IDEAS home Printed from https://ideas.repec.org/p/sol/wpaper/2013-262437.html
   My bibliography  Save this paper

Flexible Microfinance Products for Financial Management by the Poor: Evidence from SafeSave

Author

Listed:
  • Carolina Laureti
  • Alain De Janvry
  • Elisabeth Sadoulet

Abstract

Well-functioning financial services are key for consumption smoothing and to take advantage of investment opportunities. Even though poor households badly need financial services for their day-to-day money management, a commonly held view is that they are ‘too poor’ to save and to repay loans with flexible terms. This paper explores whether this view holds true for two specific flexible financial products, namely passbook savings accounts and credit lines. Analyzing the daily transactions and balances in more than 10,000 SafeSave accounts—a microfinance institution based in Dhaka, Bangladesh—over nine years (2004-2012) shows that clients make extensive use of their flexible savings-and-loan accounts to accommodate changing availability of and needs for liquidity in the face of three kinds of events: paydays, Islamic festivals (Ramadan, Eid al-Fitr, and Eid al-Adha), and political protests (hartals). Cash-in (savings deposit and loan repayment) flexibility is used to cope with both positive (paydays) and negative shocks (Islamic festivals and political protests); cash-out (withdrawal and loan taken) flexibility is used if the negative shock is anticipated well in advance (as in the case of Islamic festivals). We show that, while interest rates on loans are higher than in competing MFIs, repayment rates are comparably high. We also show that SafeSave is covering its operational costs, indicating that this type of flexible financial services can be offered to the poor in a sustainable fashion. Overall, analysis of the SafeSave experience shows that flexible financial products are much in demand by the poor and that they can be profitable for the microfinance institution that offers them.

Suggested Citation

  • Carolina Laureti & Alain De Janvry & Elisabeth Sadoulet, 2017. "Flexible Microfinance Products for Financial Management by the Poor: Evidence from SafeSave," Working Papers CEB 17-036, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/262437
    as

    Download full text from publisher

    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/262437/3/wp17036.pdf
    File Function: Œuvre complète ou partie de l'œuvre
    Download Restriction: no

