The third study for our spotlight on current microfinance research is a working paper by Afzal et al. presented at the 2014 NEUDC which delves into the similarity between savings and credit products. The authors conduct a lab experiment among women in rural Pakistan who are or have been microfinance clients.
The experiment runs in three sessions, each a week apart. At each session, the researchers randomly offer the women one of twelve different ROSCA-style credit or savings contracts. For example, one contract may require daily deposits over five days and a lump sum payout on day six. Alternatively, the payout could be on day 1 with deposits on days 2-6. While both offers break down a lump sum into small payments, the former would instinctively be called a savings product and the latter a credit product. There were also hybrids—the payment could be on any one of the six days of the cycle. Due to the randomized study design, the same individual could choose both a credit and a savings contract within the span of a week. They could also refuse these contracts or, as the researchers found, accept both. In fact, when among the sub-sample that was offered a savings and a credit contract, 53% accepted both.
The results in this situation go against the standard model that individuals demand either credit or savings but not both simultaneously. There is demand for products that provide a structure of a lump sum payout combined with regular payments and the distinction between credit and savings is largely irrelevant. Of all of the respondents, 44% accepted the contracts presented to them in all three sessions and only 19% accepted none.
We know that the poor have volatile, irregular incomes combined with unexpected expenses that are often more than their current savings balance. The structure of the contracts addresses this volatility, making it more manageable. (It is also similar to savings groups, which have been used by poor households around the world to access large payments and manage the ups and downs of cash flows.)
On the question of whether borrowers or product design matters, this study supports the latter. The design matters because it reflects the financial management needs of the individual accepting the contract. In other words, product design should break out of the concepts of savings and credit, and focus more on managing volatility.