1 month, 2 months and 3 months and an endline survey was administered between 19 and 21 months after the baseline survey. The baseline survey was administered in early July 2007 and the endline survey was administered between February and April 2009.
Results forthcoming. A follow-up study is being conducted to replicate the results, expand the sample, and assess the impact of adding a savings component to the debt forgiveness intervention. This component consists of offering a savings account with no starting fees and initial deposits subsidized by IPA.
Researchers conducted a randomized evaluation to investigate the demand for commitment savings products or financial counseling, and the impacts these products and services have on savings, among a sample of low- and moderate-income credit union members in New York City. Analysis of the effect of these financial products on savings, borrowing, and credit scores is ongoing.
In the United States, 43 percent of households do not have enough savings to cover their basic expenses for three months if unemployment, a medical emergency, or other crisis left them without a stable income. Low levels of savings can make it difficult for people to find the resources to weather unforeseen financial adversity or to rebound from bad financial decisions, particularly for low-income households.
Many factors, including social and behavioral factors, may contribute to low savings rates. Individuals may face pressure from family and friends to share resources, and they are often tempted to spend money today instead of saving for tomorrow. Commitment savings products, which are binding arrangements individuals voluntarily make to help themselves save more, are designed to help people overcome these social and behavioral barriers to savings. By committing to such an arrangement, individuals essentially “force” themselves to save by agreeing to make regular deposits and limit when and how they can make withdrawals. Another potential reason for low savings rates is that individuals may have limited financial literacy. For these individuals, financial counseling services, which teach individuals how to create a personal budget or manage excessive debt, may help them save more.
In this ongoing evaluation, researchers seek to address two questions: what is the demand for commitment savings products or financial counseling? What are the impacts of these products and services on savings rates and other financial outcomes?
Context of the Evaluation:
The Washington Heights neighborhood of Upper Manhattan in New York City is home to the largest concentration of immigrants from the Dominican Republic in the United States. The median income in Washington Heights is US$31,000 and the poverty rate is 31 percent, 10 percentage points higher than the average in New York City. Most financial products are not designed for such low-income households. The complicated pricing and terms, large minimum balance requirements, and underwriting provisions of these products and services place them out of reach for many low-income households with little credit history.
Details of the Intervention:
Researchers partnered with the Neighborhood Trust Federal Credit Union to conduct a randomized evaluation to measure the demand for commitment savings and financial counseling in the U.S., and the impacts of these products and services on a variety of financial outcomes. Researchers offered visitors to the local credit union a metro-card loaded with two subway (or bus) rides in exchange for filling out a survey. Upon completing the survey, participants were randomly assigned to one of three groups:
· Comparison group: Researchers offered individuals the metro-card, but no any additional services or products.
· Financial counseling group: A certified financial counselor offered to provide an hour-long one-on-one financial counseling session. Depending on the needs of individual clients, the session focused on topics like building and improving credit, creating a personal budget, starting a business, or managing excessive debt. Clients also received a comprehensive financial diagnostic, a copy of their credit report, and an individualized budget that included regular savings behaviors. Counseling sessions were free of charge and clients could return for free follow-up sessions if necessary.
· Commitment savings group: Researchers offered this group an interest-generating commitment savings account. The credit union members who took the offer had to make an initial minimum deposit of US$15 and had to commit to reaching a savings goal over a period of their choice i.e., three, six, twelve, or eighteen months. The low minimum deposit requirement made the product accessible to low-income savers. The customer was responsible for determining the saving goal and deciding to meet the goal by either making manual deposits or by signing up for automatic deposits (typically from their checking account). By the end of the maturity period, those who reached their goal could withdraw all their savings plus the accumulated interest. Those who did not reach the goal had to forfeit the US$15 deposit and the interest.
Researchers collected data on account balances, individuals' credit reports, self-reported well-being, and measures of behavioral characteristics.
Results and Policy Lessons:
Researchers are still collecting data for a complete analysis — all results reported here are preliminary. Overall, demand for commitment savings was high relative to industry standards and demand for financial counseling was somewhat lower. Individuals who opened a commitment savings account made substantial progress towards their savings goal but did not show changes in net savings, assets, or debt.
Demand for commitment savings and financial counseling: Twenty-one percent of those offered the product opened an account. Women and low-income individuals were significantly more likely than men to accept the offer. Around 16 percent of individuals offered financial counseling accepted the offer. As might be expected, those who viewed their financial situation as “ok” or better were less likely to take up financial counseling than those who viewed their financial situation as “bad” or “very bad.”
Commitment savings product use: Individuals who opened a commitment savings account used it in a variety of different ways. About half chose a contract that ended after 18 months while the rest chose one that matured faster. Savings goals also varied significantly, from US$300 to US$4,000. Overall, those who opened an account made substantial progress towards their goal, saving on average 70 percent of their target amount.
Impact on saving and borrowing behaviors: One crucial question was whether progress towards savings goals would come at the expense of drawing down other forms of savings (selling assets) or incurring debt. Researchers found that neither the commitment savings offer nor the financial counseling offer had any impact on net saving balances, net assets, or borrowing behavior relative to the comparison group. However, this lack of impact could be due to the relatively small number of people in the study and the large differences in saving balances across individuals and over time. More research, with larger treatment groups, is needed to obtain more conclusive results.
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.
Defined contribution retirement savings plans, where employees contribute at a minimum amount deducted directly from their salaries, are common in developing countries. However, individuals can make voluntary contributions to the plan, and selecting the most beneficial contribution amount often requires some financial knowledge. Individuals may lack the financial knowledge needed to save adequately for retirement, or may not be aware of the effects that retiring early, failing to formalize their employment, or failing to save more than the required amount will have on their eventual retirement savings. Personalized retirement savings information tailored to each individual’s financial situation may be effective in increasing knowledge and encouraging low-income individuals in the labor force to adopt habits that lead to increased pension contribution.
