What will it take to improve financial access to formal savings?

Q & A with CFSP Member Chris Woodruff
May 16, 2012

To a small number of villagers in rural Sri Lanka, access to formal financial services means a collector arrives by motorbike every two weeks and retrieves their savings deposits from a central lockbox. Before driving off, he leaves a receipt.

To other villagers and urban residents, financial access means buying a "scratch card" and uploading money instead of minutes to cellphone savings accounts.

These are just two methods in the growing effort to connect low-income and disadvantaged people in developing countries with formal banking options. They are at the heart of CFSP member Chris Woodruff's research project titled, “Finding the Headwaters of Household Financial Assets.”

Through his project, Woodruff explores whether the collectors on motorbikes and the scratch cards for cellphones are truly viable solutions for improving financial access. Will residents of Sri Lanka embrace these methods for saving long-term and will they benefit from them? Will the services be economically viable enough for commercial banks to want to help them spread more widely?

Woodruff looks at these questions and also examines what the impact on informal savings might be when formal banking services emerge. Woodruff, who is a Professor of Economics at the University of Warwick in Great Britain, shared more about his CFSP project in an interview. He describes what he hopes his work will contribute to understanding about financial access and the role it can play in alleviating poverty.

Q. How do you describe your research project and the questions you’re seeking to answer to non-economists?

Woodruff: There are two pieces to this research project. In the first one, we’re working with the National Savings Bank (NSB) in Sri Lanka to collect deposits with point-of-service terminals and handheld terminals. Deposit collectors take these out on their motorcycles, 5 to 10 km from the bank branch, in rural areas.  They initially did door-to-door collections. So, they went once a week into villages and clusters of houses in rural areas, and we knocked on the doors, and collect deposits. 

It became clear, somewhat rapidly, that this level of deposits wasn’t going to be enough to make this a commercially viable exercise, but National Savings Bank was willing to explore it as a research project, as a way of figuring out what savings demands are for the households and what might be commercially viable.  So, we shifted some of the collection services in two ways. First, in some areas, we went from weekly to bi-weekly collections. Second, in other areas, we asked the people who were participating in the savings program to identify either a house or a business that they felt would be a reliable place for us to put a locked box that they could then put their deposits in. In this way, the deposit collector could go to this point-of-service terminal, or locked box, rather than going door-to-door. He could stop in the community at one place.  He opens up all the envelopes, makes all the deposits, and leaves the receipts, which shows the deposits then made, in a place on the outside of the box. He still brings the handheld terminal. He still processes all of the deposits while he’s there, and then he seals up the envelope with the receipt in it and puts it back on the outside. People come back and collect their receipts and know it’s been deposited. 

We’re now migrating everybody to these boxes from door-to-door collections. We’ll end up with about 40 boxes. So, rather than the collectors making 400 stops door-to-door every week, they’ll make 40 stops bi-weekly. By shifting to the collection boxes, you lose the sort of peer or social pressure, though. There is a kind of obligation we have observed to come up with something for this deposit collector who has come all this way, whether you want to save or not. We haven’t analyzed the data fully yet, but we want to see what the drop off in savings is.  The idea here is that we’re trying to help NSB identify more viable products.

Q. What is the second piece of this project?

Woodruff: The second, and bigger, part of the project is related to the first. We’re working with a mobile operator, a bank, and a software company that’s developing a platform to link the mobile phones to bank accounts. Here the savings product is somewhat more flexible than with the deposit collectors. The way it works is that, let’s say, I have mobile phone. I buy a scratch card to put minutes on the phone. Instead of dialing the number that allows me to put minutes on the phone, I dial a different number. I put in a code from the scratch card, and it puts the money in the bank account instead of the minutes on the phone. So, what’s more flexible about it is that I don’t have to be at my house at 10 AM on Tuesday when the deposit collector with the point-of-service terminal comes by.

