Few conditional cash transfer (CCT) recipients “graduate” from their programs: more often, they become dependent on payments and never fully emerge from poverty. One potential solution may be the introduction of novel credit products that help beneficiaries make productive investments and better manage their income-generating activities. Unfortunately, traditional microcredit has shown to have serious limitations—including high interest rates (Meager, 2016), asymmetric information (Karlan and Zinman, 2009), and a focus on generating cash quickly for weekly or monthly loan payments rather
than longer-term returns on investment in productive activities (Field et al., 2013). Thankfully, the digitization of government-to- person (G2P) payments around the world has created an opportunity for more effective (and more affordable) types of microcredit.
This study explores the potential of banks in the Dominican Republic to provide low-interest microcredit to beneficiaries of Solidaridad, the national cash transfer program. The low rates are possible thanks to the ability of beneficiaries to automatically repay their loans through their monthly benefit stream, thus drastically reducing the risk of default and the cost of following up with delinquent customers. The availability of affordable credit may allow households to make productive investments more quickly, and without the need to save for long periods of time.
In 2015, CEGA conducted a “Deep Dive” into the Progresando con Solidaridad (ProSoli) cash transfer program in the Dominican Republic. Interviews were conducted with beneficiaries, merchants, and bank representatives to better understand the benefits, limitations, and opportunities associated with digitizing the monthly ProSoli transfers. Importantly, the “Deep Dive” uncovered a large unmet demand and willingness to pay for lines of credit that were directly linked to the ProSoli accounts. For example, researchers found that ProSoli beneficiaries frequently use their cards as collateral for cash or food advances from merchants. These advances function, in essence, as short-term loans; the practice is illegal, however, and the cash or food advances are often provided at astronomically high interest
rates. At this time, banks were already offering small loans to ProSoli beneficiaries (roughly 9,400 loans had been disbursed as of 2015). However, the fact that beneficiaries were also regularly engaging in expensive (and sometimes illegal) borrowing behavior suggested a large, untapped market for improved credit products.
This study—endorsed by the Vice President of the Dominican Republic, her Cabinet for the Coordination of Social Policy, the ProSoli CCT program, and local banks that administer ProSoli payments—tests the efficacy (and impacts) of providing linked lines of credit for cash transfer beneficiaries in the DR, with important lessons for other countries.
This randomized evaluation tests the impacts of a novel credit product—linked lines of credit that can be repaid automatically through the ProSoli cash transfer stream—on the income, business profits, and well-being of beneficiaries. The banks that administer ProSoli payments currently offer credit to ProSoli beneficiaries without this automatic repayment feature, at an interest rate of about 43% APR. By offering linked lines of credit, banks can offer a rate as low as about 26%.
Currently, about 40% of ProSoli beneficiaries who receive information about the loans say they are interested in using credit for productive investments. For those who express interest, bank agents
conduct in-person credit interviews to assess each applicant’s 1) ability to make monthly loan repayments, 2) credit history (to the extent possible), and 3) intent to use the credit to grow (or launch) a microenterprise. About 40% of beneficiaries who apply for credit are approved; half of those approved are previously “unbanked” in the sense that they have no formal financial bank account (excluding the ProSoli card) or formal credit.
This study randomizes which product is offered to beneficiaries to measure the relative welfare impacts of the new credit product (lower interest rates and automatic repayment) compared to the impacts of the existing credit product, which is more similar to existing microcredit products (higher interest rates without automatic repayment). In addition to consumption, researchers are measuring microenterprise profits, income, female empowerment, trust in financial institutions, subjective well-being, saving behavior, and take-up of other financial products. Treatment groups are established by randomly offering the new product to applicants in the study sample who pass the credit screening process described above.
The study seeks to shed light on:
• Whether low-interest credit with automatic repayment can lead to more productive investments, profits, and income, higher future consumption and well-being for beneficiaries of CCT programs
• Whether the new product can successfully facilitate graduation from CCT programs by easing credit constraints and meeting the specific needs and cash-flow challenges of micro-entrepreneurs (and if so, how much this effect can be explained by lower interest rates vs. the automatic repayment feature) In addition to survey data, administrative data from ProSoli recertification surveys will be used to
determine whether beneficiaries continue to be eligible for the program or have escaped poverty and graduated from the program. This data will allow researchers to continually measure long-term impacts of the low-interest microcredit on program graduation, even after the study period has ended. The evaluation will first involve a pilot, to test the new loan with a small sample of 150 beneficiaries.
This phase of the project will be taking place starting mid-2018. Subsequently, the full evaluation will take place at the country level, where thousands of beneficiaries will be evaluated one year after receiving their loan to measure impact.
Results and Policy Implications
This project has significant scope to be scaled up within the Dominican Republic and in other countries if it is found to be successful. Governments and non-governmental organizations in many countries
around the world provide cash transfers to the poor, and many are digitizing these payments through bank accounts, debit cards, and mobile money. Finding ways to leverage CCT payments through digital
channels to overcome the barriers of microfinance by lowering interest rates and implementing automatic repayment could increase microenterprise profits and beneficiary welfare. This could have important policy implications as it has the potential to be scaled to hundreds of millions of poor households worldwide.
November 2016 – September 2020