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Incentives and Savings Habits Among Ethiopian Micro-entrepreneurs

Development Challenge

Business savings are crucial for the growth of small and medium enterprises (SMEs) in low-resource contexts. Formal savings can provide security against business income shocks, assist business owners in obtaining credit, and prevent impulsive purchases with business savings for present-biased individuals. However, few SMEs use formal savings instruments. More commonly, they save in the informal sector or alone, earning lower returns and exposing the saver to risk of theft or unintended consumption. Some barriers have been documented; high administrative costs, transportation costs, lack of information, lack of self-control, and familial pressure to lend prevent small business owners from using formal savings programs. However, one potential lever that has not been explored is the way in which people learn about their degree of self-control, and how the learning process can alter one’s subsequent savings behavior. 


Though the majority of Ethiopia remains rural, recent years have seen tremendous growth in the population size of the country’s capital, Addis Ababa. With an annual growth rate estimated at 3.8%, the population of Addis Ababa is estimated to reach eight million people by 2020.[1] Approximately half of the city’s working population remains employed by the informal sector, and an estimated 80% of the city’s population resides in slums or informal settlements. This study targets SME owners in Addis Ababa with low levels of financial literacy, are not in the habit of saving, and handle high volumes of cash on a daily basis.


Evaluation Strategy

The study evaluates the role of financial incentives to save, interacted with learning about their ability to plan, on encouraging savings behavior among micro-entrepreneurs. A baseline survey will be conducted to assess pre-treatment socioeconomic characteristics, literacy levels, and savings behavior.

Researchers will focus on the differences in the levels of savings of participants by gathering data surrounding the take-up and use of commercial savings accounts from a local formal financial institution (the Commercial Bank of Ethiopia). The results of this study will provide greater evidence on how programs seeking to encourage small-enterprise and economic development can best promote the use of formal savings. 

Results and Policy Implications




Photo Credit: Olli Pitkänen. Taxi driver in Addis Ababa. 

[1] Federal Democratic Republic of Ethiopia Population Census Commission. "Summary and statistical report of the 2007 population and housing census–population size by age and sex." Addis Ababa, December (2008).