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This post originally appeared on the IFMR Trust Blog and is re-posted with permission.

By Bindu Ananth

I was at an excellent behavioral finance conference organized by the Michigan University’s Centre on Finance, Law & Policy last week. One of the panels on investor protection debated issues including the impacts of disclosures, choice architecture and social norms marketing on investor behavior. There was also an interesting discussion on role of advice and advisors in de-biasing investors or exacerbating weaknesses.

In the audience Q & A, in response to a question on the role of financial advice for low-income investors, one of the panelists responded that failures in the market for advice were less of an issue here since by and large, the right answer in most cases is just “save more for the future.” I found myself disagreeing with this notion strongly and one more reminder that the field of household finance has failed to examine the financial lives of low-income families in sufficient detail. In this post, I attempt to share from our KGFS work what are some of the other important aspects where advice seems to matter.

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> Posted by Hannah McCandless, Program Support Associate, Village Enterprise

Through its one-year graduation program, Village Enterprise provides business and savings training, access to savings groups, seed capital, and mentoring to rural East Africans living in extreme poverty. The program combines these grassroots interventions with linkages to financial institutions, increasing the financial capability of the extreme poor. In the second part of this series, Village Enterprise reflects on some of the learning gained through these interventions, focusing on amplifying progress made at the grassroots level through linkages to formal institutions.

The adoption of attitudes, habits, and behaviors needed for healthy financial decision-making is an essential first step in preparing individuals to be consumers of financial services. But just because households regularly save money or understand the risks of microloans does not necessarily mean that they are ready to evaluate and take-up formal financial services on their own. To be effective, financial inclusion interventions for those living in extreme poverty, at the base of the pyramid, need to both foster financial capability and facilitate healthy linkages to financial institutions.

Recognizing this need, Village Enterprise is working to establish linkages between our Business Savings Groups (BSGs, our version of VSLAs) and formal financial institutions. However, as we have learned, linking our BSGs to the right financial institution is easier said than done. We have found that creating healthy linkages is a multi-step process, rather than a one-time event.

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> Posted by Ross Tasker, COO, Nobuntu

A worker prunes trees

A worker prunes trees

Imagine an elderly lady in her late seventies, who lives in a township in South Africa. Her income is very little, some US$120 a month in assistance from the government, and her body is old and sore – she is now too old to work. With no savings to draw upon, and no other sources of income, she struggles to afford medication for her chronic ailments. Two of her three children are unemployed, and her grandchildren are hungry and unable to pay the taxi fare to get to their school. This position isn’t atypical in South Africa. There are hundreds of thousands of older adults in the country (8 percent of the total population). Making matters worse, there is a distinct lack of a formal savings culture in the country. Imagine the impossible financial decisions faced by so many elderly South Africans on a daily basis.

There are various reasons for the shortage of savings in South Africa. One of which is the legacy of structural exclusion along racial lines that the pre-democratic regime left behind. During this time, a large part of the population was denied access to basic services and human rights, let alone access to any meaningful financial services.

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> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI

Those who work in the financial inclusion space need a deep understanding of how low income people manage their money, and there is no better guide to develop this understanding than Ignacio Mas, who recently spoke at the Africa Board Fellows seminar in Cape Town. Here are some of his insights.

Unused money is vulnerable if you are poor. You have to protect it from a lot of things – theft, friends and family, and, also, your future self… (Let’s not underestimate the threat of the future you as someone who has the most access to, and authority over, those funds.) And there is no saying how resolved you will stay toward your savings goals. One way to protect any unused money against these threats is to make it less liquid. For example, you could convert your savings into a goat. In many countries, a goat can be sold if an emergency should arise, but you certainly wouldn’t sell or trade it to make an impulse purchase. Or as the vendor I just bought holiday jam from put it: “Making jam is like forced savings for me. I spend it in the summer on jars and sugar and fruit and get it back in December for Christmas shopping money!” These are examples of self-nudges that enable clients to better stick to their goals – one of the seven behaviorally-informed practices for financial capability. These approaches create behavioral roadblocks, so that individuals are able to save with less effort.

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> Posted by Elisabeth Rhyne, Managing Director, CFI, and Michael Mori, Senior Designer, Dalberg Design Impact Group

The following post was originally published on NextBillion.

From a mathematical point of view, borrowing and saving are mirror images. In both cases many small payments allow for one or more large payouts. Only the sequence differs. Stuart Rutherford’s classic description involves “saving up” (saving) and “saving down” (borrowing), both for the purpose of assembling “usefully large sums.” When viewed in this way it is clear that saving and borrowing can serve much the same purpose, and at times can even substitute for each other.

This is true, as far as it goes, and it underscores the importance of disciplined payments of small amounts as a path to obtaining the lump sums needed for major purchases.

We recently traveled to India (Mumbai and rural Maharashtra) and Kenya (Nairobi and farming villages outside of Nyahururu) as part of a research project led by the Center for Financial Services Innovation and the Center for Financial Inclusion, and conducted by Dalberg. In speaking with a variety of residents, we were struck by vast differences in the way people make borrowing and savings decisions.

The people we talked with carried out most of their financial actions through informal instruments, though many were members of cooperatives and some did have (largely inactive) bank accounts. Instead of using these formal options, they borrowed mostly from friends, family and moneylenders. They saved in cash stashed at home, livestock, land and gold, amongst other assets. We asked how they decided where and how to save and borrow. They very willingly described their thought processes and the considerations that guide them in making decisions. As it turns out, their decisions about borrowing hang on surprisingly different criteria from those about saving, bearing on very different realms of their lives.

