In collaboration with Crédito Hipotecario Nacional (CHN), we randomized the deployment of new behaviorally-motivated financial products across the bank’s entire microfinance clientele. CHN offers microfinance loans with monthly repayments over terms of 12 to 36 months, and therefore provides a unique opportunity to use the discipline of regular loan repayments over a long period of time to offer borrowers different savings strategies. In order to focus on the behavioral dimensions of savings product design, the treatments induce no direct financial incentives for clients at all and instead differ only in the manner and extent to which borrowers are ‘nudged’ to save. Since many commercial financial institutions may find binding their clients into true commitment products difficult or objectionable, our products are driven by asking clients to determine a savings trajectory that they wish to follow over the course of the loan and then prompting them to make these self-specified savings deposits at the time of each loan payment. The bank does not, however, penalize clients for failing to meet this trajectory, and deposits, once made, can be freely withdrawn at any time without charges. Our products therefore are based more on provoking mental accounting and reinforcing the salience of savings (Karlan et al., 2010) than on the use of true commitments such as the ‘lock box’ of the SEED accounts of Green Bank in the Philippines (Ashraf et al., 2006), the non-withdrawable deposits of the Grameen Pension Scheme (Collins et al., 2009), or the free deposits and costly withdrawals implemented by Dupas and Robinson (2009). Our results show that this light-handed, easily scaled approach can indeed be very successful at increasing savings balances (p. 2-3).
From the abstract
Can microfinance borrowers use the discipline of regular loan repayments in order to accumulate savings if prompted to do so? In an experiment, we offered commercial savings products to the microfinance borrowers of Guatemala’s largest public-sector bank. We find that giving these borrowers the opportunity to develop a savings plan and be reminded of saving at the time of loan repayment caused no increase in the opening of savings accounts but led to balances among savers that were two and a half times those in the control. A second treatment arm that proposed a default savings contribution of 10% of the loan payment caused the fraction of clients using linked savings accounts to double, as well as elevated deposits among savers, leading to final savings balances that were more than five times the control.A draft is here.