The fastest growing part of the financial inclusion movement isn’t a product or even a standard, it’s data and measurement. And if there’s something experts are increasingly agreeing on, it’s that it is illusory to try to define financial inclusion in any precise, universal way. John Gitau says he’s confused, and so am I. How do you measure financial inclusion? . . .
It’s true that you might not be able to measure financial inclusion itself, but you can still measure things that indicate either actual, or the potential for, progress. Such indicatorsare what we can measure, and they are very useful as long we don’t confuse them with actual measurement of financial inclusion. . . .
There are two broad types of indicators which can be applied to fuzzy concepts like our cherished financial inclusion . . . . . .
Read MoreOne way to cope with an emergency is to borrow money from family and friends. But that typically doesn’t work when a disaster strikes a whole area. Sending and receiving money over larger distances, when transferring cash from person-to-person is impractical or impossible, can be very expensive. There are a litany of costs, from communications, to finding and traveling to agents, to the actual financial cost of the transfer. And don’t forget the cost of delay—in an emergency, delays in receiving needed funds can have big consequences. . . .
One way mobile payments could have substantial short-term benefits for poor households is by speeding up and lowering the cost of emergency transfers and remittances. A new paper by William Jack and Tavneet Suri provides evidence that mobile payments are doing just that . . . . . .
Read MoreWhether the result of variable incomes, liquidity constraints or reduced access to formal financial services, poor households face unique financial constraints that undermine their ability to effectively guard against risk and accumulate meaningful savings. There’s been a lot of research into these questions in the last few years. Two important papers, “Barriers to Household Risk Management: Evidence from India” and “Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya,” circulating for a few years have finally been published this month in the American Economic Journal: Applied Economics. Now that they’re “official” it’s worth revisiting them . . . . . .
Read MoreAbout 2.5 billion adults, just over half the world’s adult population, lack bank accounts. If we are to realize the goal of extending banking and other financial services to this vast “unbanked” population, we need to consider not only such product innovations as microfinance and mobile banking but also issues of data accuracy, impact assessment, risk mitigation, technology adaptation, financial literacy, and local context. In Banking the World, a new collection of research papers edited by Robert Cull, Asli Demirgüç-Kunt, and Jonathan Morduch, experts take up these topics . . . . . .
Read MoreWhy are piggy banks in the shape of a pig? I had been certain that piggy banks were simply a decorative representation of the fact that keeping a pig (or any livestock) is an informal way to save—“deposits” paid into the pig by feeding and housing it can be “withdrawn” once the pig is sold. A bit of research informed me, however, that the etymologists have the economists beat on this one. The name derives from the old English word for the ceramic once commonly used to make household containers, “pygg.” Saving in these “pygg banks” became popular, and potters began to create savings boxes in the shape of the animal.[i] . . .
Linguistic origins of the piggy bank aside, I have been thinking about livestock-as-savings after happening upon a book chapter by economists Christopher Barrett, Marc Bellemare, and Sharon Osterloh . . . . . .
Read MoreRemittances represent an important source of income for millions of households around the world. The size of remittance flows, as compared to a country’s own domestic output, can reach numbers as high as 30% (that’s in Tajikistan, if you’re wondering.) This has led economists and policymakers alike to ask whether remittances can be relied upon to spur development. One way this might occur is if remittances are more likely to be spent on productive investments, increasing the domestic income-earning potential of households . . . . . .
Read MoreFAI asked Jessica Goldberg to tell us about the research papers that have influenced how she thinks about savings and the poor. This is what she told us: . . .
I tend to think of the papers that have influenced my thinking about savings as making three related, big-picture points: . . .
- Savings is complicated
- Savings matters
- We can help!
Together, these papers remind me that we need to think carefully about why people save, about the relationship between savings and investment, and about what types of savings products are most likely to improve people’s wellbeing. . . .
Savings is complicated . . .
To me, Robert Townsend’s 1994 paper "Risk and Insurance in Village India" really captures important ways that people’s complicated lives and social situations affect their decisions around savings. . . .
Read MoreFAI asked Chris Dunford to tell us about books and papers that really made a difference in how he thought about savings and the poor. This is his response: . . .
