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Trial Title
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Before
Can financial products reduce poverty and vulnerability? Experimental evidence from Benin on the impact of access to saving accounts and microcredit.
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Can access to formal saving devices reduce poverty and vulnerability? Experimental evidence from Benin.
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Abstract
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Amongst many development actors and public aid donors it is commonly perceived that the poor cannot escape poverty because they are credit constrained and as such cannot invest. The main reason why they are credit constrained being the lack of collaterals. Microcredit, the practice of lending small amounts of money to the poor, is heralded as a key tool in the fight against poverty in least developed countries (LDCs). It is easy to overlook the fact that what the poor may actually desire is not a loan, but simply the ability to put their savings in a secure and reliable account. In which case the poor’s interest could be best served by providing access to an affordable formal saving account (microsavings). Addressing this empirically weak spot, this project will analyse the financial needs of the poor by comparing formal (microcredit and microsavings) and informal financial services. Through a randomized controlled trial in Benin, West Africa, we will test which of these financial instruments is more effective in helping individuals to reduce poverty and vulnerability.
Microcredit and microsavings are of great interest given that the vast majority of populations in LDCs have little if no access to formal finance. Most individuals in Benin use informal saving or lending mechanisms; informal due to the lack of any binding legal arrangement. In the absence of formal finance many Beninese resort to rotating savings and credit associations (ROSCAs). Participation in ROSCAs is costly and no interest is earned. Their members also bear the risk of default by other members, which frequently leads to financial loss and the breakdown of groups. ROSCA members have less flexibility in saving than they would on their own, since the group-determined contribution level is likely to differ from their individual optimal saving rate. Despite these constraints, ROSCAs enjoy popularity and are pervasive in LDCs. One can speculate that access to more secure and reliable formal financial products could lead to significant improvement in people’s ability to save and invest and would reduce the impact associated with shocks the poor face on a near daily basis.
To carry out our comparative analysis, we will offer access to microcredit and microsavings to different samples of individuals. This will allow to:
1) Analyse what drives the demand for these financial devices and enhance our understanding of the poor’s motivations for saving and investing.
2) Compare the effectiveness of microcredit vs. microsavings and examine whether formal financial services are more effective in helping individuals to escape poverty than ROSCAs. Our proposal thus directly addresses the Overarching Question 1 of the present Call.
3) Investigate subsidiary effects of formal finance on consumption patterns and the use of informal finance. Does formal finance help in reducing expenditures on luxury/frivolous items? Do the poor manage better to avoid falling into a debt trap with or without formal finance? Is formal finance driving people out of ROSCAs?
4) Analyse the resulting investments and their sustainability in two crucial dimensions: education and health. These are known to crucially impact long-term poverty.
It is well documented that shocks, such as illness and drought, entail severe consequences on poor people’s aptitudes to keep a constant path of consumption and investing in human capital. If access to microsavings can better allow people to reduce poverty and vulnerability than can microcredit, moneys earmarked for microloans might be redirected towards improving ways to savings. Scaling up access to microsavings amongst poor households might well represent a simpler, cheaper and less risky intervention compared to scaling up microcredit programs. It could also reduce the risk associated with over-indebtedness faced by many individuals. The results of this project will be of substantial interest for public agencies and donors.
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After
Amongst many development actors and public aid donors it is commonly perceived that the poor cannot escape poverty because they are credit constrained and as such cannot invest. The main reason why they are credit constrained being the lack of collaterals. Microcredit, the practice of lending small amounts of money to the poor, is heralded as a key tool in the fight against poverty in least developed countries (LDCs). It is easy to overlook the fact that what the poor may actually desire is not a loan, but simply the ability to put their savings in a secure and reliable account. In which case the poor’s interest could be best served by providing access to an affordable formal saving account (microsavings). Addressing this empirically weak spot, this project will analyse the financial needs of the poor by measuring the impact of having access and using two formal saving devices: a saving account in an MFI and mobile banking (through the use of a mobile phone). Through a randomized controlled trial in Benin, West Africa, we will test which of these financial instruments is more effective in helping individuals to reduce poverty and vulnerability.
Microsaving is of great interest given that the vast majority of populations in LDCs have little if no access to formal finance. Most individuals in Benin use informal saving or lending mechanisms; informal due to the lack of any binding legal arrangement. In the absence of formal finance many Beninese resort to rotating savings and credit associations (ROSCAs). Participation in ROSCAs is costly and no interest is earned. Their members also bear the risk of default by other members, which frequently leads to financial loss and the breakdown of groups. ROSCA members have less flexibility in saving than they would on their own, since the group-determined contribution level is likely to differ from their individual optimal saving rate. Despite these constraints, ROSCAs enjoy popularity and are pervasive in LDCs. One can speculate that access to more secure and reliable formal financial products could lead to significant improvement in people’s ability to save and invest and would reduce the impact associated with shocks the poor face on a near daily basis.
