GLOBAL FINANCIAL DEVELOPMENT REPORT 2014
some clients a dynamic incentive, a discount on future loans if the clients repaid the current loans. This offer led to a 10 percent reduction in the default rate, and the responsiveness was proportional to the size of the incentive.
Savings A number of psychological factors help explain people’s limited use of savings products. One is lack of self-control: people want to save, but self-control issues make it difficult to resist the temptation to spend the cash immediately. This type of behavior is interpreted as a sign of hyperbolic discounting, whereby people disproportionally value today’s money over tomorrow’s (Laibson 1997). Another explanation is that individuals face pressures from family members and others to share their excess funds, which eats away at their savings. Finally, lack of forethought may make people lose sight of the fact that they might need savings in the future. Commitment savings accounts, which allow individuals to deposit a certain amount and relinquish access to the cash for a period of time or until a goal has been reached, have been examined as a possible tool to boost savings by mitigating the self-control issues and family pressures to share windfalls. The evidence comes primarily from two studies: Ashraf, Karlan, and Yin (2006) and Brune and others (2011). The first study involved a randomized evaluation of commitment accounts in a financial institution in the Philippines. The take-up of the accounts was 28 percent. There was one treatment group, and the study did not show differential take-up. The second study focused on an institution in Malawi, with take-up of the commitment accounts at 21 percent. The study had two treatment groups; one was offered a checking account only, and the other a checking account, plus a commitment savings account. There was no differential take-up between the two groups, but the group with the checking and commitment accounts saved more. In other words, the observed results did not arise because of differences in take-up. Brune and others (2011) found that the commitment
FINANCIAL INCLUSION FOR INDIVIDUALS
treatment led to increases in deposits at the bank and, over the next agricultural year, was associated with rises in agricultural input use, crop sales, and household expenditures. The commitment savings accounts seemed primarily to have helped farmers less by mitigating self-control issues than by shielding funds from the social networks of the farmers, because participants who were identified with self-control issues experienced no different effect from the commitment savings accounts relative to their peers. On the other hand, the commitment savings accounts had a higher impact on wealthier individuals, who may have faced greater pressure to share funds. Other innovations in savings product design try to pin the attention of savers on long-term savings goals to reduce the tendency to become distracted and spend funds in the short term. Two approaches have been tested in recent studies. One involves the use of reminders, and the other involves offering labeled accounts, whereby individuals create accounts with explicit savings goals, such as to finance housing or education. Accounts with general automatic savings reminders lead to a boost in savings, but accounts with specific goal reminders are even more effective in raising savings. Karlan and others (2010) find that reminders can influence the use of deposit accounts for savings. They designed field experiments with three banks, one each in Bolivia, Peru, and the Philippines. In each experiment, individuals opened a bank savings account that included varying degrees of incentives or commitment features designed to encourage individuals to reach a savings goal. Some individuals were randomly assigned to receive a monthly reminder via text message or letter, while a control group received no reminder. Reminders increased the likelihood of reaching a savings goal by 3 percent, and the total amount saved in the reminding bank by 6 percent. Reminders that highlighted the client’s particular goal, that is, reminders that made a particular future expenditure opportunity, such as school fees, more salient, were two times more effective than reminders that did not mention the goal.
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