by Dean Karlan
Then the twist: Some clients were told the lottery would pay out a single two-hundred-rupee gift card to be used in a store, while others were told the lottery would pay out four fifty-rupee gift cards, which could easily be shared. So a client in the fifty-rupee-card lottery could give out tickets to other group members, and hope to get a gift card in return if one of them won. On the other hand, the two-hundred-rupee gift card was indivisible (and was intentionally designed to require that the recipient be the one to redeem it at the store), and was thus less likely to be shared.
So if the weekly meetings led people to be more altruistic in general, then weekly repayment clients should have given out more additional tickets to fellow members than their monthly repayment counterparts, regardless of the denomination of the gift cards. On the other hand, if the weekly meetings led people to share risk better, to trust one another more, then weekly repayment clients should still have given out more additional tickets than monthly repayment clients overall—but the increase in giving should be concentrated around the fifty-rupee-card lottery (where ticket givers could more easily be compensated for their generosity in the event of a win).
In fact, that is exactly what the lottery experiment found.
In a basic way, the economists were getting at groups’ tendency toward risk sharing and economic cooperation. For the poor, who have the meagerest of economic cushions to absorb shocks, the ability to cope with risk is critical. That underscores the tremendous importance of the lottery result: An outside force (the lender) coming in and requiring weekly, rather than monthly, meetings had a noticeable effect on clients’ ability to share risk!
Sure enough, the effects of economic cooperation trickled all the way down to the lender’s bottom line: After the initial loans were repaid, clients from the weekly meeting groups were significantly less likely to default on future loans than their monthly meeting counterparts.
Feigenberg, Field, and Pande’s study provided some hard evidence that frequent group meetings led to repayment, and, in the process, shed light on one of microcredit advocates’ biggest claims—that borrowing can engender real social transformation (here in the form of increased risk-sharing) among clients. That hardly closes the discussion of how each particular microlender should shape its policies, but it’s a step in the right direction.
The Next Step (s)
Microcredit has already succeeded in one important way: It has captured the world’s attention. Millions of people are engaging for the first time in the fight against poverty, thanks to the support of everyone from Ban Ki-moon to Bono, and to the abundance of moving, true stories of personal transformation through microcredit. Witness the countless clicks at Kiva.org, the $2 million in one-dollar donations to microlenders at the checkout lines of Whole Foods grocery stores. Enthusiasm and participation are themselves a big step forward, and they will provide the power behind any effort we make. The question is: Are we using the right tools?
What if we could do twice as much good with the goodwill we’ve already got? What if we’re sawing at the prison bar with a butter knife when we could be using a steel file?
Microcredit has a strong foundation in Yunus’s group model. It works in some important, fundamental ways. But it’s far from perfect, and there are simple ways to make it better. Find out what really drives good behavior, and push it. Find out where the fat is, and cut it. This won’t happen on its own. We have to fill in the gaps and chip off the excess by tweaking, tinkering, and testing. Until we have a lending system that can serve both Mercy and Philip—without forcing one to pay for the other—microcredit still needs work.
Refining lending practices is only one part of the evolution of microcredit. Another is lenders’ expansion into offering a broader range of services to their clients. Most of the talk in development circles is about microfinance—it’s often glossed over that microcredit is just one piece of the puzzle. When we think about the role banks play in our lives in the United States, we don’t think only, or even primarily, about loans. We also think about ATMs, savings and checking accounts, money orders, and wire transfers. Though these are not credit, they are no less valuable tools. They make our lives easier.
It wasn’t so long ago that we had to make do without these conveniences, but it is increasingly difficult to imagine what the world was like then. As a teenager, I attended a summer program at Duke University to take math and writing courses (and, unbeknownst to me, to meet my wife, Cindy). My second year in the program I signed up for three weeks, but once I was there I decided to stay for seven. That meant I needed more cash for pizza and soda to make it through the summer. I still remember struggling to figure out how, in North Carolina, I could access money from my savings account in Florida. It was a long, drawn-out ordeal involving some research, numerous phone calls, a friend’s father driving me to a bank an hour away, and finally a face-to-face meeting with a branch manager.
Of course, the ubiquity of ATMs makes such a scenario unthinkable today in most developed countries. But for the poor it is not so. For the few who have bank accounts at all, simply making deposits and withdrawals still often requires significant travel and waiting time. Money transfers are mostly done face-to-face and in cash—which means they’re not just time-consuming, but risky too.
It may well be that the biggest impacts from microfinance will ultimately come from its mundane side: speeding up everyday transactions, giving people the ability to move money from place to place quickly and securely, and, most broadly, providing a safe and reliable way to earn money at one point in time and space, and spend it at another. When the spending happens before the earning, that’s credit. But when the earning happens before the spending—which is the case for most people, most of the time—it’s savings. Yes, good old-fashioned savings, like our parents and grandparents taught us. In the next chapter we will round out our discussion of microfinance by looking at some innovative approaches to helping the poor save.