To carry out our comparative analysis, we will offer access to microsaving devices to different samples of individuals. This will allow to:
1) Analyse what drives the demand for these financial devices and enhance our understanding of the poor’s motivations for saving and investing.
2) Examine whether formal financial services are more effective in helping individuals to escape poverty than ROSCAs.
3) Investigate subsidiary effects of formal finance on consumption patterns and the use of informal finance. Does formal finance help in reducing expenditures on luxury/frivolous items? Do the poor manage better to avoid falling into a debt trap with or without formal finance? Is formal finance driving people out of ROSCAs?
4) Analyse the resulting investments and their sustainability in two crucial dimensions: education and health. These are known to crucially impact long-term poverty.
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Last Published
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Before
July 18, 2017 05:21 PM
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November 05, 2018 08:30 AM
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Intervention (Public)
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We will run an RCT that will allow us to test directly for the impacts of microsavings and microcredit.
Treatment 1 will consist of being offered a loan from a microfinance institution (MFI). There are several MFIs active in Benin, although very few cover all of our three survey sites. We are planning to collaborate primarily with the FECECAM (Faitière des Caisses d’Epargne et de Crédit Agricole Mutuel; fececam.org). FECECAM is a well-established and publicly owned bank and one of the few microfinance institutions to have a full national network, and as such is present on all our three sites. Bank branches of the FECECAM across the countries are called CLCAM (this term is used below). Our treatment will cover the costs of application, the passport size pictures and the administrative fees.
Treatment 2 will offer individuals a bank savings account with the FECECAM. FECECAM already has a large client basis and offers flexible and accommodating membership conditions. It would again represent the ideal partner for this treatment. Our treatment will cover the administrative costs of opening an account and the passport size pictures required.
Treatment 3 will provide individuals the use of mobile banking by opening a mobile phone saving accounts. Comparative to other regions in Africa and notably East Africa, mobile banking is a recent phenomenon in Benin. Our treatment would offer a transfer (gift) upon the opening of an account with MTN Benin or MOOV Benin, our two partners in this project.
Our control group would not be exposed to any of these offers.
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After
We will run an RCT that will allow us to test directly for the impacts of microsavings.
Treatment 1 will offer individuals a bank savings account with the FECECAM. FECECAM already has a large client basis and offers flexible and accommodating membership conditions. It would again represent the ideal partner for this treatment. Our treatment will cover the administrative costs of opening an account and the passport size pictures required.
Treatment 2 will provide individuals the use of mobile banking by opening a mobile phone saving accounts. Comparative to other regions in Africa and notably East Africa, mobile banking is a recent phenomenon in Benin. Our treatment would offer a transfer (gift) upon the opening of an account with MTN Benin or MOOV Benin, our two partners in this project.
Our control group would not be exposed to any of these offers.
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Intervention End Date
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January 01, 2018
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March 30, 2019
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Primary Outcomes (End Points)
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1) Test whether or not formal savings devices are more effective at facilitating escape from poverty by helping individuals attain their saving and investment targets than ROSCAs or other informal saving devices such as itinerant bankers.
2) Examine the insurance aspect: by targeting survey areas where informal finance is sufficiently active, we will get enough variation in ROSCAs (which offer limited insurance) and insurance group membership. This will allow us to examine whether or not formal saving devices are more effective in helping individuals to minimise vulnerability by providing them with better insurance against shocks (health, income, etc.).
3) Investigate subsidiary effects of formal financial devices on consumption patterns. Our evidence (Dagnelie and LeMay-Boucher, 2012) shows that ROSCA membership tends to reduce expenditures on luxury/superfluous items. Is this also the case with formal savings devices? Do the poor improve their ability to avoid falling into a debt trap with or without formal finance? Does falling into a debt trap reduce average consumption in the long term, and is formal finance more effective in reducing the period of indebtedness?
4) Track over time how the use of formal finance feeds into the use of informal finance and vice-versa. Our research design will allow us to see if ROSCA members, who have been offered a formal saving vehicle, are likely to opt out of informal finance products or if the two devices are used complementarily.
5) Analyse the resulting influences of formal finance on investments, consumption patterns, savings and insurance, and their sustainability in different dimensions which impact on poverty: education and health. The basic approach to evaluate poverty is to use the well-known FGT (Foster and al. 1984) poverty indices, which provide straightforward interpretations of an individual’s monetary poverty status.
6) Highlight what drives the demand for these financial devices and estimate the importance of commitment. Understanding better the means through which the poor manage to save and the motivations for doing so, has important policy implications.
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After
1) Test whether or not formal savings devices are more effective at facilitating escape from poverty by helping individuals attain their saving and investment targets than ROSCAs or other informal saving devices such as itinerant bankers.
2) Examine the insurance aspect: by targeting survey areas where informal finance is sufficiently active, we will get enough variation in ROSCAs (which offer limited insurance) and insurance group membership. This will allow us to examine whether or not formal saving devices are more effective in helping individuals to minimise vulnerability by providing them with better insurance against shocks (health, income, etc.).