Chile requires formally employed workers to contribute approximately 10 percent of their taxable income to a pension account. However, contribution rates remain low; people may not be formally employed, may avoid contributing, may stop contributing whenever unemployed, or fail to contribute enough to retire comfortably. Low-income individuals, who comprise 65 percent of all pension account holders, can be most affected by low contributions. Lack of information and financial knowledge may also be an issue. A 2009 survey indicated that most members of the Chilean national pension system did not know how their pension would be calculated, and many who claimed to know were unable to answer questions about the topic when asked.
Description of Intervention:
Researchers will partner with the Superintendencia de Pensiones in Chile to evaluate the impact of providing personalized retirement savings information on pension contributions of low-income, working-age individuals.
The Superintendencia de Pensiones in Chile is installing self-service kiosks in eight government offices in the metropolitan region of Santiago. At the kiosk, individuals are prompted to identify themselves with their ID and fingerprint. Based on the RUT (ID number), they are randomly assigned to either receive publicly available, generic information on how to improve their retirement savings, or a personalized simulation session which shows how changing current contribution levels affects expected retirement savings balances.
The simulation software running on the kiosks can populate some of the individual’s personal financial information based on their RUT, and also asks about a number of other factors, including retirement age and estimated years of contribution towards their retirement fund. Based on this information, the individual is then shown a projection of their post-retirement finances.
All participants will be surveyed at the kiosk on topics including financial knowledge and retirement fund contribution levels. In addition, government-provided administrative data will allow the researchers to measure impacts on labor force participation and savings behavior over the next five years.
In order to increase the number of people who participate and complete the module and survey, the research team will randomly assign module assistants across both groups. This will allow researchers to study the separate impacts of introducing module assistants in addition to the self-service kiosk simulations.
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.
The number of individuals living outside their countries of birth reached 230 million people in 2013, representing over three percent of the world. Many of these migrants send remittances back to their countries of origin. In fact, officially recorded remittances to developing countries exceeded US$400 billion in 2013, with top recipients of India (US$71 billion), China (US$60 billion), the Philippines (US$26 billion), and Mexico (US$22 billion). These remittances are an important but poorly understood type of financial transaction. To date, there is little evidence about how migrants make their remittance-sending decisions.
Past studies in Mexico and El Salvador have shown that households receiving international remittances have low savings levels. In many remittance-receiving countries, policymakers are creating programs to encourage households to channel more of their remittance income to savings, education, and investment in small businesses. Providing migrant workers and their families with financial literacy training or access to financial services may be one way to improve their welfare. While researchers have studied the impacts of financial education and financial access independently, no study has looked at the possible complementarities between these two types of programs. This study examines how combining financial skills training with access to savings and loan products impacts financial decision-making and savings of transnational migrant households.
The Philippines is the second largest migrant-sending country and the third largest remittance receiving country in the world. Nearly 90 percent of service sector international migrants from the Philippines in 2010 were women. Among these, 70 percent were domestic workers. The group of recently departed Overseas Filipino Workers (OFWs) and their families left behind in Cabanatuan, Philippines and surrounding localities namely Talavera, Sta. Rosa, Palayan, and Gapan are the primary target group of the study.
Description of Intervention:
Researchers are examining the effect of financial education and access on remittances, savings, and small enterprise development. Researchers partnered with the Overseas Workers Welfare Administration (OWWA) to randomly select a sample of 1,800 transnational households from the full population of workers going abroad to work from Cabanatuan, Philippines and surrounding localities. Participants in the program were then randomly assigned to one of four groups:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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. 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.
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.
Promoting financial literacy and providing access to bank accounts have become popular approaches to help the poor save. Increased savings may help individuals meet day-to-day financial demands and invest in their futures. Furthermore, increasing the savings rate in the general population may help promote large-scale changes in a country’s economy by allowing increased investment in productive resources. In order to maximize the benefits of increased savings at both the individual and country level, it may be most effective to encourage youth to save. Young people may be more likely to adopt new habits, and they have many working years ahead of them. A growing body of literature investigates whether either financial education or bank access affect savings behavior.
Context of the Evaluation:
Uganda has a very young population: in 2006, 52 percent of the country’s population was under 15 years old and 29 percent of the country’s adult population was between 15 and 34.1 In addition, Uganda has extremely low savings rates, even relative to its neighbors. Between 2001 and 2003, the average savings rate among Ugandan households was 5.2 percent, compared with an average rate of 12.7 percent in neighboring Kenya.2
Researchers partnered with the Foundation for International Community Assistance (FINCA) and the Church of Uganda in this evaluation. FINCA, whose mission is to provide financial services to the world’s lowest-income entrepreneurs, has worked in Uganda since 1992. The Church of Uganda is an Anglican church, representing the second largest religious group in the country. As of the 2002 census, 36 percent of the population considered themselves affiliated with the church. The Church maintains a large network of youth fellowship groups, based at village churches around the country. The youth groups participating in this study had an average of 40 members. The average age was 24.5 and 40 percent of members were female.
Details of the Intervention:
Researchers evaluated whether offering financial education or group savings accounts to Ugandan youth groups increased savings. The study involved 240 Church of Uganda youth groups, which were randomly assigned to receive financial education, a group savings account, both financial education and a savings account, or neither intervention. There were 60 youth groups in each arm of the study.
The curriculum for the financial education intervention was designed in partnership with Straight Talk Foundation and Freedom from Hunger. The ten-session, fifteen-hour curriculum taught concepts and skills for improving savings behavior, including role-playing the differences between saving and borrowing to achieve a goal, how to keep a budget, and strategies for successfully discussing sensitive topics around money.
Researchers partnered with FINCA to design a group savings account without fees and with simple account-opening procedures, which minimized common barriers to opening accounts. Each club had only one account and was responsible for maintaining a ledger with individual members’ savings. Clubs were also required to make a deposit within thirty days of opening the account and to maintain a minimum balance of 50,000 UGX (US$20).
Results and Policy Lessons:
Financial literacy: Members of youth groups receiving financial education had higher levels of financial knowledge, awareness, and numeracy. Youth in groups receiving financial education only scored 0.04 standard deviations higher than the comparison group on an index combining questions relating to financial literacy. Youth in groups receiving both financial education and group accounts scored 0.06 standard deviations higher than the comparison group. Youth in groups receiving account access only did not score any better than the comparison group.
