Viewing all posts with tag: Savings  

When Social Networks Are Everything, but Not Enough

We know that the path out of poverty is rarely a smooth one.  The poor are buffeted by a wide range of shocks, pushing them backwards along the way.  Exploring the world of risk in the Kenya Financial Diaries, we learned that for many of the poor, navigating a world of risk is actually not only about how you manage your money.  It’s also about how you manage relationships with friends and family who can come to your aid when things go wrong.  Consider Greta’s story: 

Greta and her husband had saved money for a caesarian section she would need to deliver her baby. But public health facility workers went on strike just she was due, and the cost of care at a private facility was five times higher, much more than Greta could finance without hard and dangerous sacrifices. Through friends and family Greta was able to raise roughly 75% of the additional funds needed. 

For low-income Kenyans, social network financing of risk is incredibly powerful . . . 

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You Say M-Shwari, I Say Payday Loan

Over at CGAP, Julie Zollman has a terrific post on M-Shwari, the Kenyan borrowing and saving platform built on M-Pesa, examining the underlying customer needs that have led to M-Shwari’s success. Here’s a key passage:

The appeal [of M-Shwari] was the possibility of being able to borrow on demand, in real time, to stretch families’ ability to make ends meet in the short term.  M-Shwari offered liquidity bigger than credit from local shops; faster, more private, and more reliable than friends and family, and cheaper than moneylenders. Here was a product that … solved a very real financial need while also getting delivery right: being accessible, having simple rules…
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Linking Wage Labor and Savings: Evidence from Sri Lanka

We often talk about how access to financial instruments may complement entrepreneurship.  Financial instruments such as vehicles for savings and loans may help to encourage entrepreneurship and investment by making it possible for individuals to make larger investments and to hoard returns for the future.  Less has been said about the interaction between financial access and wage work, but a recent paper by Michael Callen, Suresh De Mel, Craig McIntosh and Christopher Woodruff shows, perhaps surprisingly, that a strong link can exist between financial access and wage labor as well.

In their experimental study, individuals in Sri Lanka were offered access to an improved savings product in which weekly deposits could be made to deposit collectors operating door-to-door with digital point-of-service terminals to record deposits.  As in previous studies, access to the savings product increases savings and expenditures.  The authors however also find that access to this savings product increased incomes while simultaneously encouraging disinvestment in microenterprises . . . 

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What We Talk About When We Talk About Savings

A few weeks ago I attended the first day of the New England Universities Development Consortium’s annual conference. It’s a good place to see the latest economics research on a pretty wide variety of development topics, including microfinance. During one session that included presentations of four papers, I noticed that three were about “savings” but each, on closer inspection, had a very different definition of “savings.”

One paper was examining the demand for credit versus savings, but the savings in question was money set aside for less than two weeks. Another was evaluating a program to encourage savings among 8 and 9 year olds and measured account  balances at the end of a school semester. The third discussed savings accounts held in formal banks in Nigeria, with massive balances compared to the other papers.

So what are we talking about when we talk about savings?

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The Wisdom of the Group: FAI's Newest Briefing Note on Savings Groups, Research, and Product Design

Budgeting can be a daunting task for the poor. Poor families must stretch low, often-volatile income to meet basic consumption needs, and handle un­foreseen expenses. Despite these challeng­es, the poor are able to save. They often do so in small amounts for short periods of time, adding to and spending down savings frequently. But short-term saving seldom results in long-term assets—it is not a tool for building up larger sums.

The poor have an acute need for savings tools to amass lump sums of money, yet the supply of useful products often falls short, in part because formal providers face barriers to entry in this market. Savings groups are (and have been) a traditional method used by households around the world to save.  But what makes these groups effective?  What value do they provide for members? Can lessons from savings groups inform the design of products that reduce cost, reduce risk, and help consumers save?

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New USFD Household Profile

Each of the U.S. Financial Diaries' Household Profiles presents the financial life of one family in the USFD study. While these families are not necessarily representative of the total sample, they illustrate recurring themes: households struggling with income volatility, unplanned expenses, and finding ways to save and invest, but also using creative–and sometimes counter intuitive–budget and money management strategies to help make ends meet. 

The latest profile focuses on Elena Navarro,  27-year-old woman living outside of San Jose, CA.  She has a bachelor’s degree and ambitions to attend law school. While Elena’s degree and experience qualify her for jobs that pay well above the poverty line, she lives close to the margin . . . 

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Financial Access 101: Why Savings Groups Work

Our recent Financial Access 101 video provided an introduction to savings groups - a common tool used around the world to help poor families build savings and better manage their financial lives.  In our latest installment in this series, we explore why savings groups work.  The underlying mechanisms of these groups (public commitment, social norming, salience, limited access, and mental accounting) work together to create an effective way of helping poor households increase their savings . . . 

