The following post was originally published on the ImpactX blog of the Huffington Post.

Women participating in paper prototyping for new mobile app in Uganda

Women are the backbone of the household in Africa — they manage the home, care for the children, are responsible for education and healthcare, and contribute to the household’s livelihood. Helping women helps the entire family. However, women continue to lag men in participating in the formal economy, including accessing financial services.

The Problem: The Poor — Especially Women — Are Excluded From Financial Services.

For the rural poor — especially women — accessing formal financial services is nearly impossible. Few have formal identification needed to open an account; others lack a stable job or collateral needed for a loan. Often bank branches are far from a rural village, making the trip to deposit or borrow funds too expensive and time-consuming.

Many of the rural poor have taken up an approach to support saving and borrowing by forming Village Savings and Loan Associations (VSLAs). Under this approach, 25-30 members of a community form a group. This group meets weekly and saves a fixed amount — at times, as little as 20 cents a week. The savings are lent out to members as loans. All money not lent out is stored by the group treasurer in a metal box secured with three locks and three keys, which are held by three separate key holders. It is, as some group members call it, the “Village Bank.”

The Benefits And The Challenges Of The “Village Bank”

Group savings is wildly successful, with millions of individuals across Africa reporting themselves enrolled in VSLAs or other forms of savings groups. In Uganda alone, where Grameen Foundation works closely with savings groups, the FinScope 2013 survey revealed that nearly two in three adults save in some sort of group. Savings can yield big money over time — by the end of a one-year cycle, some groups have thousands of U.S. dollars locked in the box.

The challenge, however, is that cash is risky, and the group’s success can be tempting for local thieves who may target a treasurer’s home. Storing these funds as cash also means that the group’s rich transaction history is invisible to formal institutions that might be able to provide more services to groups if they had insight into transaction activity. While some banks offer formal products to groups — like group savings accounts offered by Barclays’ Banking on Change program — many groups find that they are located too far from a bank branch.

Solving The Cash Challenge: Mobile Solutions

These issues — the insecurity of cash, and the challenge in accessing cash-in/cash-out points like bank branches — are issues that mobile money has been tackling across Africa for years. Mobile money allows individuals to deposit money on an electronic wallet (e-wallet) associated with their SIM card using their basic feature phone at any local agent location, which is often a shop in a local village. They can then send money to friends or family or transfer the funds to their bank account.

This infrastructure is already in place and could be used to help groups. The problem to-date, however, is that mobile financial services are tailored to individuals and secured by a single PIN number. For a group to feel secure depositing money into this virtual system, they need group-level security.

Grameen Foundation and Airtel, one of the leading mobile operators in Uganda, partnered to develop a solution called Airtel Weza. This new wallet took the analog product — a box with three locks — and digitized it. The product features a three-PIN system requiring approval from three group members before funds could be removed from the group’s account. To ensure that three members cannot collude, additional text messages are sent to other members in the group as well. Instead of a box for physical storage, funds are stored virtually. Instead of three locks, there are three PINs. The product was launched in the Kamuli region of Uganda earlier in August, and Airtel will continue expanding across the country in the coming months.

An Upside For Both Customers And Providers

The product serves a major social need for women involved in savings groups by giving them a safe place to store excess funds. It stimulates the local economy – over 40 percent of women report that having access to a phone provides greater access to income-generating opportunities. However, attracting women to mobile services is not just a local good; it is also a boon for mobile operators and financial institutions. According to research by the GSMA mWomen team, 21 percent fewer women than men own mobile phones in middle and low-income countries. This translates into a gender gap of 300 million women and a revenue loss of $13 billion for operators. For banks, individual small savers and borrowers can be too costly to serve; offering group products provides an efficient way to serve the poor.

Developing products tailored for this market, such as products tailored for women-dominated savings groups, helps operators reach out with an offer that resonates and encourages uptake. For women, it is an important opportunity to start participating in the formal sector through the use of mobile financial services and to start slowly closing the gender gap.