Bank savings: Using administrative bank data on the group accounts offered in the intervention, researchers found that offering financial education in addition to account access increased savings more than offering the account alone. Averaging across groups receiving account access only and groups receiving account access plus financial education, only 14 percent of members used the account. However, those who did use the accounts saved non-trivial amounts: an average of 15,000 UGX (US$6) in the account-only group and an additional 4,000-7,000 UGX (US$1.60-2.80) among those who also received financial education.
Total savings: All three interventions designed to promote savings increased participants’ total savings. This measure included saving by storing at home, by having another person hold the money, or by buying durable goods that could later be sold, in addition to savings held at a formal bank. In contrast to the administrative bank data, these results did not show that financial education and account access work together to promote savings, but rather that each approach can encourage increased savings on its own.
Income: Individuals in all three treatment groups reported earning 10-15 percent more income than individuals in the comparison group. However, researchers were unable to determine whether this effect resulted from individuals working more in order to increase their savings or from individuals using savings to make investments that generated income.
Are financial education and formal savings accounts complements or substitutes in the medium to long-term? Do the impacts on behavior and income persist over time? What are the mechanisms underlying the increase in earned income? To answer these questions, a follow-up of this evaluation three years after the commencement of the intervention is currently being conducted by IPA in Uganda, under the Financial Capability Research Fund. Results forthcoming.
Uganda Bureau of Statistics (UBOS) and Macro International Inc. 2007. Uganda Demographic and Health Survey 2006. Calverton, Maryland, USA: UBOS and Macro International Inc. Page 11.
 Bank of Uganda research department, Sept. 14, 2005. Found in “Savings Habits, Needs and Priorities in Rural Uganda.” Prepared by Richard Pelrine, Olive Kabatalya. Rural SPEED and Chemonics International. Produced by USAID, September, 2005.
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.
Commitment savings products are a useful tool to help individuals with self control problems stick to their financial plans, but they are unnecessarily restrictive for individuals who want to back out of their commitments due to an unanticipated change in income or other household shock. To shed light on the mechanisms behind the failure to adhere to financial plans, researchers carried out a lab-like study in Malawi that mimicked real life choices. The study measured how often participants changed their financial plans, and what prompted those changes. When participants back out of financial commitments, is it due to self control problems or other factors such as spousal pressure, household shocks, or a lack of understanding about what the commitment entailed in the first place?
Commitment savings accounts have been used to increase savings and investment in economies as diverse as the United States, the Philippines, and Malawi. These accounts are designed for customers who experience self-control problems and have trouble following through on their own plans to save money. However, if people change their financial plans for other reasons, related to changes in income household needs, for example, then commitment savings accounts may actually make them worse off by reducing their flexibility to cope with shocks or correct mistakes. Therefore, to improve the design and targeting of these products, more evidence is needed on why some individuals do not follow through on their own financial plans.
This evaluation studied the frequency with which individuals change financial plans made under commitment, and investigated whether revisions are correlated with time inconsistent preferences or other factors, including social or spousal preferences, unexpected changes in finances, or mistakes in planning for the future. Such information can be used to improve the design and marketing of commitment savings devices as one of a portfolio of products to help people manage their income and consumption.
Context of the Evaluation:
Malawi’s economy is heavily dependent on agriculture. Most farmers have one harvest a year, and they need to save in order to smooth consumption over the year as well as invest in agricultural inputs for the next planting season. However, many farmers are unable to achieve their own savings goals and use less fertilizer than they planned. Research suggests that commitment savings accounts may make it easier for farmers in Malawi to save for the next planting season, and that these accounts can have positive impacts on the amount of planting for the next season, sales from the next harvest, and consumption after harvest. However, more evidence is needed to understand why farmers have trouble following through on their plans, and whether commitment accounts are the most appropriate tool to help them.
This project took place among Malawian tobacco farmers. Tobacco is Malawi’s most important cash crop, and the return to investments in fertilizer is high for tobacco farmers. The median participant was 46 years old, had four years of formal education, and lived in a village with 120 inhabitants. He had zero formal savings, and household assets worth approximately US$30.
Details of the Intervention:
Researchers carried out a two-stage field study that mimicked real life choices, using real stakes, to determine what motivates farmers to revise their prior choices and back out of commitments to save. The sample included husband-wife pairs in 1,071 households for a total of 2,142 respondents. Of those, 661 households were randomly selected to participate in stage two of the study.
In the first stage of the experiment, all respondents made a series of 10 choices about how to allocate money between “sooner” and “later” time periods. Money allocated to the “later” time period earned interest, which provided an incentive for patience. Half of the choices pertained to a near-term time horizon: receiving money one day or one month and one day after the interview. The other half of the choices were in the “far” horizon and pushed the trade-off into the future: either two or three months from the interview.
Decisions in this stage were used to measure respondents’ tendencies to be more patient about decisions in the future than the present, which is an indication of time-inconsistent preferences. To give respondents the incentive to take the choices seriously and to set up the second stage of the study, households received vouchers redeemable for cash in accordance with one randomly-selected decision among 20 total (10 each for husband and wife) that the household made. One voucher was issued for the amount of money that had been allocated to the “sooner” time period and a second voucher was issued for the money that had been reserved for “later.” Each voucher could be redeemed for cash on or after its maturity date. The amount of money was substantial, equivalent to about one months’ wages.
For 661 households, the decision for which the two vouchers were issued was a far-horizon trade-off, with vouchers redeemable two and three months after the initial interview. While the initial allocation had been made under commitment, households were unexpectedly revisited shortly before the first voucher could be redeemed and given the opportunity to reallocate the money between the two payment periods if they wished. The change between the initial and revised allocation thus measured the tendency to revise financial plans made under commitment.
Surveys of all respondents at each stage measured household wealth and income. During the initial survey, additional indicators of financial sophistication and expectations of future income were included. In the second stage, respondents were asked about any changes in their expected income or unanticipated changes to their financial situations.