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NYT: In Lending Circles, a Roundabout Way to a Higher Credit Score

Earlier this week, The New York Times published a feature on new initiatives aimed at bringing informal savings groups into the formal financial sector:

While informal lending circles among families, acquaintances, co-workers and neighbors are familiar to hundreds of millions of people all over the globe, they are rarely recognized by mainstream financial institutions . . . 

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Financial Access 101: Intro to Savings Groups

Budgeting can be a daunting task for poor famlies - they must stretch low, often-volatile income to meet basic consumption needs, handle unforeseen expenses, and try to build savings. But banks and formal institutions often do not offer savings products to the poor because their small deposits and frequent transactions do not cover the cost of servicing accounts.  For rural populations, not having a nearby bank branch is another obstacle to formal savings.

Despite these obstacles, poor families DO save.  Savings groups are one tool that  poor access as a dependable mechanism for saving.  In the latest video from our Financial Access 101 series, we provide an introduction to savings groups, the basic models, and why they help poor families better manage their financial lives . . . 

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Commitments to Save - Effective but Dangerous?

Among the useful insights from behavioral economics (or behavioral science, if you prefer) is a greater understanding of the difficulties everyone faces following through on our good intentions to save for the future. People routinely say that they would like to save more—to build a cushion, for retirement, for a future vacation—but when the time comes to put money away, it gets spent instead.

Some of the most well-known and oft-cited policies and products influenced by behavioral economics address this issue

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How can financial services advance the rights of the poor?

I recently attended the launch event for Bill Easterly’s latest book, The Tyranny of Experts.  His thesis is that international development policies have been determined by a group of so-called experts, who both ignore the rights of the poor and systemically violate those rights.  After his presentation, Professor Easterly urged the audience to start more discussions that highlight a rights-based development agenda.

This call to action prompted me to think about how the provision of financial services can advance the rights of the poor, and reminded me of my first-hand experience with Slum Dwellers International (SDI) in Uganda.  SDI is a grassroots organization of the urban poor that started in India in 1996 but now works in 33 countries . . . 

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The New York Times: How Credit-Card Debt Can Help the Poor

Today The New York Times features a perspective from Shaila Dewan on the importance of credit and saving in the lives of the poor.  Dewan highlights that life without credit can be expensive and severly limiting in terms of accessing housing and other services or dealing with emergencies.  She also notes that savings and credit are interconnected and quotes FAI's Jonathan Morduch on his own observations of the relationship between this activities from his research in Bangladesh . . . 

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In Conversation with FAI: David McKenzie on Mental Accounting in Development Research

Imagine you enter a shoe store that is having a sale – buy any pair of shoes, get a second pair for free. Sounds like a great deal, right? Now imagine that same store had an offer to take 50% off any two pairs of shoes. Even though you are spending the exact same amount for the same two products, perhaps you react differently to the two offers. Perhaps there is something about removing “free” from the offer that might make you feel like you’re not getting as good of a deal. And how would you pay for these shoes – with cash? Credit card? Mobile wallet balance? Does it even matter? Research shows that people perceive $1 in mobile money differently than $1 in cash, and that these different perceptions DO influence spending habits.

The process of mentally separating different forms of money and assigning value to them, keeping track of potential costs and benefits to transactions, and categorizing expenses into buckets like “food” and “healthcare” is called mental accounting . . . 

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Under-savers Anonymous: A US Chapter?

As a field researcher collecting data for the US Financial Diaries project in Cincinnati, I interviewed 30 low-income families about the details of their household finances over 16 months. One question was always in my mind: What’s the difference between their financial lives and mine? And how might this comparison help design financial products for people who are struggling to make ends meet? One of the most important distinctions I identified was our vastly different abilities to save. For me, an unexpected $300 car repair might be a pain in the butt, sure – but I’m able to deal with it by dipping into my savings account. For USFD families, that same bill could throw the household into a mire of debt, stress, and embarrassment (not to mention lack of transportation).

My experience in the field lines up with data on the dismal savings rate in the US compared to other parts of the world. It speaks to the difficulty of putting aside money when very little is coming into a household in the first place, and it highlights the dearth of financial products offering effective carrots or sticks to boost Americans’ savings . . . 

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From Responsible Finance to Suitable Finance: Financial Engineering for Low-Income Households

This post is written by Bindu Ananth and Amit Shah. Bindu Ananth is President of the IFMR Trust and Amit Shah is Head of  Business Intelligence at IFMR Rural Finance. They co-edited the recently published book “Financial Engineering for Low-Income Households.”

