BEHAVIORAL ECONOMICS IN FINANCIAL INCLUSION
Understanding human decision-making can improve access to financial services,
enabling people to make the right choices about their savings, borrowings, and future
Busara capitalizes on the proven success of behavioral interventions in the financial inclusion space to develop a wide range of innovations:
• Increasing savings rates
• Expanding access to credit
• Increasing take-up of insurance
• Improving assessments of creditworthiness
• Encouraging people to save for their retirement
WHY FINANCIAL INCLUSION MATTERS TO US
Financial inclusion is a critical priority in the developing world and is integral to driving sustained economic growth. Improving access to financial services can improve the lot of low-income households and minority groups who may not otherwise have control over their finances.
Despite significant innovation in financial products targeting consumers at the base of the pyramid, increasing financial inclusion remains a daunting task. Studies have shown that only 41% of adults in developing countries have access to a formal financial account compared with 89% in high-income economies. We believe that many of the barriers preventing lower-income individuals from accessing finical services can be overcome through the application of behavioral science.
HOW BEHAVIORAL ECONOMICS CAN HELP
Organizations and governments around the world have benefited from the power of behavioral interventions in improving access to and use of financial services.
FRAMING: LENDING IN SOUTH AFRICA
A bank in South Africa measured the effects of framing on loan take-up by mailing different advertisements to different clients. The results showed that including a photo of an attractive girl increased loan demand by as much as if the interest rate had been reduced by 25%.
MENTAL ACCOUNTING: CASH TRANSFERS IN THE UK
One study looked at the UK Winter Fuel Payment (WFP), a cash transfer given by the government to households aged over 60. Standard economic theory would predict that labeling the cash transfer would have no impact on how it was spent. This did not turn out to be the case. Households that were given an unconditional, unnamed cash transfer spent on average £3 of it on fuel. However, if the transfer were termed ‘Winter Fuel Payment’, households spent an average of £41 on fuel.
SALIENCE: LOAN REPAYMENTS IN UGANDA
A study in Uganda looked at various loan repayment behavior. A few incentives were tested including a cash reward upon completing payments (set at an amount equivalent to a 25% interest rate reduction on the loan), a 25% interest rate reduction on any future loan taken from the bank, and a monthly text message reminder before the loan payment date. The results implied that text message reminders were as effective as the 25% rate reduction in terms of repayments.
Contact us to learn more about Busara’s work in financial inclusion.