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

Lead Research Organisation: Heriot-Watt University
Department Name: Sch of Social Sciences

Abstract

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.

Planned Impact

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.

Publications

10 25 50
 
Description We use a field experiment to assess the impacts of offering access to a traditional formal microfinance institution (MFI) deposit account
and a mobile money account to financially excluded households. We contrast the effects of these saving devices on different welfare dimensions. Overall, mobile money accounts substantially improve income, savings, food consumption and financial well-being while the MFI accounts made no substantial difference on those outcomes,
except for food consumption in households.
Exploitation Route If the Beninese government wishes to promote access to a formal saving device (formal in the sense that is based on a contract which has legal value in front of a court) it could do so more efficiencly and with better outcomes, and for comparable deployment fees, by promoting access to mobile money instead of favouring access to an MFI account. This could have important and beneficial consequences on future users as we document in our findings.
Sectors Digital/Communication/Information Technologies (including Software),Financial Services, and Management Consultancy

 
Title Dataset 
Description We have collected information on around 4000 individuals over 3 sites across Benin. These individuals were selected randomly according to standard techniques prescribed notably by AfroBarometer. Our initial baseline was completed in spring of 2017. Our treatments were offered during the period Sept-December 2017. We plan on 2 further follow-up surveys that would allow us to have a panel dataset of 3 observations over time for each individual. Our rate of attrition is in line with other work I have done in that region in the past. 
Type Of Material Database/Collection of data 
Year Produced 2017 
Provided To Others? No  
Impact We are still in the process of collecting data. Two further follow-up waves are planned at this stage: October 2018 to Feb 2019 and a final one in June-July 2019. So it is too early for us to talk about the impact of these data. 
 
Description Collaboration on a paper on the heterogenous impacts of Mobile Money 
Organisation Colorado State University
Country United States 
Sector Academic/University 
PI Contribution I guide my research partner in navigating the dataset, and in creating variables. I provide most of the intuition and inspiration for estimation models. I also coordinate the writing effort.
Collaborator Contribution My research partner is involved in doing the estimations and the writing of the current working paper we are developing. This means that he uses the software STATA. We are both working on the interpretations and the write-up.
Impact We are still at the write-up phase so there is no working paper issued yet.
Start Year 2021
 
Description Collaboration on a paper on the heterogenous impacts of Mobile Money 
Organisation Colorado State University
Country United States 
Sector Academic/University 
PI Contribution I guide my research partner in navigating the dataset, and in creating variables. I provide most of the intuition and inspiration for estimation models. I also coordinate the writing effort.
Collaborator Contribution My research partner is involved in doing the estimations and the writing of the current working paper we are developing. This means that he uses the software STATA. We are both working on the interpretations and the write-up.
Impact We are still at the write-up phase so there is no working paper issued yet.
Start Year 2021
 
Description Collaboration on writing a paper on the longitudinal impact of ROSCAs membership. 
Organisation University of St Andrews
Department School of Economics and Finance
Country United Kingdom 
Sector Academic/University 
PI Contribution I guide my research partner in navigating the dataset, and in creating variables. I provide most of the intuition and inspiration for estimation models. I also coordinate the writing effort.
Collaborator Contribution My research partner is involved in doing the estimations and the writing of the current working paper we are developing. This means that he uses the software STATA. We are both working on the interpretations and the write-up.
Impact We are still at the write-up phase so there is no working paper issued yet.
Start Year 2021
 
Description Collaboration related to fieldwork 
Organisation MOOV
Country Benin 
Sector Private 
PI Contribution MOOV and MTN are helping us in carrying out or project as described in the grant application. As such we are not in a particular way making a contribution to this partnership.The following question is of greater interest.
Collaborator Contribution MOOV and MTN have made similar contribution to the project. They have helped us in setting our treatments and making them operational on the field. This means that when we proposed an individual to use a mobile banking account offered by either one of these mobile operators we had the sufficient equipement on the field to do that and make sure the enrolment was done efficiently and adequately. Another part of that collaboration will come later towards December 2018 and will concern using banking data from the new members we registered following our treatments. More information will be given for the next yearly report.
Impact At the moment we are still collecting data and will be doing so until December 2018 so at this point there is no output (papers, conference presentation, etc.) related to this collaboration.
Start Year 2017
 
Description Collaboration related to fieldwork 
Organisation MTN
Country Benin 
Sector Private 
PI Contribution MOOV and MTN are helping us in carrying out or project as described in the grant application. As such we are not in a particular way making a contribution to this partnership.The following question is of greater interest.
Collaborator Contribution MOOV and MTN have made similar contribution to the project. They have helped us in setting our treatments and making them operational on the field. This means that when we proposed an individual to use a mobile banking account offered by either one of these mobile operators we had the sufficient equipement on the field to do that and make sure the enrolment was done efficiently and adequately. Another part of that collaboration will come later towards December 2018 and will concern using banking data from the new members we registered following our treatments. More information will be given for the next yearly report.
Impact At the moment we are still collecting data and will be doing so until December 2018 so at this point there is no output (papers, conference presentation, etc.) related to this collaboration.
Start Year 2017