savings

The Next Big Thing in Microfinance: Savings

Jamie Zimmerman — Wed, 06 Aug 2008 16:18:00 -0400

Last month, I argued that USAID inaptly named a three-day virtual conference on savings as "The Forgotten Half of Microfinance." Instead, I posited:

"As someone working on asset building and financial inclusion for the poor (and/or their cross-fertilization in the development field), I would contend that the hosts got it wrong when chose the title for this event. Indeed, "savings" is not "forgotten" at all. Though perhaps traditionally underemphasized, I would argue that, on the contrary, savings is the in fact the "next big thing" in financial interventions."

Looks like I got this one right.

Probably to the surprise of the organizers, the USAID/Microlinks Speaker's Corner on savings was overwhelmingly active, with 324 participants from 53 countries. For those who didn't attend this virtual, email-based conversation, you missed out on the experience of 72 full hours of non-stop emails (we're talking hundreds) from both the novice and the seasoned, from non-profit, public and private sectors, all eager share their many ideas and experiences and learn from others how to expand opportunities for savings for the poor, marginalized and excluded around the globe. It was an inspiring and educational experience. You can access the entire forum at www.microlinks.org/sc/savings. Or you can download the compilation document, which contains all postings from the forum. Its 200 pages long.

Not only is savings indeed not forgotten, but a recent article in the Wall Street Journal confirms my contention this is in fact "the next big thing." On July 31, the WSJ published Robert A Guth's piece, "Giving a lot for savings a little," which announced the Bill and Melinda Gates Foundation intention to "donate hundreds of millions over the next few years to programs to spur savings in poor countries." In the article, Bob Christen, Director of the Financial Services for the Poor division of the Foundation, says the foundation intends to invest heavily to get savings back on the world agenda. So, if it's not already there (as I claimed it to be), then it will be soon-and in a big way.

The Global Assets Project is working inform this new movement towards savings and financial inclusion by promoting savings products, policies and programs that facilitate asset building and wealth creation for these populations. Indeed, the WSJ article was printed one day after the Global Asset Project's launch of its newest report: Global Savings, Assets and Financial Inclusion: Lessons, Challenges and Directions. The report addresses emerging global trends, opportunities and collaborations across the fields of asset building, microfinance, policy and financial education. It describes lessons, challenges and opportunities for thinking about how the poor, in developed and developing countries, can build their assets and wealth. Finally, it includes possible next steps that the diverse range of actors working within these fields should take to move this emerging body of work forward.

As this next big thing grows ever bigger, my hope is that the insights, challenges and recommendations in this report can help inform those policymakers, funders and practitioners in the drivers seat.

The Pressing Need to Rethink Our Existing Tax Rules for Retirement Savings

Annette Nellen — Sun, 20 Jul 2008 18:00:00 -0400

On 6/26/08, the House Ways & Means Committee held a hearing on Individual Retirement Accounts (IRA) due to concern over underutilization and reasons why many small businesses did not offer some type of IRA plan for workers. The GAO report on the topic was highlighted. Subsequent to this hearing, a few other committees held hearing on retirement savings and a report was released by Ernst & Young on people not having enough to live on in retirement.

There are some troubling data and realities about IRA participation and inadequate retirement savings. For example:

For 2004, 79% of all taxpayers were eligible to make an IRA contribution (about 145 million taxpayers). Just 14.7 million taxpayers made a contribution though (about 10%). Participation was highest for taxpayers with $200,000 or more of AGI and that group also made the largest average contribution. For eligible taxpayers with positive AGI, participation was greater among higher income taxpayers. [Bryant, Accumulation and Distribution of IRAs, IRS, 2004]
In 2001, 60% of taxpayers either had assets in or income from an IRA or employer-sponsored plan. Thus, 40% of taxpayers have no retirement accounts although they may have other assets for retirement. (Sailer & Holden, IRS, 2004)

I have more information in a short article - Rethinking IRAs.

On 7/10/08, the Joint Economic Committee held a hearing on the shift from defined benefit plans to defined contribution plans, the greater risk upon workers under DC plans, and the greater return DB plans produced. A representative of the venture capital industry noted the importance of DB plans to providing funds for investment.

On 7/16/08, the Senate Special Committee on Aging held a hearing on people not saving enough for retirement, the recent increase in hardship withdrawals from 401(k) plans and the possibility of "automatic IRAs" that allow for payroll contributions to IRAs. Click here for more information on this topic from Chairman Kohl.

The EY report (July 2008) - Retirement vulnerability of new retirees, found that "almost three out of five middle-class new retirees can expect to outlive their financial assets if they attempt to maintain their current pre-retirement standard of living. To avoid outliving their financial assets, middle-class retirees will have to reduce their standard of living, on average, by 24 percent." The report was prepared for Americans for Secure Retirement.

Living longer, inadequate participation in retirement savings, financial illiteracy, greater personal responsibility for managing retirement savings (DC versus DBs), frequent job changes, and retirement tax rules that are skewed to benefit higher income individuals all point towards a retirement savings crisis that will cause people to work longer, put pressure on social programs and children of retirees, and lower our standard of living.

The reality of greater personal responsibility for retirement will require greater financial education in schools, easier options for retirement savings (such as automatic payroll contributions) and modification of existing tax rules to bring greater equity to the system.

What do you think?

Girls, Cows and the Way the World Should Be

Jamie Zimmerman — Fri, 11 Jul 2008 16:05:00 -0400

*This blog by Evelyn Stark of CGAP and Jamie Zimmerman originally posted on 7-10-08 at CGAP's new Microfinance Blog site: http://www.cgap.org/p/site/c/template.rc/1.11.1909*

Just released last week and swiftly making its way through the fast lanes of the internet, Nike Foundation's new video for its GirlEffect campaign is stunning and provocative. It resonates with the socially-minded, big hearted idealist in all of us. The video explains how global poverty eradication will come from empowering a girl through micro-credit: the loan enables her to purchase a productive, money making asset (a cow), which quickly snowballs into further financial and social opportunities, more assets, greater social, economic and political empowerment, and into economic development of entire nations and opportunities for all women around the world. You get the picture (but if not - you can watch it here: http://www.girleffect.org/).