Results and Policy Lessons:
Eighty-one percent of the decisions made in the first stage were consistent with the law of demand. That is, individuals typically allocated more income to later periods when offered higher rates of return for waiting. This suggests that the majority of respondents understood the tradeoffs they faced. While respondents were sensitive to interest rates, they also displayed considerable time-inconsistency, making different choices over the near than the far horizon. While these static preference reversals were frequent, they were only slightly more likely to be present-biased as opposed to future-biased.
In the second stage, researchers found that revisions were common, often substantial in size, and that while some participants became more impatient and shifted money forward towards the “sooner” voucher, others became more patient and shifted money backwards towards the “later” period. The first set of revisions, towards the sooner period, are the classic form of time inconsistent behavior that undermines savings and can be managed through products like commitment savings accounts. Crucially, these revisions were predicted by present-biased preferences as measured in the first stage of the experiment, but not by other factors like changes in expected income, deaths in the household, financial sophistication (a proxy for mistakes), or pressure from one’s spouse. People were also more likely to make present-biased revisions when they were revisited closer to the date on which the first voucher could be redeemed.
Together, these findings are significant because they suggest that many instances of revising financial plans are due to time-inconsistent preferences rather than other factors. Commitment savings accounts are useful tools for individuals who have present-biased preferences, but may be harmful for people who change plans for other reasons. This study confirms an important role for commitment savings accounts as one way for people in developing countries to manage their consumption and savings.
However, present-bias is far from universal in this population, and policy design must take account of this heterogeneity. Efforts to help some combat temptation must avoid saddling others with commitments they do not need.
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.
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.
Adolescent girls living in low-income settings may be trapped in a vicious cycle that prevents them from attaining employment and achieving better health outcomes and reproductive autonomy. Researchers will evaluate the impact of a program in Sierra Leone that aims to address this problem by bundling health education, vocational skills training, and micro-credit. They will evaluate the impact of these programs components, together and individually, on girls’ economic activity, engagement in sexual and risky behaviors, and future goals.
Adolescent girls in low income countries appear to be trapped in a vicious circle where low skills and poor labor market opportunities make girls turn to (often older) men for financial support; this increases the chances of childbearing that, in turn, further reduces the chances of acquiring useful skills and future labor force participation. In previous research in Uganda, researchers found that a combination of health education and vocational skills training can break the vicious circle. This study aims to assess where the causal chain starts, namely, whether it is the lack of health education, skills, or credit that keeps adolescent girls trapped in the vicious cycle of high fertility and low labor force participation.
Context of the Evaluation:
In Sierra Leone, teenage pregnancy and early childbearing are pervasive: of all pregnancies, 34 percent occur amongst teenage girls (SLDHS 2008) and 40 percent of maternal deaths occur as a result of teenage pregnancy (MICS 2010). In 2013, the Government of Sierra Leone launched a Strategy for the Reduction of Teenage Pregnancy, which aims to reduce the adolescent fertility rate by 4 percentage points by 2015. As part of this strategy, the government has partnered with UNICEF and BRAC to implement the Empowerment and Livelihood for Adolescents (ELA) program. BRAC is implementing the ELA program in six countries globally. In Africa, the program has already been implemented and evaluated in South Sudan, Tanzania, and Uganda.
Details of the Intervention:
Researchers designed a randomized evaluation, which is being implemented by IPA, to evaluate the impact of the ELA program and its various components on girls’ economic activity, engagement in sexual and risky behaviors, and aspirations. In addition, they will assess if the program affected girls who did not participate in the program but have social ties with those who had.
The program operates from adolescent development centers, or “clubs,” staffed by BRAC trained mentors, who are older adolescent girls from the same communities. Researchers will evaluate the following three program components, together and individually:
Health education ("life skills training") which is mostly delivered by trained mentors, covers the following topics: sexual and reproductive health, early pregnancy, menstruation and menstrual disorders, leadership among adolescents, gender, sexually transmitted infections, HIV/AIDS, family planning, gender-based violence, and adolescent responsibility within the family and community. Group learning is encouraged through participatory classroom trainings. In addition, the girls receive issue-based sexual and reproductive health training from the BRAC Health Program. Girls aged 13-24 can participate in the health education training.
Vocational (“livelihood”) training covers the skills required to engage in different income generating activities and financial literacy. Girls can choose to receive training in hairdressing, tailoring, animal husbandry, or agriculture. The training lasts about a month and is delivered by local service providers in Sierra Leone. The financial literacy module covers topics such as budgeting, financial services, financial negotiations, and accounting. Following successful completion of training, trainees receive input supplies to start their chosen business activity. To prevent school dropout, only girls aged 17-24 are eligible for training.
MicrocreditEligible girls who are engaged in a self-employment activity will be offered credit of up to US$100 to finance their business. The loan duration will be one year with an annual interest rate of 25 percent and weekly repayments. Girls aged 17-24 are eligible for credit.
Participants will be randomly assigned to one of the following four groups, each consisting of 50 villages and 1,400 adolescent girls:
(1) Health education
(2) Health education, vocational training
(3) Health education, vocational training, microcredit
(4) Comparison group: No program
Results from this replication study will allow for a cross-country comparison of the program’s effects and help to build the evidence on the program’s impact. In addition, by introducing different treatment groups this evaluation aims to separate the effects of the programs different components, which will provide important information to partners on how the program should be expanded. Moreover, information drawn from individuals about the relationships they have with others in their village, known as social networks data, will reveal how information and skills acquired by program participants spreads to non-participants.
Results and Policy Lessons:
Read more about the ELA Sierra Leone program here.
Read about previous research on the program in Uganda here.
There are growing concerns that American households tend to borrow too much and save too little, making it hard to meet basic needs, build assets, prepare for retirement, and pay for emergency expenses. Large debt burdens may compromise individuals and families’ ability to create a safety net or make investments for the future. In an ongoing study, researchers are evaluating the effect of peer support and text message reminders on financial outcomes of individuals enrolled in a debt management program in the United States.