    References listed on IDEAS

    as
    1. Jalan, Jyotsna & Ravallion, Martin, 2001. "Behavioral responses to risk in rural China," Journal of Development Economics, Elsevier, vol. 66(1), pages 23-49, October.
    2. Fafchamps, Marcel & Udry, Christopher & Czukas, Katherine, 1998. "Drought and saving in West Africa: are livestock a buffer stock?," Journal of Development Economics, Elsevier, vol. 55(2), pages 273-305, April.
    3. Karlan, Dean S. & Linden, Leigh, 2014. "Loose Knots: Strong versus Weak Commitments to Save for Education in Uganda," Center Discussion Papers 162693, Yale University, Economic Growth Center.
    4. Morduch Jonathan, 2010. "Borrowing to Save," Journal of Globalization and Development, De Gruyter, vol. 1(2), pages 1-11, December.
    5. Lee, Jeong-Joon & Sawada, Yasuyuki, 2010. "Precautionary saving under liquidity constraints: Evidence from rural Pakistan," Journal of Development Economics, Elsevier, vol. 91(1), pages 77-86, January.
    6. Jeon, Doh-Shin & Menicucci, Domenico, 2011. "When is the optimal lending contract in microfinance state non-contingent?," European Economic Review, Elsevier, vol. 55(5), pages 720-731, June.
    7. Carolina Laureti, 2017. "Why do Poor People Co-hold Debt and Liquid Savings?," Working Papers CEB 17-007, ULB -- Universite Libre de Bruxelles.
    8. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-591, May.
    9. Shonchoy, Abu S. & Tsubota, Kenmei, 2015. "Economic impact of political protests (strikes) on manufacturing firms : evidence from Bangladesh," IDE Discussion Papers 523, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    10. Uzma Afzal & Giovanna d’Adda & Marcel Fafchamps & Simon Quinn & Farah Said, 2018. "Two Sides of the Same Rupee? Comparing Demand for Microcredit and Microsaving in a Framed Field Experiment in Rural Pakistan," Economic Journal, Royal Economic Society, vol. 128(614), pages 2161-2190, September.
    11. Michal Bauer & Julie Chytilova & Jonathan Morduch, 2012. "Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India," American Economic Review, American Economic Association, vol. 102(2), pages 1118-1139, April.
    12. Pierre Bachas & Paul Gertler & Sean Higgins & Enrique Seira, 2017. "How Debit Cards Enable the Poor to Save More," NBER Working Papers 23252, National Bureau of Economic Research, Inc.
    13. Gloede, Oliver & Menkhoff, Lukas & Waibel, Hermann, 2015. "Shocks, Individual Risk Attitude, and Vulnerability to Poverty among Rural Households in Thailand and Vietnam," World Development, Elsevier, vol. 71(C), pages 54-78.
    14. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence From a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 635-672.
    15. Erica Field & Rohini Pande & John Papp & Natalia Rigol, 2013. "Does the Classic Microfinance Model Discourage Entrepreneurship among the Poor? Experimental Evidence from India," American Economic Review, American Economic Association, vol. 103(6), pages 2196-2226, October.
    16. Ambrosius, Christian & Cuecuecha, Alfredo, 2016. "Remittances and the Use of Formal and Informal Financial Services," World Development, Elsevier, vol. 77(C), pages 80-98.
    17. Dehejia, Rajeev & Montgomery, Heather & Morduch, Jonathan, 2012. "Do interest rates matter? Credit demand in the Dhaka slums," Journal of Development Economics, Elsevier, vol. 97(2), pages 437-449.
    18. Marc Labie & Carolina Laureti & Ariane Szafarz, 2017. "Discipline and flexibility: a behavioural perspective on microfinance product design," Oxford Development Studies, Taylor & Francis Journals, vol. 45(3), pages 321-337, July.
    19. Robert M. Townsend, 1995. "Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 83-102, Summer.
    20. Cassar, Alessandra & Healy, Andrew & von Kessler, Carl, 2017. "Trust, Risk, and Time Preferences After a Natural Disaster: Experimental Evidence from Thailand," World Development, Elsevier, vol. 94(C), pages 90-105.
    21. Erica Field & Rohini Pande, 2008. "Repayment Frequency and Default in Microfinance: Evidence From India," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 501-509, 04-05.
    22. Barboni, Giorgia, 2017. "Repayment flexibility in microfinance contracts: Theory and experimental evidence on take up and selection," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 425-450.
    23. Czura, Kristina, 2015. "Do flexible repayment schedules improve the impact of microcredit?," Discussion Papers in Economics 26608, University of Munich, Department of Economics.
    24. Craig McIntosh, 2008. "Estimating Treatment Effects from Spatial Policy Experiments: An Application to Ugandan Microfinance," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 15-28, February.
    25. Platteau, Jean-Philippe & De Bock, Ombeline & Gelade, Wouter, 2017. "The Demand for Microinsurance: A Literature Review," World Development, Elsevier, vol. 94(C), pages 139-156.
    26. Udry, Christopher, 1995. "Risk and Saving in Northern Nigeria," American Economic Review, American Economic Association, vol. 85(5), pages 1287-1300, December.