This also has two parts. One part is trying to understand where savings come from and when you offer these services how much people will use them; the other part is trying to determine the willingness to pay for these services.  Right now, these scratch cards go out to retailers through a distribution system where the mobile operator pays roughly 8% to the retailer when the scratch cards go to minutes. That’s just the cost of doing business, and it is built into the system. If, as a retailer, I sell 100 rupees worth of minutes, I should only get 92 rupees. But, if these 92 rupees aren’t going to the purchase of minutes, if it’s going to be deposited in the bank, the mobile operator is not going to pay that 8 rupees.

So, the question is: who’s going to pay the 8 rupees?

And, of course, this is an issue that sparks debate. Some people are convinced that users won’t pay anything on putting cash in, and they’re not going to pay any sort of fee.  When we talk to the mobile operator at the software company, they’re convinced that people will pay 10% for small deposits. They’re convinced that people will think about this in nominal terms and not in percentage terms. This is one of the things we want to find out. In our sample, some of the people will have to pay the full 8% fees, some will pay 4%, some 2%, and some will pay zero. We’re trying to understand the demand of elasticity for these services; we hope to come back to this discussion among retailers, mobile operators, and consumers with hard evidence. 

Q: How are ROSCAs (Rotating Savings and Credit Associations) tied into your study?

Woodruff: When we went to the rural areas to collect deposits, we broke the sample up into clusters so that there are about 156 different zones. Roughly half of those have collection services and half don’t. In around 90 of them, we identified at least one person in the zone who was a member of a ROSCA in which all of the members of the ROSCA lived within a kilometer of them. When we offer the product, we offer it to varying percentages of the people in the ROSCAs. Sometimes, we offer it to everybody in the ROSCA. Sometimes, we offer it to only the single member that we’ve picked. We’re trying to understand whether, as you increase the number of people who use the savings products who are also in the ROSCA, you begin to see people leave the ROSCA.

Q. What do you hope to contribute to the understanding of financial systems and poverty with your project?

Woodruff: So far, there have been a few studies that suggest that commitment to savings or bank accounts have very large effects on income. We don’t have any studies that have been done with high frequency data where we have the chance to unpack where this change in income is coming from. I think that’s one thing that we’ll be able to contribute.  We’ve got, what I think is, very high quality, high frequency data that allow us to look at consumption, other sorts of informal savings, and other savings mechanisms to try to understand what happens when people have access to savings and savings accounts.

Secondly, this sample is designed in such a way as to tell us something about how formal savings interact with informal savings, and, in particular, about ROSCAs. We’re interested in whether the availability of formal savings crowds out some of the informal savings. (So far, initially at NSB, it looks like it doesn’t at all, but we want to try to understand that and to verify.)  Probably few of us in developed countries are involved in ROSCAs. So, there must become a point where the financial system is working efficiently enough that you don’t use these kinds of savings mechanisms. We want to understand if this happens at this fairly rudimentary level of savings collections.

Q: What led you to be interested in this path of investigation?

Woodruff: I guess this started in two places. The ROSCA aspect started from a general interest of mine in how formal and informal institutions interact, not only in savings and financial services, but also in contract enforcement and other things like that, which I’ve done work on in the past.  That’s a question I’ve been interested in for a long time: what happens to informal institutions when the formal institutions change?

The savings question involved in this project was generated when Craig McIntosh, who is the collaborator on the project, and I started having conversations after we saw the Dupas-Robinson paper on Kenya* that showed these massive effects of savings.  I think we just wanted to understand, in a much more detailed way, if that effect was real. And, if it was, we wanted to understand, in a much more detail, what the mechanisms were. Sri Lanka is a place where, through my collaboration with Suresh de Mel, the quality of the data that we get there is just much better than it is any place else I have work. It’s a very good operation, and I think that matters a lot when because we’re trying to say something quite precise about the data.

* “Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya” by Pascaline Dupas and Jonathan Robinson. NBER Working Paper No. 14693. January 2009.

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