Access to basic banking services in Sub-Saharan Africa remains limited, and lags far behind other parts of the developing world. Such limited access could potentially have important repercussions on people's lives. If lack of access to a formal bank account makes it more difficult for people to save, they will be unlikely to have enough saved up to cope with unexpected emergencies such as household illness. When such shocks occur, rather than withdraw money or take a loan from the bank, people might have to take much costlier actions, such as cutting back on food consumption or removing their children from school. Lack of banking access may also make it difficult for people to save up large sums or obtain credit for start-up costs for a business, agricultural inputs, or even preventative health products like anti-malarial bednets. Over the past decade, there as has been a significant push to understand these impacts more fully and to explore strategies to expand access. Comparatively little attention has been paid to the demand side—why people may choose to stay out of the formal banking system.
In western Kenya, large bank branches are located primarily in major towns, often leaving rural villages with very few options. Villages in the study sample have two options: a "Village Bank", owned by share-holding villagers and affiliated with a microfinance organization, and a partial-service branch (essentially a sales and information office with an ATM) for a major commercial bank. Both banks have substantial minimum balance requirements and withdrawal fees, and the Village Bank also has an account opening fee. The Village Bank does not pay interest on deposits, and neither does the Commercial Bank, at least for the poor (interest is only paid if the account balance exceeds 20,000 Ksh, or about US$210).
To better understand the demand for formal financial services, researchers conducted a randomized evaluation in two phases. In the first phase, 55 percent of the total sample of 989 households was randomly offered a voucher for a free savings account at either of the two local banks. Researchers paid the account opening fees, provided the minimum balance, and arranged for the banks to simplify the account opening procedures for study participants, but did not waive the withdrawal fees. The vouchers were delivered to people in their homes, at which time field officers explained how the bank and the account worked, and how to redeem the voucher.
Nine months later, among those who had not received the savings intervention, half were randomly selected to receive information about local credit opportunities. Trained staff visited these individuals at home and delivered a detailed script explaining the rules and procedures for obtaining a loan from either of the two local institutions. Among those who had received the savings intervention previously, half were selected to receive the same financial information script as well as a voucher redeemable for one free share at the Village Bank, thereby removing one of the most significant barriers to getting a loan.
A background survey collected information on demographic characteristics of the household, sources of income, as well as access to financial services, knowledge and perceptions of available financial services, and saving practices more generally. Nine months after the start of the savings intervention, a survey was administered to a randomly selected half of the sample, asking respondents open-ended questions about their current savings practices, perceived barriers to saving, and perceptions of the various saving mechanisms available to them. For those who had received an account voucher but had not redeemed it, the survey also asked why they had not opened an account. The survey also included a number of questions about familiarity with and interest in local credit options.
Results and Policy Implications
At baseline, knowledge of banking options was very limited--only 60 percent of adults knew of the bank branches in the area and almost no one knew the fee schedule for account opening or the conditions for applying for a loan.
Savings intervention: While overall take-up of the savings account was 62 percent, only 28 percent of those who opened an account made two or more deposits in the 12 months after account opening. These results suggest that entry costs—be it the cost of acquiring information, the opening fees, or the administrative hassle—are only part of the explanation of the low banking rates observed in the sample. Qualitative surveys with respondents indicate that the most common concerns with available savings mechanisms were risk of embezzlement, unreliable services, and transaction fees.
Credit intervention: Though the vast majority of respondents took the vouchers when offered, only 40 percent redeemed them and only 3 percent had even started the process of applying for a loan 6 months later. Evidence from qualitative surveys on barriers to borrowing suggests that the fear of losing one's collateral if one cannot repay the loan is the primary deterrent. Overall, the results suggest that simply expanding existing services is not likely to massively increase formal banking use among the majority of the poor unless quality can be ensured, fees can be made affordable, and trust issues are addressed.
2010 - 2011