For Savings-Linked CCTs to work, They Must Meet Demands of the Poor

Neither CCTs nor microsavings, whether separate or combined, are a “magic bullet” for ending poverty. By linking the two, however, it seems they could become even more valuable tools to help the bottom of the pyramid (BOP) better manage their finances (cope with emergencies and disasters, acquire or improve land, address family needs, make business investments, etc.). This is true, both in the short term and also for longer term asset building, while also enabling them to invest in human capital; education, better health care, and more nutritional diets.

Of the many interesting points raised at this month’s Global Expert Colloquium on Savings-Linked Conditional Cash Transfers (CCTs), I was particularly struck by discussions of how such programs could meet the needs and demands of very poor CCT beneficiaries. 

There are obvious benefits to formal savings, as a risk management mechanism for one, but as Harvard Economics Professor and ideas42 founder, Sendhil Mullainathan explained at the colloquium, advantages of savings go beyond the evident. His studies show that the impoverished shoulder such significant amounts of stress and mental load, regarding their finances, that their judgment can become clouded. Specifically, this additional stress weighs so heavily on the study’s subjects that IQ test scores are lowered when poverty-stricken participants are asked about their current personal finances. Not only are savings inherently good, but they provide hope and free the destitute from additional stress, enabling them to make better decisions.

In addition to the many benefits, there seems to be a significant demand for microsavings amongst the BOP population. Most want to save in a formal, safe, inexpensive, and convenient manner. Unfortunately, savings of this kind aren’t always available to poor consumers. Too often, they’re forced to save what little they have under their mattresses, or by investing in insecure assets, like jewelry or livestock (vulnerable to theft, flooding, etc.). Linking CCT beneficiaries to formal savings could help address this dilemma.

But even if it’s evident that these savings products are both wanted and beneficial, how do we mobilize people’s desire and intention to save into action through CCT programs? A number of recommendations arose throughout the colloquium to make savings easier and even more beneficial for the poor.  I highlight those I found particularly constructive below.

1) Make monthly CCT grants sufficiently large to make savings possible. If the monthly amount only covers the household’s immediate needs, they won’t participate. CCT programs have also found that depositing grants in odd amounts with cent remainders also increases the likelihood that participants won’t withdrawal the full amount at one time.

2) Make savings convenient: a number of countries allow banking agents to perform basic transactions at general stores, mobile-phone kiosks, through postal workers, etc. Incorporating these agents, as well as existing mobile-phone banking networks (like in Kenya) into the savings-linked CCT program will make it much more convenient for the impoverished to save by greatly increasing the amount of transaction points, rather than relying on sporadic and inconvenient brick and mortar branches.

3) Make the savings as liquid as possible, by minimizing fees and penalties for transactions and withdrawals. The idea is for participants to save for short term, consumption-based expenditures, like school supplies, or new clothing, while also encouraging saving for unforeseen events (funerals, illness, natural disasters, etc.). Penalizing withdrawals from savings accounts with fees and red-tape for these necessary expenses would inhibit the savings culture we are trying to create.

4) Provide some kind of monetary incentive to save, by matching funds that are deposited or that remain in the account after a period of say, three months. This will be especially helpful in the beginning stages of the program and should help develop a savings habit.

Additional experimentation and pilot testing are crucial to determining which of these, or other, mechanisms would best facilitate and/or incentivize positive savings behavior among the very poor. However, I am encouraged by the initial conversations and research discussed at the colloquium.