Portfolios of the Poor: This book has changed the “narrative” in the microfinance community more than any other since the founding of the microfinance industry. Though the effort to promote a “client-centered” approach (a.k.a. demand-driven rather supply- or product-driven) has been concerted for over a decade, this book is what made clear and compelling both the importance and implications of starting with an understanding of what the client is already doing. But it goes further to help us understand what the poor are doing, not just those who step forward to be clients of current microfinance services. The book’s orientation and messages liberate us from the institutional straightjacket to revisit fundamental questions of what we might do to help the poor help themselves deal with financial issues. For me and my colleagues at Freedom from Hunger, and apparently for so many others, the book resonates with the stories we’ve been hearing from clients for decades and gives us a broader perspective in which to situate those stories. . . .
What has this to do with savings? The composite picture from financial diaries gives us vivid understanding of the roles and variety of savings in the financial management tool kit of the poor . . . . . .
Read MoreThe Findex project helps to correct a long-standing imbalance in evidence on global finance: an abundance of data on the supply of financial services but curiously little that’s systematic and comparative about global demand. Together with the IMF’s Financial Access Survey, we’re finally getting a clear picture of the holes in global financial access. . . .
There’s a lot to celebrate now that the Findex is here. So much so that it’s striking that it took so long to create a constituency for the efforts. Stanley Fischer had initiated the push in 2004 as head of the Advisors Group for the UN Year of Microcredit, and I joined Princess Maxima of the Netherlands in pushing the agenda forward in advisory roles with the UN in 2005. But it was the Gates Foundation’s support of the World Bank research group in 2010 that ultimately got us here. . . .
The Findex headline turns out to replicate an earlier count of the global financial gap: half the world is unbanked, about 2.5 billion adults, the same bottom line that came from aggregating a range of independent surveys from ten years ago. But even if the headline is familiar, the Findex delivers rich details . . . . . .
Read MoreA lot of progress has been made in understanding the savings behavior of poor households over the last few years. A raft of new studies are beginning to appear that promise to advance our understanding further. . . .
But thus far, the new studies are providing as many new mysteries as answers. David Roodman does a good job of exploring the mysteries presented by one of the first of these studies—a trial of a commitment savings product in Malawi. In summary, the researchers found that access to a commitment savings product helped increase savings balances—but NOT in the commitment savings account. Sometime soon I’ll be blogging about a new paper from Pascaline Dupas and Jonathan Robinson that similarly suggests that a commitment device works even though it doesn’t require much commitment. . . .
The mysteries aren’t limited to commitment devices though . . . . . .
Read MorePart 1 ("The Economics of Microsavings") of this brief exploration into the economics of savings-driven microfinance looked at the role of microsavings at microfinance institutions. In one large study, poor borrowers, despite accounting for 75% of active accounts, only contributed 3% of total deposits mobilized, mainly because they maintain low balances. However, poor savings clients carry out frequent transactions, for which they have well-demonstrated willingness to pay relatively large fees. These and other fees can be a major source of revenue on its own. However, many savings clients are also borrowers, and it is through the combination of fees, high yield microcredit loans, and other services (insurance, transfers, etc.) that microsavings clients can be truly profitable. . . .
That raises a question: if small savers are indeed profitable without providing significant funding, then where does the funding of deposit-driven MFIs come from? . . .
Read MoreI have a confession to make. When I began composing this blog, I approached it with a fairly simple hypothesis: Microfinance institutions (MFIs) that engage in large-scale deposit taking must likewise grow their loan portfolios. After all, deposits are a source of funding with high operational cost that must be appropriately offset by growing revenue, and only microfinance portfolios provide yields high enough to achieve that. And because many poor families have a higher demand for savings services than for credit, the resulting over-liquidity could push MFIs into unsustainable portfolio growth, eventually leading to the very credit bubbles that microsavings advocates are trying to avoid. . . .
It seems a reasonable enough hypothesis, and sufficiently controversial to be interesting. Trouble is, it’s not true. Reality turns out to be more complicated. In this two-part blog series, I will explore the underlying economics behind microsavings . . . . . .
Read MoreIn developed economies, households often use both savings and borrowings to produce large amounts of capital to buy fixed assets like houses and vehicles. House buyers, for example, make a down-payment from their savings and borrow the rest. Saving and borrowing are thus complements in this context. . . .
Behavioral economics provides another mechanism through which saving and borrowing act as complements: for households that are loathe to draw down their hard-earned savings, the ability to borrow–and thus to leave their stash of savings untouched—can function as a helpful way to maintain accumulations. Were households more confident in themselves, or if they had better mechanisms to achieve discipline, “borrowing to save” would be less useful, but in an imperfect world it can be the best of an array of imperfect strategies (Morduch 2010). . . .