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The issue of financial stress is an important one since there has been widespread concern in India and elsewhere that debt to microfinance lenders is causing distress to many borrowers. Financial stress is well-documented as an important factor leading to mental health problems. Mental health problems, in turn, are among the most important causes of morbidity in the world, and studies in developing countries have found strong associations between common mental disorders and economic problems. A 2010 World Health Organization Report warns that poverty and mental health disorders can create a “vicious cycle” where not only do they exacerbate each other, but also lead to reduced development and increased vulnerability. However, the net impact of limiting a borrower’s debt level on her level of stress is unclear. On one hand, curbing indebtedness may reduce stress; on the other, if less credit worsens her economic well-being, then this may increase stress.

With Erica Field of Duke University, I led a study to shed light on this question. We asked whether small changes in contract design could help alleviate borrower reports of stress. The answer, published in the PLOS ONE journal, seems to be yes.

We conducted the study in 2008 with Village Financial Services in Kolkata, India. This MFI recruited clients and formed 148 five-member loan groups comprising 740 clients. We randomly assigned the groups to the control arm of the study, where groups made the standard weekly payments, or the treatment arm, where groups paid on a monthly basis. For a seven-week period starting a few months after loan disbursal, team members interviewed a random sample of 105 weekly and 105 monthly clients regarding their state of mind every 48 hours via cell phones distributed specially for the study. We administered 5000 surveys over the course of the study, asking clients questions regarding their confidence in their ability to repay the loan, their anxiety about loan repayment, whether they argued with their spouse about finances, and the time they spent thinking about repayment.

The results were striking: Clients on a monthly schedule were 51 percent less likely to report feeling “worried, tense, or anxious” about repaying, were 54 percent less likely to report a lack of confidence about repaying, and reported spending less time thinking about their loan compared to weekly clients.

Furthermore, monthly clients more than doubled their business income relative to weekly clients, increasing their total household income by 84 to 88 percent. This suggests that a more relaxed repayment schedule encouraged them to use their loans more profitably. Considering that the correlation between financial deprivation and financial stress problems is well established, we hypothesized that this large increase in income was probably an important contributor to the stress reductions we saw.

Further evidence to support this comes from an analysis of the time series data. Comparing weekly and monthly groups, the differences in business investments were concentrated in the early part of the loan cycle, while stress levels were about the same until around the twelfth week of the 45-week loan cycle, at which point monthly clients’ stress levels began to drop steadily. This pattern supports our hypothesis that better investment led to increased income, which in turn reduced psychological stress.

These results suggest that the financial stress associated with the standard Indian microfinance contract, with its rigid repayment schedule starting immediately after disbursement, can be reduced with a small design adjustment. If such a simple and inexpensive change can have such dramatic benefits, then maybe gradual, evidence-based redesigns can optimize microfinance and help it deliver on its original promise.

This study was one of a series our team is conducting to explore the effects of contract flexibility on the lives of microfinance borrowers. Increasingly it appears that product design can play a key role in influencing how microcredit works.

Rohini Pande, together with Asim Ijaz Khwaja, are co-founders of Evidence for Policy Design, or EPoD, a research initiative at Harvard that seeks to apply nuanced, evidence-based methods to policy issues in the developing world. In February 2014 they will be offering a week-long executive course, “Rethinking Financial Inclusion: Smart Design for Policy and Practice,” through the Harvard Kennedy School’s Executive Education program, with the aim of bringing design insights from economic theory and empirical evidence directly to decision-makers. 

Rohini Pande is a Professor of Public Policy at the Harvard Kennedy School and Co-Director of Evidence for Policy Design (EPoD) at Harvard’s Center for International Development. Her research examines how the design of financial access initiatives, democratic institutions, and government regulation affects policy outcomes and citizen well-being, with a particular focus on gender. She leads several large-scale research projects testing the design of financial products and evaluating the impact of microfinance on a range of social and economic outcomes. Pande holds a PhD in Economics from the London School of Economics.

Image credit: Deutsche Bank

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