7
TO SAVE
The Unfun Option
Vijaya was beautiful, and she was surrounded by beautiful flowers. She sat in the shadow cast by the crumbling east facade of the Koyamedu Market in Chennai, India. When Jake met her she was sitting at her table making garlands. It was repetitive work. She reached in front of her to pick out a single white jasmine bud from a pile of thousands, then she looped a piece of white nylon cord around its tiny stem and cinched it into a knot, sliding it down to join hundreds of others already tied. It was a growing strand of ancient DNA, pairs of opposing buds spiraling around a central axis. The finished portion lay coiled on the table like a wonderful and gentle snake.
The whole place smelled of wet flower petals and sweet incense, but nothing else about it suggested a luxury spa. Nor were the great ropes of fresh flowers destined for opulent hotel lobbies or the dining tables of the rich and famous. They were to be bought and disposed of by common people, who laid them at the feet or hung them around the neck of a religious icon in any one of the thousands of Hindu temples around the city. It takes some getting used to, but it is a fact: You will see a man walking barefoot, wearing a ripped and threadbare lungi, face dirty with soot, and he will be carrying half a yard of fresh roses. He might have spent his last twenty rupees on them.
Vijaya and her neighbors, who sat at similar tables making similar garlands, were hardworking women. They had something to show for it. Hidden in the folds of their dusty saris were small wads of crumpled, sweaty bills. Ten rupees, fifty rupees. The rupees were usually not plentiful, but that made them all the more important.
Each morning Vijaya arrived at Koyamedu and bought three hundred rupees’ worth (about $6.50) of flowers from a wholesaler. She set her table upright, laid down her spool of white cord, and propped a wooden crate on its end for a stool. Then she dumped out the day’s flowers on the tabletop and got to work, tying them automatically and efficiently. As long as Jake watched her, she never missed a knot or broke a stem. She took a break only when a cus
tomer approached her table. He would point to one of the coiled garlands and she would measure out the length he requested against her forearm. Then she would cut it off with a razor blade, take his money in her right hand, and deposit it in the folds of her sari.
By the day’s end she might have sold four or five hundred rupees’ worth. Jake asked her what she did with the profit. As it turns out, most of it never made it out of the market. Each evening, after all the flowers were gone, Vijaya was visited by a man who had no interest in garlands. He was there to collect a daily loan payment. A few daily loan payments, actually.
Vijaya had three or four loans outstanding at once. She used them for almost everything: to buy flowers in the morning, for the monthly rent on her family’s house, for her children’s school fees and hospital bills. The loans varied in amount and duration, but they had one thing in common: interest. That meant Vijaya was paying extra—usually about 3 percent extra per month—for most of her family’s biggest expenses.
When Jake asked her roughly how much interest she paid in total on all the loans, she demurred: “Interest?” If it was a considerable burden, she didn’t let it show. “I give about one hundred or one fifty each day to the man who comes. If I have extra, maybe I give some extra. If I need more money, I ask for it. That is the rotation.” She stressed that word, rotation. It suggested a smooth and continuous cycle, like the coming and going of the monsoon.
The system of borrowing for most big expenses was actually less like a monsoon and more like a leaky faucet. It meant rupees were constantly trickling out of Vijaya’s sari—and ultimately out of her family’s coffers—and spiraling down the moneylender’s drain in the form of interest. Ironically, losing money in this fashion, day after day, is no mean feat. That Vijaya was even able to keep up with her loans proves that she was making more than enough (the more being the interest amount) to cover her expenses.
Therein lies the puzzle.
Why Saving Is Good
Taking small short-term loans over and over is rarely the best way to operate, economically speaking, but it is exactly the way many millions of people operate. The rotation is churning in the neonlit offices of payday-loans outfits in Sioux Falls, South Dakota, as much as in the flower markets of Chennai.
Wherever it occurs, the borrowers engaged in it are making a statement: There is something I need, but I don’t have enough cash on hand to buy it. So I will take it today on credit, and eventually I will pay extra for the privilege of getting it early.
But whence the extra? This is an especially important question for a repeat borrower, say, one who takes $50 every Monday and pays back $55 on Friday. To support this regular borrowing, she must have found a way to consistently squeeze (at least) an additional $5 from an initial outlay of $50. So she knows how to put her money to work; unfortunately, it is working for the lender. But it is a powerful engine that turns $50 into $55 over the course of a week, and perhaps it could be refitted to serve her instead of her creditors.
Suppose she resolves to save a dollar each week and put it toward the next week’s $50 outlay. (For simplicity, assume throughout that her business remains the same size, always requiring a weekly investment of $50 to buy goods to sell.) On Monday after the first week of saving she borrows $49 instead of $50. That Friday she will repay just $53.90 ($49 plus 10 percent interest of $4.90), saving $0.10 in interest. By the end of the week she has also put aside another dollar, now for a total of $2.10. Next time she only needs to borrow $47.90. As the cycle continues, the compounding interest savings and the growing weekly savings combine to eat away at the loan amount. It’s all over sooner than you might expect: After twenty weeks she is completely debt-free. Now her powerful engine, which had been supporting the local moneylender, cranks out five dollars for her to keep once each week, like clockwork.
