Saving More to Borrow Less: Experimental Evidence from Access to Formal Savings Accounts in Chile

Abstract

Poverty is often characterized not only by low and unstable income, but also by heavy debt burdens. We find that reducing barriers to saving through access to free savings accounts decreases participants' short-term debt by about 20%. In addition, participants who experience an economic shock have less need to reduce consumption, and subjective well-being improves significantly. Precautionary savings and credit therefore act as substitutes in providing self-insurance, and participants prefer borrowing less when a free formal savings account is available. Take-up patterns suggest that requests by others for participants to share their resources may be a key obstacle to saving.

Why Do Poor People Co-Hold Debt and Liquid Savings?

“…Other authors (Prina, 2015;Kast & Pomeranz, 2014) show that the poor may value savings account for precautionary purposes. Precisely, formal savings accounts hedge risks that cannot be shared interpersonally, and thus complement pre-existing sharing arrangements (Dizon et al, 2015;Dupas et al, 2015).…”

“…Ravi (2014) finds a link between repayment frequency and income frequency among Indian households, due to the fact that individuals with self-control problems repay their loans as soon as income is earned. In addition, evidence in the literature shows that short-term income shocks are the typical event (small loss, high probability) for which self-insurance through formal accounts is an effective alternative (Kast & Pomeranz, 2014). All things equal, cash-in variability may reflect fluctuations in both income and expenditure.…”

“…Most authors assume the validity of this argument (Morduch, 2010;Atkinson et al, 2013;Kast & Pomeranz, 2014) but hard evidence is missing. The common belief is that the poor co-hold debt and liquid savings for precautionary purposes.…”

Banking the Unbanked? Evidence from Three Countries

“…Individuals in the treatment group were visited by a NBS agent, were given some basic information about NBS and the accounts, and were told that the accounts normally featured various fees that would be waived for the study period. 19 At the conclusion of the visit, the agents gave respondents a voucher (which also expired after 4 months) which could be brought to NBS and redeemed for a free account. Beneficiaries of the free account were informed that the monthly maintenance fees would be waived for a total of 18 months, after which the promotion would end and account holders would have to cover it on their own.…”

How to Raise Household Savings in LAC: Constraints and Best Practices

“…In Chile, Kast and Pomeranz (2014) implemented a randomized control trial among 3,500 low-income microfinance clients in which the treatment provided them with cheap access to a formal saving product. Reducing constraints on saving generated a 20 percent drop in total outstanding short-term debt, mainly explained by a reduction in debt from informal sources such as family and friends.…”