Using Behavioural Science to Develop attractive Savings Products in Ethiopia

The need for savings in Ethiopia
Microfinance Institutions (MFIs) in Ethiopia can be established only by Ethiopian shareholders since National Bank of Ethiopia (NBE) regulations prohibit foreign ownership. In addition, the shortage of foreign currency in the country makes it difficult to repay foreign loans. These two factors combined have limited the access to loanable funds to client savings, loans facilitated by Development Bank of Ethiopia (DBE), retained earnings and occasionally by guarantees of international investors to a Commercial Bank of Ethiopia (CBE) loan to one of the MFIs (facilitated by ICCO Cooperation). The limited access to liquidity has restricted lending and this hinders access to credit by farmers and others. 

NBE has allowed Ethiopian MFIs to mobilize ‘’public saving’’ since the first Microfinance Regulation in 1996. The goal was to enable MFIs to mobilize enough liquidity from their clients to operate independently, without needing external support. 

Unfortunately, most MFIs, big and small, are still looking for donor money and (Development) Bank loans to capitalise their loan book. As a result, many businesses and farmers remain under-financed, hindering agricultural investment. 

Supply side failure to tap into the opportunity to mobilise more savings
In the Ethiopian context, where a majority needs to survive on low and unreliable income, savings is a highly valued service and an effective ”coping mechanism”. For poor women especially, having access to a secure saving mechanism ensures effective ‘’control’’ over their hard-earned income leading to more resilience and empowerment for these women. There is great potential demand for suitable saving services, as confirmed by many grass-root researches, including a large survey by AEMFI (2014) which suggested that 71% of sample households preferred savings over loans and other financial products. Especially in rural areas, the absence of savings service means that the majority utilizes informal savings and rudimentary insurance mechanisms, which are often risky, unsafe, inefficient  or unreliable 

Ethiopia has a long tradition of self-help groups, mainly iddirs. Various research revealed that while the opportunity is open for MFIs to engage in mobilizing ‘’public savings’’, a capacity gap remains with the MFIs, particularly at the grass-root level. While all MFIs have several (voluntary) saving products, often a copy-paste from other context and accompanied by yearly ‘’targets’’, there is no effective mechanism to equip staff with a capacity to win the trust of the community and attract saving into their institutions. AEMFI’s (2014) wider research confirmed that only a few (about 12%) trust MFIs for ‘’some’’ cash saving, but the majority prefers to save (especially) larger amounts in Commercial Banks, even if a Bank’s branch is far from their village. For the majority of rural and urban dwellers, MFIs are still not considered as real banks to save money. Yet, these people knock on MFIs doors for a loan, knowing a Bank would never give them one. This challenge has been acknowledged by the Ethiopian Government (National Financial Inclusion Strategy, 2017).

The Experiments with Savings
ICCO Cooperation’s STARS program aims to increase income of Smallholder Farmers (SHFs) with an integrated approach; a) access to finance combined with (market driven) enhancements in Value Chains. Access to loans can only be provided if MFIs have adequate loanable funds. Cognizant of these facts, MFIs effective savings mobilization, is a key part of STARS program. It has partnered with The Busara Center for Behavioural Economics to support three private MFIs through designing tailored saving products and services which can meet specific needs of the target population. The overall approach is based on behavioural science findings that human beings are not necessarily acting ‘’rationally’’ – as traditional economics would propose. Instead, regarding savings, people and especially poor people, are saving much less than what they can because saving requires ‘’attention’’ and ‘’self-control’’ while ‘’they face so many pressing issues they must attend to, that saving what little they can, gets little or no attention’’. Specifically, it proposes that through appropriate interventions, human behavior can be influenced for a better outcome. 

The intervention aimed at developing different demand based (voluntary) saving products and incentivizing MFIs staff. The three savings products that were developed in this pilot are: 1) Rental saving, 2) Commitment Saving and 3) Referral System. 

• Rental Saving i.e. saving for rent payments, is a service whereby staff regularly remind (or nudge) potential saving clients, to set aside money for meeting their rental commitment
• Commitment Saving is based on the experiences of daily Susu collections, which exist in many urban (market) areas, including Merkato, in Addis Ababa. The mainstream practice is that a daily collector moves to every client to collect a committed amount from each saver, for the month. Upon the thirtieth day, the collector gives the accumulated money back to the client, less the payment for his/her effort, usually one day collection.
• The Referral System attracts new clients through spreading information by existing clients through word-of-mouth instead of ‘’formal’’ bank/MFI promotion. Referrers receive an incentive for every registered new client. 

Three innovative MFI partners of ICCO-STARS; Buusaa Gonofaa, Wasasa, and Metemamen participated in this intervention. Busara supported the intervention design and data analysis in a controlled environment with trial branches and control branches. 

The status of implementation so far
The three MFIs have been testing the three products in various branches in Oromia since September 2019. The institutions have dedicated staff to carry out the experiments, with the Head Office supervising branch operations and reporting to the STARS and Busara team. 

‘’Commitment savings’’ seems to meet the needs of many potential clients, especially those with micro-businesses and much daily cash, either from shops or in open (Gulit) markets. Saving part of their daily sales before they spend it. Conveniently from their working premises thus avoiding transaction cost of travel to a branch. 

‘’Rental savings’’ attracted few clients so far. While the experiment is only implemented at a few branches, it appears that most potential savers are also more familiar with alternative commercial banks. 

“Referral savings” appears to be working well, though more could be done; For example, the individuals who do the promotion, often those well connected at their level, trusted, respected, need to be selected, and equipped on the ‘’message’’ they need to transmit, Otherwise, an unrealistic promise is spread through a community.

Overall, new clients have opened accounts with the MFIs but many of them are not (yet) building their savings balance. External effects due to the locust outbreak, political turmoil, Covid-19 and resulting high inflation, certainly had an influence. Overall, it is too early to conclude that new clients will or will not save more. 

Mobilizing savings takes time and continuous effort and MFIs are still not considered as real Banks, where people can leave their money in trusted custody. 

COVID – 19 and Savings
The COVID-19 pandemic poses even more challenges to communities where the majority is vulnerable. MFIs are among the institutions bearing these risks. Specifically on saving services, observations suggest that those MFIs who have been more supportive through flexible (loan and saving) terms, have built a positive public image. 

Overall, saving collection has slowed down, mainly because business activity has slowed down. The MFIs who have introduced Commitment saving, had to stop the physical contact, especially in busy business area’s. 

In addition, saving withdrawal has been increasing, as households want to stock consumption items in times of uncertainty. Many clients with ‘’time deposits’’ had to break their contract and lost. Some savers withdrew their savings, fearing that the MFIs could collapse. Easy withdrawal of saving deposits is said to be appreciated by clients, who now can cope better with their vulnerable circumstances. In fact, people who had savings they could rely on, proofed themselves to be more resilient towards crises such as COVID-19. 

Some MFIs are demonstrating their commitment to their social objectives by actively implementing health-related activities and creating awareness with clients on COVID-19. 

Next steps
The testing of the savings products continues. In addition, building trust of MFIs with the public is an important lesson. First we identify: 

• • what the target segments need to know about an MFI
  • what front line staff communicates to sell their services.

Based on this, Busara develops a behaviour-based communication protocol for branch staff. This serves both the newly developed saving products and also already existing saving products. 

The microfinance sector at large can benefit from these pilots as we capture lessons learned through our M&E function, ultimately leading to more resilient farmers with better perspectives.