Designing Products to Help Clients Build their Savings Balances

IPA seeks to address the challenge of helping low- to moderate-income households build assets, provide for future consumption, and accumulate buffers to weather shocks and manage risks.

Innovative financial products such as commitment savings accounts have proven to be effective in helping households accumulate significant sums and meet their savings goals across a variety of domains, from health to enterprise. Commitment savings products help users overcome behavioral and social barriers that prevent many individuals from reaching their savings targets and making desired investments in the future.

At the Financial Inclusion Program we are looking for partners to bring the proven impact of commitment savings to more beneficiaries worldwide through a structured replication and scale-up program.

 

The Product

In Kenya, Francis might want to buy fertilizer to prepare for the next planting season, but when he receives the money from his harvest, there are other expenses to attend to in the months before the next sowing season, and he forgets or is unable to plan ahead for the upcoming investment in fertilizer. In the Philippines, Maria may be able to save up some money at home, but her extended family often asks for financial assistance and it is difficult for her to say no. Commitment savings products work because they allow households to set aside money for a predefined goal that they are keen to achieve in the future.

Commitment savings products are a simple and effective way to encourage savings accumulation towards life goals and large lump sum expenditures. Evidence shows that low-income households can and do save, though not as much or as frequently as they want to, often due to immediate temptations as well as pressure from social networks to share any surplus.

These types of products can vary in the level of obligation they require from the client. A soft commitment may simply entail labeling a savings account with a particular goal; examples may be “children’s education” or “business equipment” or “house down-payment”, with no explicit enforcement or penalty. The individual’s motivation to save therefore is driven by psychological commitment or ‘mental accounting’ mechanisms. A hard commitment, on the other hand, might entail entering into a contract to accumulate funds and pay for a desired product, such as fertilizer, or could feature withdrawal restrictions or financial penalties for missed deposits. Remarkably, even products with soft commitments have been shown to increase savings balances and goal attainment significantly.

The Evidence

Individuals in the Philippines, who were randomly offered goal-based commitment savings accounts with voluntarily-set restrictions on access to deposits, increased their savings balances by 82% relative to the comparison group over a one year period.

Tobacco farmers in Malawi cultivated 7.7 percent more land, and increased the value of their agricultural input use by 17.1 percent, agricultural output by 20.1 percent, and household spending by 13.5 percent when they were offered a commitment savings account in addition to an ordinary savings account.

Members of Rotating Savings & Credit Associations (ROSCA) in Kenya spent 66-75% more on preventive health products when they were given a soft commitment savings device labeled for health expenditures; they spent 128-138% more on health when the account included a social commitment element in the form of group savings at the ROSCA.

We are partnering with financial institutions in the United StatesGhanaIndiaPeru, and the Philippines to design and test variations of commitment savings products. Our approach involves replicating and scaling promising commitment savings products that lead to the greatest cost-effectiveness and welfare impact.

We hope that this demonstration effect of thousands of clients using beneficial commitment savings products will provide an impetus for pro-poor financial products worldwide.

A Call for Partners

We are looking for partners who are interested in exploring these questions with us and scaling-up a commitment account for their clients. Potential partners include:

  • Financial institutions with whom we can partner in the design and roll out of appropriate commitment savings products for existing and new clients
  • Donors keen on supporting technical assistance packages to enable commitment savings product offerings and continued research in this field.

Ideal partners will be willing to expand their commitment savings products to several thousand clients over the next year, aim to serve the poor, and have a robust Management Information System (MIS) to track administrative outcomes, such as savings and/or loan balances. If your institution fits this description and is interested in improving the savings practices of your clients, please contact us. To download the information on this page as a pdf, please click here.

If you are interested in participating in or supporting this project, please contact Faith McCollister, Associate Director, at fmccollister@poverty-action.org.

 

A video of Dean Karlan's presentation on commitment savings for the Financial Access Initiative can be viewed below: