Economic Geographies

There’s been a seeming lot of discussion lately about the non-traditional savings habits of the poor, what with Portfolios of the Poor coming out, and I recently saw another interesting document on product-specific savings plans in India.  Women (usually) may sign up with a store to save towards the purchase of a specific product, and may be rewarded with an extra several percentage discount at the end – the original installment plan (although they don’t get to take the product home first!).  The shortcomings of this plan are that the money is non-fungible (i.e. can’t be later withdrawn to pay for a different product), and that there’s no guarantee that the price of the product won’t rise over the course of the saving period, forcing the client to save more than originally expected.  However, a number of clients also identified the social pressure to complete their savings and make the purchase as a valuable incentive to continue saving, which they wouldn’t have had with a formal savings account.  This echoes the findings of other studies of non-monetary rewards for savings, and could be an interesting concept around which to design new savings schemes.

Another interesting document recently – this one a qualitative study of group liability borrowers in India, which highlighted the role of compulsory savings in both easing loan repayments and increasing borrowers’ confidence to take on larger loan amounts.  I find this fascinating in part because it’s somewhat counterintuitive – if compulsory savings place a greater burden on borrowers to provide some money every week, all other things being equal, I would have expected such a program to be a disincentive for participation, rather than an incentive.  The study suggested that women were more confident in their borrowing because they knew they could draw down their savings if necessary, which almost suggests that compulsory savings functions as a type of emotional capacity building for financial planning.  Cool result, although it needs more quantitative testing.

[NB: Can't find the citation for this one either!  Definitely kicking myself for not including it in the first place now.]

Lending group sizes: Read something recently stating that repayment rates were highest among a studied selection of lending groups when the group had 14 people in it.  I find this fascinating – is it something like Dunbar’s number for close friends, instead of general social connections?  What I don’t totally understand is why the number would be as large as 14.  It seems to me that the social pressure exerted by any one individual on others would decrease linearly with the number of group members – that is, I can put more pressure on 5 other people to repay their loans than on 14, because of my own time constraints.  Or perhaps the limits on social pressure are outweighed by the implicit pressure of having 13 other examples of people successfully repaying their loans, instead of just 4?  Freakonomics mentioned some research recently about the power of implicit social pressure (or sanction) in guiding behavior, with regard to people seeing examples or merely believing that a majority of others were acting in a certain way.  Perhaps one could think of living up to an example (of loan repayment, in this case) as a way of earning social capital, instead of actively spending it by pressuring other group members to repay their loans.

Social determinants of lending group access: Another predictable but still interesting fact is that self-selecting lending groups are sometimes reluctant to take on members who are too poor – lacking social capital as well as financial (and isn’t that a metaphor for poverty in general?).  It does make sense to view current poverty as deterministic of future entrepreneurial success, from the POV of another lending group member, but I also wonder if group members would view occasional poverty (i.e. brought on by a recent illness) differently than chronic poverty.  How long does someone have to be abjectly poor before a lending group is more likely to reject them?  That’s an interesting question.  [NB: Can’t find citation for this, although I think it may have come from Understanding Poverty.)

Monthly vs. weekly repayment schedules: This was a wonderful study – an analysis of whether Indian MFI clients were more likely to repay their loans if they made weekly repayments, monthly repayments, or monthly repayments with weekly group meetings regardless.  Repayments didn’t actually vary in a statistically significant manner across any of the three repayment schemes, although the monthly group actually had the lowest rate of missed payments according to the raw data.  I say “wonderful” because this knowledge is a great step towards designing lending programs that are better suited to the variable and unpredictable incomes of the poor – it’s quite valuable to understand that time-consuming weekly repayments aren’t necessary to pressure clients into repaying, which may give them more flexibility with their repayments (and use of loans).