3) Investigate subsidiary effects of formal financial devices on consumption patterns. Our evidence (Dagnelie and LeMay-Boucher, 2012) shows that ROSCA membership tends to reduce expenditures on luxury/superfluous items. Is this also the case with formal savings devices? Do the poor improve their ability to avoid falling into a debt trap with or without formal finance? Does falling into a debt trap reduce average consumption in the long term, and is formal finance more effective in reducing the period of indebtedness?
4) Track over time how the use of formal finance feeds into the use of informal finance and vice-versa. Our research design will allow us to see if ROSCA members, who have been offered a formal saving vehicle, are likely to opt out of informal finance products or if the two devices are used complementarily.
5) Analyse the resulting influences of formal finance on investments, consumption patterns, savings and insurance, and their sustainability in different dimensions which impact on poverty: education and health. The basic approach to evaluate poverty is to use the well-known FGT (Foster et al. 1984) poverty indices, which provide straightforward interpretations of an individual’s monetary poverty status.
6) Highlight what drives the demand for these financial devices and estimate the importance of commitment. Understanding better the means through which the poor manage to save and the motivations for doing so, has important policy implications.
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Experimental Design (Public)
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Before
We will collect and analyse data using a large and representative survey of around 3,100 households. We will sample from Cotonou, the largest city in the country with around 1 million inhabitants, and from two towns in Benin: Parakou in the north and Abomey in the centre. This sample frame will offer a mix between households who live in urban and semi-urban conditions. The first six months will focus on improving our questionnaire by piloting it. The next 24 months of the project will see us visiting each randomly selected household across our three sites every 9 months, for a total of 2 observation points for each household. During the remaining 6 months of the project we will start the analysis phase.
Our survey will target parts of the three sites where informal finance is present and thriving. This would give us enough variations in ROSCAs and insurance group membership. We know from our previous surveys in Benin (in 2004, 2006 and 2014) that these areas are likely to include poor households with the appropriate income brackets and financial degree of activities for this study. On the one hand, targeting poorer regions is likely to lead to negligible (if not undetectable) impact from our treatments. Poorer households who cannot even use informal finance are less likely to demand any saving vehicles because of their inability to save. On the other hand, targeting richer neighbourhoods would see us surveying a large proportion of households already using formal finance products, which would render our treatment superfluous.
Our questionnaire will include a baseline survey aimed at obtaining housing information and information on each member: religion, activity, education, work, risk aversion, discounting, etc.
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After
We will collect and analyse data using a large and representative survey of around 3,500 households. We will sample from Cotonou, the largest city in the country with around 1 million inhabitants, and from two towns in Benin: Parakou in the north and Abomey in the centre. This sample frame will offer a mix between households who live in urban and semi-urban conditions. The first six months will focus on improving our questionnaire by piloting it. The next 24 months of the project will see us visiting each randomly selected household across our three sites every 6 to 9 months, for a total of 2 (or 3) observation points for each household. During the remaining 6 months of the project we will start the analysis phase.
Our survey will target parts of the three sites where informal finance is present and thriving. This would give us enough variations in ROSCAs and insurance group membership. We know from our previous surveys in Benin (in 2004, 2006 and 2014) that these areas are likely to include poor households with the appropriate income brackets and financial degree of activities for this study. On the one hand, targeting poorer regions is likely to lead to negligible (if not undetectable) impact from our treatments. Poorer households who cannot even use informal finance are less likely to demand any saving vehicles because of their inability to save. On the other hand, targeting richer neighbourhoods would see us surveying a large proportion of households already using formal finance products, which would render our treatment superfluous.
Our questionnaire will include a baseline survey aimed at obtaining housing information and information on each member: religion, activity, education, work, risk aversion, discounting, etc.
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Planned Number of Observations
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The precise number of observations planned per cluster depends on the population density of each cluster. We are planning around 1350 hh selected for Cotonou, 1150 for Parakou and around 600 for Abomey. The precise distribution of hh selected per cluster depends on a closer exploration and analysis of their respective density.
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After
The precise number of observations planned per cluster depends on the population density of each cluster. We are planning around 1600 hh selected for Cotonou, 1300 for Parakou and around 600 for Abomey. The precise distribution of hh selected per cluster depends on a closer exploration and analysis of their respective density.
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Sample size (or number of clusters) by treatment arms
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Before
Our sample size per arm per cluster is planned according to following distribution: 1/4 of total hh per cluster (CLCAM microcredit treament), 1/4 (CLCAM bank account treatment); 1/4 (mobile banking money treatment), 1/4 control group (no treatment).
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After
Our sample size per arm per cluster is planned according to following distribution: 1/3 (CLCAM bank account treatment); 1/3 (mobile banking money treatment), 1/3 control group (no treatment).
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