There are growing concerns that American households tend to borrow too much and save too little. This imbalance can have strong implications for households’ ability to meet basic needs, build assets, prepare for retirement, and weather negative shocks such as emergency expenses or unexpected unemployment. Families with large debt burdens may continue to borrow and thus compromise their ability to create a safety net or make investments in the future. Many see Debt Management Plans (DMPs) as a promising tool for debt reduction, yet creating a DMP and sticking to the program requires ongoing work and effort. Descriptive evidence suggests that limited attention, apprehension about giving up credit cards, a perceived lack of support, and the five-year time period of plans may hinder clients from completing them. To promote DMP use and completion, text message reminders and peer support programs may help individuals follow through on DMP commitments. However, little evidence exists on the effectiveness of such programs and whether they help people reduce their debt.
Context of the Evaluation:
Low-income individuals in the United States often rely heavily on expensive financial services such as payday loans, auto title loans, pawn shop loans, and bank overdrafts. Individuals frequently turn to expensive debt obligations because their riskiness disqualifies them from traditional, lower-priced alternatives.
Clarifi is a non-profit organization that provides low-cost access to various financial products, services, and resources. Debt Management Plans (DMPs) are one of Clarifi’s financial planning tools that aim to help clients manage and repay their debt with the help of experienced credit counselors. The retention rate of clients who join Clarifi’s DMP programs is 80 percent, meaning that 20 percent of DMP enrollees leave the program within the first year.
Details of the Intervention:
Working with Clarifi and its Debt Management Plan clients, researchers are evaluating the effect of various messaging and peer support programs on the financial outcomes of participants. The evaluation involves 1,000 of Clarifi’s clients in southeastern Pennsylvania, southern New Jersey, New York state.
As part of Clarifi’s general program, all clients in the study participated in educational workshops and outreach, as well as debt repayment counseling prior to enrollment in a DMP. At the time of enrollment into DMPs, researchers randomly selected individuals to receive peer support, reminder messages, or both. Those in the peer support group were able to select up to five peer supporters (friends of family) to monitor their progress on a DMP. Peer supporters received information on the client’s progress, including notification when the client missed a scheduled debt payment.
To test the impact of regular text message reminders, individuals from each group (peer support or no peer support) were then randomly divided into a comparison group (no messaging) or one of three message reminder types: tasks, plans, or goals. These messages are designed to counter specific types of limited attention.
The study is designed as a survey with an embedded experiment and took advantage of Mexico's privatized social security system, which requires workers to choose their retirement investment funds (AFOREs) from an approved list. This research project will collect detailed survey data and implement a series of field experiments in order to further understand the factors that determine workers' investment choices. The survey will collect information on financial planning, financial literacy, and investor perceptions of the privatized social security market.
The survey will also contain two field experiments. The first will examine if survey participants are more likely to switch funds when provided with transparent information on the fees each AFORE charges. The second will test if financial literacy can be taught by providing simplified information on the importance of compounding interest, coupled with information about fees charged by the AFORE. The survey results will allow for estimates of the impact of each piece of information on fund choice and sensitivity to fees. This information can be combined with information on market-level responses by AFOREs, with regard to their fees and total number of investors.
If most people (regardless of income) choose funds to minimize fees, AFOREs will compete on price. But if more people choose based on brand names or convenience, then funds will be less concerned with price and more concerned with brand promotion. Previous research has suggested that more-educated consumers choose funds to minimize fees, while less-educated consumers choose funds based on brand name or convenience. Because lower income individuals are likely to have less education, market outcomes may lead to lower net returns for low-income households.
Since social security is intended to be a safety net that provides income in old age to all citizens, differences in individuals' investment behavior (and firm response) across demographic groups is critically important for understanding the impacts of privatization on income distribution.
Small and medium enterprises (SMEs) are thought to be important drivers of growth in developing economies, but entrepreneurs in these countries face many barriers, including poor access to training, finance, and business networks. In Colombia, Fundación Bavaria’s “Destapa Futuro” (Open the Future) program identifies promising enterprises and provides them with a suite of financial, technical, business, and training resources. Researchers found that the trainings did not affect key business outcomes, such as sales and profits, but helped entrepreneurs to expand their business networks.
For additional information on current SME Initiative projects, click here.
Small and medium enterprises (SMEs) are thought to be important sources of innovation and employment in developing countries, due to their flexibility in responding to new market opportunities and their potential for growth. However, entrepreneurs face a number of barriers to expanding their businesses and employing more workers, including constrained access to credit, lack of management skills, and unfavorable government regulation. Business training, capital, and mentorship are possible tools that could help SMEs overcome these barriers, but existing evaluations of business training programs and capital injections for entrepreneurs have found mixed results. Additional research is needed to understand how training programs should be designed and delivered in order to best help entrepreneurs develop their operations and foster economic growth.
Context of Evaluation:
Fundación Bavaria, a foundation started by one of the largest beverage companies in Colombia, works to foster entrepreneurship in Colombia through an intensive, year-long program called “Destapa Futuro” (Open the Future). The program uses a competitive process to identify entrepreneurs with promising business plans or small start-ups and provides them with business training, capital, technical advice, and the opportunity to network with investors. Since 2005, Bavaria has spent close to $10 million on the program, trained thousands of entrepreneurs, and financially assisted more than 200 businesses.
Destapa Futuro targets relatively experienced and educated entrepreneurs. The average participant was 36 years old, had 16 years of education, and had four years of experience as an entrepreneur. Seventy-three percent were male. During the fifth round of Destapa Futuro in 2010-2011, these participants received business training from two organizations that support entrepreneurs, the Centro de Formación Empresarial (CFE) and Endeavor Colombia.
Description of Intervention:
Researchers evaluated Destapa Futuro’s impact on business outcomes, the difference between the two organization’s different training strategies, and the relative impact of receiving prizes in cash or in kind. In order to participate in the program, entrepreneurs completed an online application, which included questions on business characteristics, leadership potential, experience in business administration, and potential social impact. From the database of 8400 applications 475 candidates, half of them with business plans and the other half with existing start-ups, were selected and ranked.
This pool of 475 entrepreneurs was divided into three groups:
The top 25 entrepreneurs all received the Endeavor training. Because their participation in the training program was not randomly assigned, they were not part of the study sample.
