Publication - Working Paper
After a decade in which the micro-credit sector has taken off worldwide, a great deal of interest is now focusing on the prospect of mobilizing micro-savings by pulling the liquidity of the poor into the formal banking sector. This interest is coming from several different sides. First, a new wave of technological innovations from mobile banking to ATM cards hold out the promise that the transactions cost barrier on small accounts may fall precipitously when the technologies are applied to savings deposits. Second, the banking sector itself is facing a period of scarce liquidity, and mobilizing savings among the unbanked can prove a very low-cost source of lending capital, and one which presents no currency risk. Finally, from a welfare perspective this change may be beneficial both to the poor, whose effective rate of return on savings moves to positive from net negative (theft, inflation, etc.), and stimulative to the economy as a whole by improving arbitrage and lowering real interest rates. Hence there is a sense that the time of micro-savings has arrived. Products such as M-Pesa in Kenya have captured the attention of both policy makers and the private sector. The most popular products to date have focused on money transfers rather than savings mobilization. The project we propose pairs a mobile operator and a bank in Sri Lanka to offer regular savings accounts funded through the mobile agent network. A successful product in this space has enormous potential for scalability. The project is a randomized control trial. All households will eventually have access to the product, but some will have early access, before the mobile operator markets the product more broadly. Some of these households will receive rebates on user fees, effectively lowering the cost of using the mobile banking product. Using data from surveys of households conducted as a part of the project, we aim to answer three questions of first-order importance on the topic of financial services and the poor: 1) Does providing low-cost financial services increase formal savings in low-income households? We focus on a reduction in the cost of financial transactions – especially important for low-balance accounts – using mobile telephones linked to bank accounts 2) Does the availability of formal savings mechanisms lead to accumulation of assets either in the household or in enterprises operated by the households? 3) Where do funds deposited in formal savings accounts come from? That is, which expenditures are reduced to provide the funds that allow households to build savings balances?