Five years ago when we set up the KGFS model of financial institutions in remote-rural India, we wanted to make a fundamental shift in the way financial services were offered to households. We wanted the organising principle to be suitability, i.e., how do we make sure that every single customer receives the portfolio of financial services that is most suitable given her needs and preferences? This is essentially what wealth managers are supposed to do for ultra-rich individuals but we wanted to do it for clients with a mean income of USD 1000 per year through staff with twelve years of formal education . . . 

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New Research from the American Economic Review

The American Economic Association (AEA) recently released the Papers and Proceedings issue of its journal American Economic Review, which presents selected papers from the AEA's annual meeting. The AER is one of the premier economics journals and has very broad coverage. For instance, you can learn everything you never knew you wanted to know about income and church attendance in nineteenth century Prussia. Happily, this volume also includes a number of papers relating to mobile money, credit, savings, and insurance.

Mobile Money

In their study, William Jack, Adam Ray, and Tavneet Suri investigate how households using M-PESA interact with and exploit their informal networks when making transactions. The authors find M-PESA users have more remittance activity, make transfers over distances greater than 100 km, and have more reciprocal transactions than non-users.

While Jack et al. looked at volume of transactions, David Weil and Isaac Mbiti used aggregate data in their research on the velocity of mobile money. One of the more intriguing findings is that withdrawals are made frequently and in small amounts, even though users can reduce fees if they group withdrawals. As the use of mobile money grows in other countries (M-PESA recently launched in India, for instance) it will be interesting to see how similar these (and previous) findings are in different cultural contexts.

Gender and Finance

Using data from over 30,000 firms in 90 developing countries, Elizabeth Asiedu, Isaac Kalonda-Kanyama, Leonce Ndikumana, and Akwasi Nti-Adde analyze whether gender is a determinant in financing constraints and access to credit for firms. They find that indeed, female-owned firms are more likely to be financially constrained than male-owned counterparts but only in the sub-Saharan African region. There is no gender gap in other regions but small firms are more likely to be financially constrained than larger firms, and foreign-owned firms are less likely to be constrained than domestically owned firms.

Moving from the macro to the micro level, Carolina Castilla and Thomas Walker investigate gendered dynamics of intra-household financial decisions in their paper. In a field experiment in Southern Ghana, researchers conducted public and private lotteries with cash and in-kind prizes to observe the effects of these windfalls on household allocations. They found “husbands' public windfalls increase investment in assets and social capital, while there is no such effect when wives win. Private windfalls of both spouses are committed to cash (wives) or in-kind gifts (husband) which are either difficult to monitor or to reverse if discovered by the other spouse.”


We return to Kenya with Michael Kremer, Jean Lee, Jonathan Robinson, and Olga Rostapshova in their study on behavioral biases and firm behavior. Among a sample of Kenyan shopkeepers, those with lower math skills were less accepting of small-scale risk and were also less likely to have larger inventories than those with higher scores. There are some interesting observations in the paper on the connection between loss aversion and microfinance, suggesting that small business owners are less likely to access microcredit if risk averse and social safety nets could possibly help increase investment in these enterprises.

Similarly, Ahmed Mushfiq Mobarak and Mark R. Rosenzweig look at risk in the context of the Indian insurance market, specifically rainfall insurance. Their findings show that when insured farmers took greater risks, wage levels increased but so did the volatility of labor demand, creating a threat to landless workers. When offered the choice, landless workers also purchased insurance when contracts were offered to farmers.


Lastly, Suresh de Mel, Craig McIntosh, and Christopher Woodruff report the findings of their field experiment in rural Sri Lanka that tested the efficacy of various methods of collecting deposits in formal bank accounts. Although their research shows frequent, face-to-face collection increases aggregate household savings, collections using community lock boxes affected the number of transactions but not the overall level of savings.

How the Poor are Saving for Change

Last month Oxfam America, Freedom from Hunger, and the Strømme Foundation released the results of a three year in-depth study evaluating their joint Savings for Change (SfC) program in Mali. The study, implemented by IPA and the Bureau of Applied Research in Anthropology at the University of Arizona, combined an RCT and ethnographic research techniques over a period of three years resulting in arguably the broadest and deepest rigorous evaluation of a savings program we have.

SfC currently operates in 13 countries in West Africa, Latin America, and Asia but the program in Mali is one of the largest. Since 2005, women in the program have formed small groups that meet regularly and require members to contribute to a joint savings fund. Members then take out loans from the pot at an agreed upon interest rate. At a predetermined annual date, the fund is divided among members and returns can be anywhere from 30-40% or higher. The timing of the payout usually coincides with planting season, festivals, or other periods when there is a greater need for increased cash flow. For this study, researchers randomly selected villages to receive the SfC program from a pool of 500. They also conducted ethnographic case studies and the quantitative data necessary for the impact evaluation . . . 

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