The following 100 entrepreneurs were randomly assigned to receive training from either Endeavor or CFE.
The remaining 350 entrepreneurs were randomly assigned to either the CFE training group or the comparison group, which did not receive any training.
Both the Endeavor and CFE trainings included modules on financial management, marketing and business plan development. Endeavor offered an in-person training, delivered in two two-day sessions. All classes had a maximum of 20 entrepreneurs per trainer. In addition to lectures, each entrepreneur participated in several one-on-one discussions with program coordinators, trainers and mentors. CFE used a combination of online learning and in-person classes. In the online component, which consisted of four modules over one month, participants were assigned to groups of 18-21 students. They completed online modules with homework assignments, participated in online forums, and collaborated via email and phone. The entrepreneurs who completed homework and participated in forums were eligible for the in-classroom training, which consisted of four days of classes with the same tutor assigned during the online training.
After the CFE and Endeavor trainings were completed, the 100 entrepreneurs with the best business plans and course performance were selected to receive an additional coaching session in preparation for the business plan presentation that would determine the prize winners. The coaching session provided contestants with feedback on content and style of their presentations. After the presentations, the best 60 entrepreneurs were awarded a prize to fund their business.
In order to test how having the flexibility to choose how to spend the prize money affected business outcomes, half of the winners were randomly assigned to receive cash, and the other half received an in-kind prize. Cash prizes ranged from about 5,600 USD to 56,000 USD (10-100 million COP). Fundacion Bavaria determined the nature of the in-kind prizes based on the entrepreneur’s requests and available resources, and they included business equipment, marketing and advertising materials and other business investments. Forty winners were also randomly selected to receive mentorships with Bavaria executives, who listened to business plan presentations, gave advice, and suggested potential contacts.
Results and Policy Lessons:
Impact on business outcomes: Entrepreneurs who participated in the CFE training did not have higher sales, costs, profits or number of employees than the entrepreneurs who did not receive any training. Entrepreneurs in the CFE training were just as likely to start a company as entrepreneurs who did not receive training. Similarly, entrepreneurs who participated in the Endeavor training did not have significantly different business outcomes compared to those who participated in the CFE training.
One of the goals of the Destapa Futuro program was to help entrepreneurs expand their business networks by meeting fellow entrepreneurs, trainers and mentors. Entrepreneurs in the CFE training who did not have existing start-ups were more likely to secure a contact with a partner, ally or investor than entrepreneurs who did not participate in the training. The Endeavor training was more beneficial for network expansion for entrepreneurs with existing start-ups, while the CFE training was more beneficial for entrepreneurs with business plans only.
In-kind versus cash prizes: Compared to recipients of cash, winners of in-kind prizes did not have significantly different sales, profits or costs. The type of prize also did not influence investment choices of entrepreneurs, with the majority investing their winnings into machinery and equipment. Since the type of prize did not affect outcomes of entrepreneurs, and it was logistically easier and faster to disburse cash prizes, in this context cash may be a preferred option.
In the sixth round of Destapa Futuro, Bavaria Foundation modified the program to be more financially sustainable while providing more personalized support to entrepreneurs.
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.
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.
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:
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:
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.
Research on financial knowledge and behavior indicates that individuals in both developed and developing countries around the world lack adequate knowledge to make informed financial decisions. In response to evidence that financial literacy is correlated with well-being, many service providers, donors, and policymakers have begun including financial training and business education as part of their broader anti-poverty strategies. Intuitively, financial education provides useful tools to people of all ages, yet empirical evidence for this impact is meager and often mixed. This project tests two financial education curricula for primary school students. Specifically, it measures the impact of financial education on student behavior attitudes, and outcomes.
Context of the Evaluation:
Saving and finances are part of daily life for many youth, yet traditional school curricula often overlook the specific issues and challenges students encounter with money. This curricular gap represents a missed opportunity for students and teachers. Aflatoun, a Dutch non-governmental organization providing social and financial education to 540,000 children in 33 countries, operates a voluntary after school club in Ghana for primary and junior high schools. Aflatoun uses a uniquely designed “social and financial education curriculum” to improve children’s saving habits as well as financial attitudes and self-esteem. Aflatoun’s training on handling money, saving on a regular basis, and spending responsibly aims to teach children, at a young age, lessons and behaviors that they will carry with them throughout their lives.
Aflatoun operates in collaboration with local partners to implement its programs. Two project partners in Ghana - the Women and Development Project (WADEP) and the Netherlands Development Organization (SNV) - trained instructors and managed program implementation. SNV Ghana worked with three other implementing partners in two regions to train teachers and monitor the implementation of clubs: Berea Social Foundation (Western Region), Support for Community Mobilization Projects and Programs (Western Region), and Ask Mama Development Organization (Greater Accra Region).
Details of the Intervention:
The study included 5,000 primary school students aged 9 - 14 in 135 public schools in semi-urban and rural Ghana, including 30 schools in Greater Accra, 60 in Volta, and 45 in Western District. One-third of the schools in each region were randomly assigned to each of three different groups: the Aflatoun program, Honest Money Box (HMB) intervention, or a comparison group without treatment.
The Aflatoun curriculum includes lessons about planning, budgeting, saving, proper spending, as well as self-esteem building exercises. It uses songs, games, and worksheets, which put children at the center of the learning process. Aflatoun also adapts its messages and activities to the context of the countries in which it operates, focusing on cultural heritage and community in order to foster a collective sense of empowerment among participant children. The HMB intervention, in contrast, is solely focused on financial education and is designed to provide a comparison for Aflatoun’s unique social and attitudinal curriculum. IPA developed the HMB intervention as a group savings scheme with a financial literacy curriculum. Some of the topics covered in the curriculum include: What is Money?, Saving and Spending, Planning and Budgeting, and Entrepreneurship, as well as lessons in how to use the Money Box, a lockbox that stores group savings.
To implement the two programs, local partner organizations trained approximately 200 teachers (two teachers in each selected school). Teachers instructed two multi-grade clubs, with an average of 54 students per club, and delivered the assigned curriculum, in addition to providing a secure storage space for the money saved, generally in the teacher’s locked office. Clubs met, on average, once a week after school at a time decided by the members. Students saved money from their pocket change and recorded transactions on individual passbooks. IPA and partner organizations monitored the teachers to ensure that implementation met pre-determined standards.
The evaluation was conducted over the course of one school year. Between 20 and 40 children per school were chosen to be surveyed.. The baseline survey was conducted in September 2010 and the endline in August 2011. The surveys collected data on financial well-being of students and their families, cognitive function, and perspectives on savings and time and risk preference. The endline survey captured the same information as the baseline, in addition to a financial education endline assessmentand a psychosocial module to understand students’ outlooks and levels of self-control.
The surveys used are available here in .doc format:
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.
Microcredit is often offered in conjunction with client education services, to provide training for clients through the existing infrastructure. Karlan and Valdivia (2008) found that business training for microfinance clients improved business knowledge, practices and revenues for beneficiaries and increased repayment and client retention rates for the institution. Financial literacy is another educational topic that may be effective in improving economic conditions of clients and financial conditions for lenders. By offering financial trainings with credit, microfinance institutions may help clients to better manage their loan repayment and avoid overindebtedness. Microfinance institutions may minimize educational costs and improve outreach of the model by using information and communication technologies (ICTs) such as radio and television.
Context of Evaluation:
Arariwa is a NGO based in Cusco, Peru which serves much of Southern Peru. Arariwa offers livelihood trainings, technical skill development, and microfinance products to clients in these areas. To offer microfinance, Arariwa establishes communal banks that participate in group savings, loans, and educational programs. In an effort to improve client success, Arariwa is utilizing its existing infrastructure to provide financial education.
Description of Intervention:
A total of 666 communal banks were randomly assigned to a treatment group, which received a financial education module, or a comparison group which received education on other topics such as health and self-esteem.
The financial literacy program consisted of nine monthly training sessions that used both video and radio components to convey lessons. The sessions, provided during monthly bank meetings, were based off a curriculum adapted from Freedom from Hunger’s (FFH) training modules, and also used short videos (5-7 minutes in length), activities, and moments of reflection to reinforce key concepts. Training sessions lasted 45-minutes and covered the following topics: creating financial goals and savings plans, investing in business, calculating loan payments, and avoiding default. After meetings, participants were asked to listen to a 25-minute radio program to reinforce the training content and to complete a set of homework questions. The radio program was broadcast four times a month and presented testimonies from successful Arariwa clients.
Results and Policy Lessons:
Low implementation levels led a discontinuation of the evaluation. After 11 months, only one percent of the communal banks in the treatment group had completed the full training program. Problems faced by the implementer included: little preparation of credit officers to assume facilitation, low attendance levels at training sessions, and delinquency crises requiring credit officers to focus most of the meeting on collecting repayments. ICTs used as complements to the training presented very limited take-up and usage. The video component was often difficult to broadcast during meetings due to challenges in obtaining TV sets and DVD players in rural communities and as a result the median bank only trained with the DVD one time. Less than seven percent of the members in the treatment group listened regularly to the radio program, despite a set of incentives connected to the program.
Many subsistence entrepreneurs in developing countries do not maintain adequate business records which may limit their ability to streamline business operations and increase profits. This exploratory study was designed to explore take up and role of a new mobile application in helping small shopkeepers in Colombia to keep records, create business reports and manage other business tasks. Results show that while the application wasn’t widely adopted by the study participants, it was particularly useful for some of the shopkeepers who had good record keeping practices before they were introduced to the application.
Note: This research project is a pilot study designed to provide insights for a potential scale up to a full randomized controlled trial.
For additional information on current SME Initiative projects, click here.
Many entrepreneurs in developing countries who rely on their small businesses to meet basic consumption needs do not maintain records of business expenses or sales. Without a system for managing finances, these small businesses may miss opportunities to increase profits and trim expenses. Providing tools to these micro entrepreneurs to help them manage their finances may be a way to improve their business outcomes and household consumption levels.
Colombia has an estimated 400,000 micro and small stores or "tiendas”, which account for 52% of food and retail sales [,]. While tienda entrepreneurs sell hundreds of different products and manage relationships with wholesalers, most of them continue to use minimal business administration tools, for example, writing down sales and purchases in notebooks, or don’t use any record keeping at all.
To test if a more formal and engaging record keeping system could improve shopkeepers’ business records management, IPA partnered with Frogtek, a firm that builds business tools for entrepreneurs in emerging markets. Frogtek developed Tiendatek, a smart phone application that allows shopkeepers systematize their business by managing their accounting, inventories, sales, payments to suppliers, expenses and earnings. All data generated by the shopkeeper is uploaded and stored on a mobile phone and a Frogtek web server. The Tiendatek application creates reports on sales, purchases, credit, inventory, and break-even points based on the data uploaded by a shopkeeper.
Tiendatek relies on mobile phone technology, which is widespread and popular in Colombia. The country has among the highest rates of participation in the communication and technology markets, with 92.3 cell phone subscriptions per 100 people and 45.5% of the population using internet []. Thus, the application is easily accessible for micro and small retailers.
Details of the Intervention:
This exploratory study was designed with the goal of understanding take up of Tiendatek application and characteristics of shopkeepers who end up adopting the application. In the case of sufficient take up the study was also designed to explore whether and how the application helped small shopkeepers to better manage their businesses. The study targeted shopkeepers with sales between 1,000 and 2,000 USD a month. Frogtek staff interviewed shopkeepers, assessed their interest, delivered a mobile phone with Tiendatek application installed and provided training in one or two visits. Shopkeepers also received technical assistance from Frogtek staff for 6 months after delivery of the phone. In total, 58 shopkeepers received the phone, training and technical assistance.
Fifty-one shopkeepers were surveyed approximately ten to twenty days after receiving a new phone. A follow up survey was completed eight to ten months after the initial phone delivery with 47 shopkeepers. In addition, all data generated by shopkeepers and uploaded to a Frogtek web server was used as supplemental data for the study.
