Can financial products reduce poverty and vulnerability? Experimental evidence from Benin on the impact of access to saving accounts and microcredit.

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.

The beneficiaries of our research are primarily those interested in policies aimed at alleviating poverty through the use of formal financial devices.

1. Policymakers
Our research seeks to inform public policy decisions and will be of immediate interest to government officials and policy analysts in Benin, but also in many other countries where individuals have limited access to formal finance. Our research provides answers to matters affecting the daily life of a large proportion of individuals and on which policy makers can legislate or generate changes.
We will meet with Beninese policy-makers at the three ministries involved with financial institutions: Ministry of Microfinance, of Finance and Economics and of Development and Economic Analysis. This will be facilitated by our research partnership with the Economic and Social Council of Benin (ESC) which includes policy-advisers who interact regularly with key civil servants in various ministries. In addition, these actors will be invited to our workshop in Cotonou as audience and discussants, to disseminate and debate research findings and to further the dialogue between academia, the private and public sector.

2. Advocacy groups
Our findings are also aimed at advocacy groups on a number of themes.
a) Health and education: our results should be of interest to NGOs involved in public health and other public bodies arguing that better access to formal finance produces knock-on benefits in the form of improved health and more consistent investments in education.
b) Equality in access: this is of special interest to groups advocating gender equality as women's access to personal formal finance is often particularly compromised. In Benin, ROSCAs are often organised around ethnic or gender affiliations. This makes it more difficult for women and members of smaller ethnic groups to join and benefit from them. The promotion of a wider access to formal finance could help in reducing this structural inequality.
c) Rural development: our research should be of concern to groups (notably the NGO 'Groupe pour l'avancement de l'épargne rural') advocating a widening of the offers of financial services outside Cotonou, the only large city in Benin). Reaching poorer towns, considered as less lucrative markets for financial operators, could bring important gains to regions whose offer of formal services lags substantially.

3. Public-private partnerships
Our findings will deliver quantifications that will prove valuable for public-private partnerships seeking investment opportunities in formal finance. Such investment decision would be facilitated by having a better understanding of the potential benefits formal finance can bring. Bank and mobile phone saving accounts providers will gain insights as to what device is likely to be more effective and who is more likely to take up an account. State and bank could develop ways in facilitating access to formal saving accounts through different means. To the extent that we find major welfare losses stemming from a lack of access to formal finance, different incentives could be set so that Benin could experience an important scaling-up of its formal finance offer.

4. Local Research partners
The African School of Economics and the University of Abomey-Calavi (the only university in Benin) will be beneficiaries of this project. We anticipate that around 2 PhDs from each institution will be involved in the project and will gain abilities in the management of surveys and in the statistical analysis of a large longitudinal sample. This will generate opportunities for interactions with experienced researchers and PhD exchanges with Heriot-Watt and the University of Guelph. The Department for International Cooperation at the ESC, of which C. Tomavo (our partner and consultant) is member, will also benefit through its implication in the survey and the dissemination of our results.