Behaviorally Informed Rational Financial Inclusion Policies

Posted on July 22, 2013 by Sumita Kale

Poor are Rational showcases case studies that reveal that financially excluded poor undertake rational financial activities; they have the zeal to diversify their investment portfolio, drive to leverage their investments, calculating enough to save, repay loans and ultimately can also augment their income with returns from their financial activities.  In the new light of greater understanding of poor’s financial behaviour, several emerging economies have initiated a modified approach suiting the needs and financial behavior of excluded sections to achieve financial inclusionFor instance-

1)      In a field experiment in 2011, Opportunity International Bank in Malawi devised a saving mechanism through commitment accounts as farmers had difficulty in saving on their own (Commitments to Save: A Field Experiment in Rural Malawi)This allowed farmers to save a portion of their post harvest payouts but restricted their access to their own funds until a future date of their choice.  "Randomized impact evaluation of this new product revealed that it led to an increase in the use of agricultural input by 26%, greater crop sales by 22% and a 17 % increase in household expenditures as compared to a situation in absence of such savings product (Commitments to Save: A Field Experiment in Rural Malawi).

2)       SEED (Save, Earn, Enjoy, Deposit) a commitment savings product offered by Green Bank in Philippines.

3)      Jipange KuSave in Kenya and P9 in Bangladesh experimented with the provision of interest free loans in which a portion of the loan amount was kept as savings (CGAP, Brief Note, October 2012).

These observations juxtaposed with limited success of blanket financial inclusion policies in India (mass opening of bank accounts, etc)- as at present only 58.7% of households in India avail of banking services, out of which 54.4% is for rural areas and 67.8% is for urban areas (Revving up the Growth Engine through Financial Inclusion),emphasizes on the need for a novel  approach to achieve financial inclusionPerhaps observing the financial behavior of poor in detail would be the first stepping stoneThe next step would be to formulate innovative behaviorally informed and appropriate financial inclusion policies and suitable financial instrumentsFor instance, complimenting the universal opening of bank accounts with provisions for safe and lucrative options for saving and investment; it would attract the financially excluded poor away from risky informal instruments into the formal financial net and consequently pull them out of the vicious poverty trap.

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