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> Posted by Brian Kuwik, Chief Regional Officer, Africa, Accion

Today around the world, we celebrate our youth and their achievements and reflect on the goals of “eradicating poverty and achieving sustainable consumption and production” for the youth of this generation. To achieve these goals, a culture of saving money consistently over time will be important.

How can financial institutions, policy makers, and parents encourage the youth to save? A six-year project (2010-2015) across four countries, YouthSave, led by Save the Children and Washington University examined this question. Recently, I attended the project’s dissemination event in Accra, Ghana and learned about how, as part of the project, a bank partnered with middle and secondary schools to offer formal savings accounts to students 12-18 years of age.

Many Ghanaian students are saving money informally in their schools because they either lack national identification documents or cannot find an adult whom they trust to be the primary signatory to a bank account.  Some entrepreneurial students act as “susus” collecting cash from their classmates on a daily basis and safe-guarding it. Since they often keep one day of savings as a fee for this service, this can be a costly way of saving.

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> Posted by Hannah Sherman, Project Associate, CFI

A financial shock can happen suddenly and at any time, and a single unexpected expense can push many American households into financial hardship. Something as straightforward as a car repair can have a snowball effect on a family’s finances if they are not prepared for it. A 2015 report from the Pew Charitable Trusts found that in 2014, 60 percent of American households experienced a financial shock, and that the average household spent half a month of income on its most expensive shock.

While most households have at least a loose budget for recurring expenses like housing, food, and transportation, most are not prepared for additional unexpected expenses, a study from the Center for Financial Services Innovation (CFSI) found. Consumers’ attitudes and behaviors are typically consistent with their financial health – i.e. those who are financially healthy are more likely to have recovery strategies available when setbacks strike.

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> Posted by Gabriela Zapata, Independent Consultant

A Spanish-language version of this post immediately follows the English version.

With so much hype around and support for financial education initiatives in Mexico in recent years, CFI’s and JPMorgan Chase & Co.’s project on innovations in financial capability-building provides a great opportunity to see who is actually moving the needle (or not) in favor of developing financial capability in Mexico.

Here, the terms financial capability and financial education are often used interchangeably. While the ultimate aim of these closely related efforts is to enable people to make informed and better decisions around financial products and services, the positive behavior change that is sought from these efforts, with very few exceptions, is neither clearly defined from the outset nor measured.

Most initiatives in Mexico fall under what I would call “classic” financial education, focusing on information dissemination, either classroom-based or online, primarily on generic topics (e.g. savings, credit, insurance, interest rates, credit card, etc.), money management, and budgeting/planning. Unsurprisingly, it is much easier to account for their activities and outputs (e.g. type and number of courses and materials developed; number of courses given; number of attendees) than to measure their impact on decision-making. Only a few undertakings measure knowledge acquisition or learning levels right after the intervention, and they have no way of knowing how, in practice, the learning informs consumer decision-making going forward.

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> Posted by Leonardo Tibaquirá Morales, Product Manager, Accion

A Spanish-language version of this post immediately follows the English version.

In the microfinance movement, microcredit has been the primary focus for ensuring a better future for those with lower incomes. However, diversified action is needed to achieve real financial inclusion, including options for savings. According to the Global Findex, in Latin America between 2011 and 2014 the proportion of people with access to financial services increased from 39 percent to 51 percent. This is good news. Though if we check savings figures, we can see that only 13 percent of people in the region in 2014 saved in a formal institution during the last year. What can we do to better mobilize savings in the microfinance segment in Latin America?

There are many factors that affect savings mobilization in financial institutions. When the microfinance industry began, microcredit was considered to be the main tool and efforts were concentrated around ensuring an attractive credit product offer and an adequate methodology for providing credit products. Savings mobilization, to put it simply, was not considered a big priority. Inclusive finance institutions, especially in Latin America, focused their growth efforts on increasing their credit operations and their number of credit clients. Many of these institutions were non-regulated and without a license to take deposits. Therefore, for many, savings was not even a viable funding option. Microfinance institutions’ (MFIs) commercial structures, goals, monitoring, training, incentives, and even the layout of their branches were designed with credit in mind. Savings mobilization was not given importance.

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> Posted by Innocent Ephraim, Ignacio Mas, and Daniel S. Mhina

The following post was originally published on NextBillion and has been re-published with permission.

Like their counterparts in countries across Africa and around the world, a large number of Tanzanians have flocked to emerging mobile payment solutions, whether it’s to send money home, facilitate informal business transactions, pay bills or buy pre-paid electricity. The reality, however – in both Tanzania and many other markets ­– is that most digital accounts are empty and serve mainly, if not exclusively, as a pass-through for such payments. This limits the transformational potential of mobile money.

In a recent Financial Sector Deepening Trust (FSDT) Focus Note, we point out several factors that make digital accounts an illogical store of value for people who live precariously on low and uncertain incomes, and face health or weather-related shocks which can easily overwhelm their means. From it we derive six ways in which providers can help make digital storage of value more attractive.

PROVIDE BOTH FRICTION AND FLOW

First, digital accounts need to deliver both fast and convenient payments (“flow”) as well as illiquidity features to support people’s mental hierarchies for different kinds of money, based on their origin or purpose (“friction”). How can one savings account or mobile wallet deliver both friction and flow? Features need to be introduced that give users more of a sense of control over when they need flow and when they want friction. Only then can digital accounts play a significant role in helping people manage their money tensions, which, unlike day-to-day payments, play out in time.

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