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Flexible Microfinance Products for Financial Management by the Poor: Evidence from SafeSave

Carolina Laureti, Alain de Janvry () and Elisabeth Sadoulet ()

No 17-036, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: Well-functioning financial services are key for consumption smoothing and to take advantage of investment opportunities. Even though poor households badly need financial services for their day-to-day money management, a commonly held view is that they are ‘too poor’ to save and to repay loans with flexible terms. This paper explores whether this view holds true for two specific flexible financial products, namely passbook savings accounts and credit lines. Analyzing the daily transactions and balances in more than 10,000 SafeSave accounts—a microfinance institution based in Dhaka, Bangladesh—over nine years (2004-2012) shows that clients make extensive use of their flexible savings-and-loan accounts to accommodate changing availability of and needs for liquidity in the face of three kinds of events: paydays, Islamic festivals (Ramadan, Eid al-Fitr, and Eid al-Adha), and political protests (hartals). Cash-in (savings deposit and loan repayment) flexibility is used to cope with both positive (paydays) and negative shocks (Islamic festivals and political protests); cash-out (withdrawal and loan taken) flexibility is used if the negative shock is anticipated well in advance (as in the case of Islamic festivals). We show that, while interest rates on loans are higher than in competing MFIs, repayment rates are comparably high. We also show that SafeSave is covering its operational costs, indicating that this type of flexible financial services can be offered to the poor in a sustainable fashion. Overall, analysis of the SafeSave experience shows that flexible financial products are much in demand by the poor and that they can be profitable for the microfinance institution that offers them.

Keywords: Bangladesh; liquidity; household finance; contract design (search for similar items in EconPapers)
JEL-codes: D14 G21 O12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-fle, nep-mfd and nep-pay
Date: 2017-12-20
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