Tiendatek received positive feedback from shopkeepers who participated in the study, with 96 percent of them indicating that they would recommend it to their colleagues. However, most shopkeepers did not use the application fully; they did not register all business transactions through the application which in turn limited their ability to take advantage of features such as profits and inventory reports. Moreover, of the 40 shopkeepers who answered the question in the follow up survey, only 10 were still using it 10 months after receiving it.
While the application wasn’t widely adopted by the study participants, it was more popular with those shopkeepers who were more diligent in their record keeping and accounting practices initially. Out of 32 shopkeepers who reported having some system of recordkeeping in the baseline survey, four adopted Tiendatek, while among the 15 who did not have a formal recordkeeping system initially, six begun using notebooks and none started using Tiendatek. Moreover, shopkeepers who had good record keeping and business practices before they received the phone, for example, keeping written records and making an inventory of products, were more likely to use Tiendatek more frequently and for a longer period of time.
Researchers designed and piloted a program called Borrow Less Tomorrow (BoLT) that took a behavioral approach to debt reduction, combining an accelerated loan repayment schedule with peer support and reminders. Results from a sample of free tax-preparation clients in Tulsa, United States suggest a strong demand for debt reduction: 41 percent of those offered BoLT used it to make a plan to accelerate debt repayment. The results also offer suggestive evidence that the BoLT package reduced credit card debt.
A mounting body of evidence suggests that behavioral factors, such as lack of self-control and an inability to remain focused on achieving a financial goal, impede individuals’ ability to accumulate wealth. Most financial products and policy instruments developed to overcome these behavioral issues focus on asset accumulation, such as retirement planning. For many households, however, debt reduction offers a more efficient path than asset accumulation to achieving greater wealth. Nevertheless, the availability of behaviorally-oriented financial interventions to reduce debt is far more limited, and additional research is needed to understand how such debt reduction programs should be structured and how they affect individuals’ financial health. This study is the first known evaluation to apply behavioral economics to debt reduction services.
Context of the Evaluation:
This study took place in 2010 in Tulsa, Oklahoma, a city located in the southern United States. Researchers partnered with the Community Action Project of Tulsa (CAP), an anti-poverty agency that provides a range of social services—including early childhood education, first-time homebuyer’s assistance, and free tax preparation—to low- and moderate-income individuals. The 465 participants of this study comprise individuals who sought tax preparation services from CAP under its Volunteer Income Tax Assistance program.
The majority of participants in the sample were low-income, with 75 percent reporting a total annual household income of less than US$30,000, which is equivalent to the bottom 31 percent of the national income distribution1. The average individual credit card and auto loan debt of the sample was US$2,447 and US$5,546, respectively, which was low relative to U.S. averages. The mean age of the sample was 44 years and 74 percent was female.
Details of the Intervention:
In 2010, researchers developed and piloted a program called Borrow Less Tomorrow (BoLT) to help CAP clients reduce their debt. During tax season (January-April), researchers and CAP staff asked tax preparation clients if they would be willing to complete a financial and behavioral survey in exchange for a US$5 gift card to a local gas station. Among the group that completed the survey, a total of 465 individuals were eligible to participate in the study because they had a positive balance on auto or credit card debt and had expressed interest in reducing their debt. All participants also granted permission for researchers to pull their credit reports on a regular basis to monitor debt payments and financial status.
Researchers randomly assigned 238 individuals to be offered BoLT (the treatment group), and 227 individuals to not be offered BoLT (the comparison group). For those offered BoLT, the research team explained the program components to the participant and worked to identify a single, suitable debt on which to focus effort (e.g. a debt with a substantial balance and a high interest rate).
BoLT comprised three separate interventions:
Planning/Goal Setting: The surveyor used a simple repayment schedule calculator to show the participant how small increases in monthly payments could help dramatically reduce the time and cost to pay off their debt. The participant and surveyor would then establish a realistic repayment plan. In addition to an overall acceleration in repayment, participants were also offered the option to escalate payments every month. For example, a participant could commit to paying US$25 in month 1, US$35 in month 2, and so on to pay off debt at an even lower cost and faster pace.
Peer Support: For those participants who agreed on an accelerated repayment plan, surveyors offered the participant the option of selecting one or more peers to be notified if she fell off-track with her repayment commitment. The peer could then offer encouragement (but not financial support) to help the participant regain momentum and reach her repayment goal.
Reminder Notices: As a tool to focus participants’ attention on their debt reduction goals, those who agreed on an accelerated repayment plan were also offered the option of receiving a monthly reminder by email or phone to stay on track with their commitments.
Results and Policy Lessons:
Demand for debt reduction support: Overall, researchers found strong demand for behaviorally-motivated debt reduction support. Among those randomly assigned to receive the offer to participate in BoLT, 41 percent signed up for an accelerated repayment plan. Of those who signed up for the plan, 41 percent signed up to escalate payments every month. Conditional on take-up of BoLT, 27 percent accepted the offer to receive peer support and 81 percent accepted the offer to receive monthly reminder notices. Households living in extreme poverty (i.e. incomes less than US$10,000 per year) were less likely to sign up for BoLT, but there is no evidence that take up differed by whether a participant demonstrated more or less self-control or attention paid to her finances.
BoLT Performance: By monitoring credit reports, researchers found that 51 percent of BoLT participants were on-schedule with their repayment plan after 12 months in the program. The study demonstrated weak evidence that those who were offered the opportunity to participate in BoLT achieved a lower overall level of debt after one year than the comparison group, which did not receive the BoLT offer. However, many of the estimated differences in debt reduction between the treatment and comparison groups were not statistically significant. The researchers found no evidence of a difference in credit scores, payment delinquencies, or credit line use between the treatment and comparison groups.
While noting that these pilot results should be considered with caution due to limited sample size and the use of just a single program design, the researchers found strong demand for debt reduction products and services, but only suggestive evidence that this product led to improved financial well-being for participants. They posit that debt reduction products and services could be used by businesses and financial advisors to enable employees and clients to achieve their financial goals.
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.