    27. Prina, Silvia, 2015. "Banking the poor via savings accounts: Evidence from a field experiment," Journal of Development Economics, Elsevier, vol. 115(C), pages 16-31.
    28. Shonchoy, Abu S. & Kurosaki, Takashi, 2014. "Impact of seasonality-adjusted flexible microcredit on repayment and food consumption : experimental evidence from rural Bangladesh," IDE Discussion Papers 460, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Antonia Grohmann & Steffen Herbold & Friederike Lenel, 2020. "Repayment under Flexible Loan Contracts: Evidence from Tanzania," Discussion Papers of DIW Berlin 1884, DIW Berlin, German Institute for Economic Research.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marc Labie & Carolina Laureti & Ariane Szafarz, 2016. "Discipline and Flexibility: A Behavioral Perspective on Product Design in Microfinance," Working Papers CEB 15-020, ULB -- Universite Libre de Bruxelles.
    2. Barboni, Giorgia, 2017. "Repayment flexibility in microfinance contracts: Theory and experimental evidence on take up and selection," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 425-450.
    3. Carolina Laureti, 2015. "The Debt Puzzle in Dhaka’s Slums: Do Poor People Co-hold for Liquidity Needs?," Working Papers CEB 15-021, ULB -- Universite Libre de Bruxelles.
    4. Singh, Nirvikar, 2018. "Financial Inclusion: Concepts, Issues and Policies for India," MPRA Paper 91047, University Library of Munich, Germany.
    5. Marc Labie & Carolina Laureti & Ariane Szafarz, 2013. "Flexible Products in Microfinance: Overcoming the Demand-Supply Mismatch," Working Papers CEB 13-044, ULB -- Universite Libre de Bruxelles.
    6. Emiliano Magrini & Pierluigi Montalbano, 2012. "Trade openness and vulnerability to poverty: Vietnam in the long-run (1992-2008)," Working Paper Series 3512, Department of Economics, University of Sussex Business School.
    7. Carolina Laureti, 2017. "Why do Poor People Co-hold Debt and Liquid Savings?," Working Papers CEB 17-007, ULB -- Universite Libre de Bruxelles.
    8. Zimmerman, Frederick J. & Carter, Michael R., 2003. "Asset smoothing, consumption smoothing and the reproduction of inequality under risk and subsistence constraints," Journal of Development Economics, Elsevier, vol. 71(2), pages 233-260, August.
    9. Stefan Dercon, 2002. "Income Risk, Coping Strategies, and Safety Nets," World Bank Research Observer, World Bank Group, vol. 17(2), pages 141-166, September.
    10. Jin, Ling & Chen, Kevin Z. & Yu, Bingxin & Huang, Zuhui, 2011. "How prudent are rural households in developing transition economies:," IFPRI discussion papers 1127, International Food Policy Research Institute (IFPRI).
    11. Aragón, Fernando M. & Karaivanov, Alexander & Krishnaswamy, Karuna, 2020. "Credit lines in microcredit: Short-term evidence from a randomized controlled trial in India," Journal of Development Economics, Elsevier, vol. 146(C).
    12. Karlan, Dean & Morduch, Jonathan, 2010. "Access to Finance," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4703-4784, Elsevier.
    13. Gaurav, Sarthak, 2015. "Are Rainfed Agricultural Households Insured? Evidence from Five Villages in Vidarbha, India," World Development, Elsevier, vol. 66(C), pages 719-736.
    14. Battaglia, Marianna & Gulesci, Selim & Madestam, Andreas, 2018. "Repayment Flexibility and Risk Taking: Experimental Evidence from Credit Contracts," CEPR Discussion Papers 13329, C.E.P.R. Discussion Papers.
    15. Giles, John, 2006. "Is life more risky in the open? Household risk-coping and the opening of China's labor markets," Journal of Development Economics, Elsevier, vol. 81(1), pages 25-60, October.
    16. Sirikarn Lertamphainont & Robert Sparrow, 2016. "The Economic Impacts of Extreme Rainfall Events on Farming Households: Evidence from Thailand," PIER Discussion Papers 45, Puey Ungphakorn Institute for Economic Research, revised Oct 2016.
    17. Hillesland, Marya, 2019. "Gender differences in risk behavior: An analysis of asset allocation decisions in Ghana," World Development, Elsevier, vol. 117(C), pages 127-137.
    18. Dubois, Pierre, 2002. "Consommation, partage de risque et assurance informelle : développements théoriques et tests empiriques récents," L'Actualité Economique, Société Canadienne de Science Economique, vol. 78(1), pages 115-149, Mars.
    19. Aker, Jenny C. & Sawyer, Melita & Goldstein, Markus & O'Sullivan, Michael & McConnell, Margaret, 2020. "Just a bit of cushion: The role of a simple savings device in meeting planned and unplanned expenses in rural Niger," World Development, Elsevier, vol. 128(C).
    20. Wondimagegn Tesfaye & Gebrelibanos Gebremariam, 2020. "Consumption smoothing and price enhancement motives for grain storage: empirical perspectives from rural Ethiopia," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 8(1), pages 1-19, December.

    More about this item

    Keywords

    Bangladesh; liquidity; household finance; contract design;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sol:wpaper:2013/262437. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Benoit Pauwels). General contact details of provider: http://edirc.repec.org/data/cebulbe.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.