The example above is fairly realistic in terms of dollars, cents, and percentages, but it is also a fable. There is a moral in it. Saving—even a little at a time—can make a big difference.
Why Saving Is Hard
Like so many things right and good, saving is hard to practice. Most of us can find sufficient evidence of this in our own experience; still, it serves to list a few reasons why people in every corner of the world find it difficult to save.
For starters, on first inspection saving is not very attractive. It does not quench thirst, fill bellies, or prevent illness; nor is it shiny or fun to play with. It preaches abstinence and forbearance, always opts for the sensible shoes, and is probably registered with the local temperance union. Compared with the other things calling out to us and to our wallets, saving is just plain boring.
Second, for those who can see past its homely exterior, it still takes discipline to choose saving over buying something to be used right now, especially when the immediate purchase seems essential. One falls into thinking that today’s needs and opportunities are really more pressing than future needs and opportunities will be. Procrastination often sneaks in and makes itself at home while discipline is taking a nap. Saving, like a stern old schoolmarm in a gray woolen frock, will always be there tomorrow, so it can wait.
As this happens repeatedly, the hazy future becomes a storehouse for all the good things we’ll eventually do, and not-saving becomes a matter of momentum (or, more appropriately, of inertia). This is actually a pervasive phenomenon documented in psychology and behavioral economics. It happens to all of us, and not just with our piggy banks—the story also makes sense if you replace saving with quitting smoking, eating healthier, or exercising regularly.
Even for a person endowed with discipline and foresight, the road to saving is strewn with barriers and hazards. A few of these are transparent and predictable, like account-opening fees, withdrawal fees, and minimum balance requirements; but for the most part the obstacles are a sneaky, poorly behaved bunch. They are the devils on our shoulders, the monkeys on our backs, and the needy people with whom we are bound up. Your husband’s weekly card game, a taste for fine wines, those persistent calls from a cousin asking for a little cash—ferocious beasties all, they can devour a hundred times their weight and still be hungry.
Vijaya was grappling with one of these beasties. She said as much when Jake asked her whether she kept any savings at her house. Naturally, she didn’t enjoy handing over the better part of her day’s earnings to a collector instead of bringing it home to her family; but she didn’t see an alternative. She laughed matterof-factly and slapped the arm of the woman sitting next to her, who also chuckled and shook her head without looking up from the garland in her hand. Vijaya knotted another jasmine bud and said, “Of course we cannot save anything in the house. Whatever I bring home, my husband drinks it up.”
She did the international pantomime for drinking. The adjacent flower sellers, who had overheard her comment, concurred. They also knew the pantomime.
Almost as Good as Keeping It Under the Mattress
Facing a steeply uphill battle at home and with limited access to formal banking, many are forced to develop alternative savings solutions. That’s essentially what Vijaya was doing with her loans—using the agent’s daily collection to stand in for a savings account she did not have.
Other circumstances have bred a great variety of informal savings schemes around the world. West Africa has susu associations, in which a collector takes daily deposits from clients in exchange for a monthly fee; and ROSCAs (short for “Rotating Savings and Credit Associations”), in which members get access to a pool of monthly savings on a rotating basis, flourish on six continents.
There are many varieties, but most informal savings schemes have at least one feature in common: a cost to the saver. In developed countries, where interest-bearing savings accounts are widely available at no cost, solutions like these simply do not stack up. But half of the world’s population—over 2.5 billion people—use no formal financial services for either saving or borrowing. The informal solutions survive because, although they’re costly, they fill gaps
that desperately need filling.
Those gaps are exactly where effective development programs can have a big impact. And we can learn a lot about what’s needed by studying the way people use costly savings schemes in real life.
Pascaline Dupas of UCLA and Jonathan Robinson of UCSC undertook such a study in rural western Kenya in 2006. They designed an RCT to see whether obstacles to savings were responsible for low business growth among microentrepreneurs. Specifically, could gaining access to a bare-bones savings account make people better off?
First, Dupas and Robinson identified and surveyed a group of entrepreneurs—market vendors, bicycle taxi drivers, barbers, carpenters, hawkers, and others—and had them agree to keep detailed daily logs on their incomes, expenditures, and health status. Then they randomly selected half and offered to open savings accounts for them at the local cooperative, free of charge.
The account they pitched was no great shakes. It did not bear interest, and carried fees for all withdrawals. (Thus, it effectively had a negative interest rate.) It stands to reason that anyone who would actively use such an account must be facing some kinds of obstacles to savings; after all, the venerable under-the-mattress approach offers the same (zero) interest rate and no withdrawal fees. So their first question was: Would anybody even use it?
The answer was a resounding yes. Of those receiving offers, 89 percent opened an account, and 55 percent went on to make at least one deposit within six months. Such a strong response suggests that, for many people, an expensive, no-frills account with the village cooperative was really the best thing going. To find out which participants fit that description, Dupas and Robinson looked at the data they had collected in the initial survey. One thing seemed clear: Women made use of the account far more than men did (although the sample of individuals in the study proved too small to say with statistical certainty why this was the case). Maybe, like Vijaya, they faced more savings obstacles at home.