In other contexts, borrowing and saving are depicted as alternative activities . . . . . .
Read MoreCredit is just one useful financial service, but credit has been the first focus of microfinance institutions because there’s a business model that makes lending possible, not because it is necessarily most important for customers. Customers pay handsomely for access to credit. Regulations also often make it much easier to lend than to take deposits (since the risk rests with the lender). . . .
Saving programs have emerged, and some advocates now claim that deposit services deserve claim to being the most fundamental need for poor families – and for the poorest specifically. But the picture developed by Collins et al (2009) pushes against that view. We argue that a range of financial devices are sought and used together, with different degrees of substitution and complementarity. None have clear primacy . . . . . .
Read MoreLow-income households are often trapped in a “debt-cycle”: They borrow to cover necessary expenses, repay the loan with their subsequent income, then borrow again because they have nothing remaining after repayment. Inconsistent income and seasonality, especially for farmers, makes borrowing attractive at the time of necessity. However, the associated interest costs may stifle the chances for the borrower to accumulate savings. Piyush Tantia from ideas42 discusses the case study, "Turning Interest into Savings," which describes the design, implementation and results of piloting a debt-to-savings product in India . . . . . .
Read MoreDaniel Rozas reflected recently on the moral component of encouraging savings among the poor. As Daniel points out, Victorian efforts at “reforming” the poor generally couched saving or thrift as a moral question. That moral component isn’t often found in today’s discussion of encouraging savings. . . .
It’s an interesting observation and worth thinking about. But while thinking about it, we should also consider the morality on the other side of the equation. Are there ethical concerns with encouraging savings? I can think of a few.
First, there is an issue that Daniel highlights: class imperialism. Put another way, how much should the wealthy be able to dictate to the poor how they live their lives? I think there are few who yearn for prior days when poverty was primarily viewed as the result of moral failings, failings which could be overcome by overseers all too often literally attempting to whip the poor into shape . . . . . .
Read MoreWhich mechanisms would you put in place if you wanted to save more? . . .
Suggestions are given at the tail-end of a recent UK study by the Personal Finance Research Centre. The researchers ran four focus groups and 30 one-on-one interviews with low income citizens in the UK. . . .
Here are some of the ideas that the respondents suggested: . . .
1. Seize the bits. Identify small, affordable amounts that can be saved while hardly being noticed in terms of one’s day to day standard of living. Bank of Amerieca’s “Keep the Change program” is one example from the US. "Portfolios of the Poor" has good examples from Bangladesh and India. It’s always great to get something for (nearly) nothing, and the big question is whether those small bits will add up to something meaningful quickly enough . . . . . .
Read MoreMicrofinance, like every other area of finance, has proven itself vulnerable to hype and fad. The long cycle of hyping microcredit seems to finally have run its course (though enthusiasm for microcredit has proved remarkably resistant to reality before). But there’s a new darling of the microfinance world that’s taking over much of the enthusiasm formerly reserved for microcredit: savings. . . .
Savings does have plenty going for it. It’s easy to understand and uncontroversial. Savings doesn’t have the moral baggage that lending and borrowing does. The downside of savings is hard to see. No family ever got caught in a “savings trap” or became “savings slaves.” Meanwhile the upside to accumulating assets is obvious . . . . . .
Read MoreThe recent acquisition of the online bank ING Direct by Capitol One caused heated responses from some of ING’s 7.7 million customers. Their biggest fear was that Capital One would abandon ING’s labeled savings account option. The simple option allows customers to open and nickname additional savings accounts into which they can set up online automatic transfers and funnel money toward a specific purpose. . . .
Top nicknames for ING sub-accounts include “savings,” “vacation,” “emergency fund/rainy day,” “house” and “taxes.” People can use this feature on the go, instantly opening a new labeled savings account from their smart phone when they decide they would like to start saving for something new, like “roof repair,” while they’re driving home in a hail storm, or a “wedding ring,” after a successful first date . . . . . .
Read MoreHow do you entice low-income families to save? One of the great innovations at Bank Rakyat Indonesia (BRI) was to give people a chance to win prizes if they held savings in the bank's SIMPEDES account. Getting lottery coupons proved far more popular than getting interest. The idea flew in the face of the traditional view that families are always risk averse. The SIMPEDES success helped show that families could be averse to the risk of big losses—but simultaneously risk-loving over small bets. BRI implemented the idea in 1984, and it's now morphed into a tenet of behavioral economics . . . . .
Read More
