Our design is simple, and builds on the evolved wisdom of the ROSCA idea: in short, we replicate the rotating structure of a ROSCA in an individual-liability product. This combines saving and credit into a single financial service, offered to individuals (rather than groups), and tests whether microcredit demand is motivated by savings needs.
Experimental treatments vary the type of contract offered to participants. Contracts differ by (i) timing of lump sum payment and (ii) interest rate. Assuming a product cycle of six weeks, lump sum payments are either made on week 1 or week 6 (where ‘week 1’ refers to the week immediately following the week of the offer). On any week that the lump sum is not paid, the participant is required to pay a fixed amount. The base lump sum payment is either smaller (that is, a negative interest rate), equal to (zero nominal interest rate) or larger than (positive interest) the sum of weekly fixed amounts paid.
We there have two treatments, which together can be combined in six different ways (that is, there are three possible interest rates and two possible weeks for lump sum payment). Each participant in the experiment is randomly offered one of these contracts, and must make a ‘take it or leave it’ decision whether to accept. We are interested to test (i) whether there is demand for this kind of rotating individual-liability product, and (ii) if so, how that demand varies with the terms of the contract randomly offered.
The proposed study will represent a novel and important contribution to the existing literature on microfinance under two main respects. First, almost no research in this literature considers directly the trade-off between microcredit and microsaving; that is, almost no literature studies the extent to which savings and credit may operate as substitute methods for easing credit constraints. One notable exception is the recent work of Kast and Pomeranz (2013), who show some evidence that reducing barriers to savings lowers borrowing among microfinance clients in Chile. The proposed study, by evaluating a product that embodies both savings and credit components, will be able to directly test the degree of complementarity or substitutability of credit and savings for different types of individuals. Second, while there is some suggestion that the formalisation of informal savings products can have large advantages for the poor (Dupas and Robinson, 2012), no previous research has tested directly whether the rotating structure of a ROSCA can viably be implemented as an individual microfinance product. The proposed study, by reproducing the structure of a ROSCA within an individual liability product, can test the viability of formalising one of the most common informal savings tool in the developing world, and evaluate its impact.