At the heart of this new campaign - started by the Nike and NoVo Foundations, with the support of the UN Foundation, Population Council, ICRW, Center for Global Development and Plan International - lies a core and founding ethos in the microfinance movement: empowerment through small loans to women. The powerful message and imagery in this video will likely resonate loudly and emotionally with a large, global audience. But it's also a bit too simplistic in its portrayal of human, social and economic development.

Microcredit may be a catalyst for empowerment, but it will not solve disenfranchisement of girls and women without other mechanisms also working in their favor. These girls need legal empowerment and effective institutions to guarantee such rights. They need access to effective social services such as education and health to fully develop their human capital. They need institutions and systems (at the local and national level) that encourage their empowerment and advancement.

Of course we want and need to support girls to stand up for their rights to be cowherds, MPs, bankers, petty traders or even advertising executives! How we get there from the finance side might just be a microloan for a cow... or, maybe a savings club operating in a safe environment, with a trained mentor such as Population Council and K-Rep found in Kenya; or, a maybe it's a Child Savings Account that matures just in time for secondary school that's needed (see: Xac Bank, Hatton Bank and an experiment in Uganda); or a free goat that might lead to college in the US as it did for Beatrice Birra.

The reality is that the presence of a cow, food cart or other productive asset a microloan can facilitate will not automatically improve a girl's life. Between the microloan to a girl and a world free of poverty, there is a chasm filled with other problems that need to be solved.

The video will be an effective starting point to raise awareness of the potential power of microfinance. But it's also a challenge: what can we do to make it a reality?

Savings as a Financial Intervention: USAID online conference July 8 - 10

Jamie Zimmerman — Mon, 07 Jul 2008 16:37:00 -0400

This week USAID's knowledge sharing website, Microlinks.org and MicroSave are hosting a three-day interactive, web-based discussion on "Savings: the Forgotten Half of Financial Interventions." This discussion is open to the public and a worthwhile seminar for anyone in the global savings and asset development community (see a summary of topics and facilitators below). To begin my participation in this discussion, I would like to contribute not by posing a question to the hosts, but by sharing with them a simple observation: As someone working on asset building and financial inclusion for the poor (and/or their cross-fertilization in the development field), I would contend that the hosts got it wrong when chose the title for this event. Indeed, "savings" is not "forgotten" at all. Though perhaps traditionally underemphasized, I would argue that, on the contrary, savings is the in fact the "next big thing" in financial interventions.

Savings has been re-emerging as a major theme in microfinance for some time now, and was the main theme of a major symposium the Global Assets Project hosted over a year ago in Singapore. Nevertheless, I agree that we still have much to learn and do in the field of savings for the poor and lower income populations around the world, and look forward to learning from the facilitated dialogue and global experience-sharing this seminar makes possible.

Here's more information on the speaker's corner (from the microlinks website):

Introduction to this discussion:

The rapid growth of the microfinance sector in the past couple of decades signifies its success in terms of outreach and sustainability. Although the sector continues to be primarily supply-driven, changes are underway and service providers have started to acknowledge that the low income are not a homogenous group, but a group that, like any other group, requires a wide range of financial services and has evolving demands.

While the demand for services is changing, on the supply side most of the financial interventions have been credit-led. Savings remains neglected and is probably talked about only when policy or regulatory issues are discussed. This is unfortunate as researchers globally have revealed repeatedly that the low income not only have the capacity to save, but that they save significant amounts (in cash or kind), and also that they lose a lot of these savings either to fraudulent institutions or by theft or natural disasters. In addition, the use of informal savings mechanism is high among low income people.

Further complicating this unbalance between the demand for savings options and service offerings from the supply side is the access to secured services in remote areas, difficult terrains or areas vulnerable to some risk, for example, flood prone areas. Absence of formal savings services results in "financial exclusion" of the larger population.

Join the dialogue:

Hosted by Madhurantika Moulick of MicroSave, this Speaker's Corner aims to bring into focus the various issues related to savings - the forgotten half of the financial interventions - by looking at the demand and supply side of savings, and bringing special attention to savings options in hard to reach areas.

Each day, participants are invited to share their own experiences, questions and comments in the discussion forum:

Day 1 (July 8) - Demand for Savings Needs of Low Income People. What are the needs? Are those needs diverse or homogeneous? Can affordable products be designed that can meet client needs?
Guest facilitator: Lisa Parrott and Sukhwinder Arora.
Day 2 (July 9) - The Suppliers's Perspective on Savings. Why are savings not promoted? Is it due to legal restrictions only, or are other factors in play? What challenges are service providers facing and what opportunities or solutions exist?
Guest facilitators: N. Srinivasan, Renée Chao-Béroff, and Mary Miller.
Day 3 (July 10) - Savings Options in Difficult Areas. What exactly are the challenges in reaching out to rural and remote areas with effective savings services? How have others overcome these challenges, and is technology the answer?
Guest facilitators: Hans Dieter Seibel, Hugh Allen, and Kimberley Wilson.

Big Trouble with Small Savings at India's Sahara

Jeff Meyer — Fri, 27 Jun 2008 18:00:00 -0400

I recently came across a news story from India that I think offers both a couple of cautionary points for regulators regarding deposits, and a few questions for bankers and microfinance practitioners who are thinking about how to expand savings opportunities to more poor households.

First, stick with me while I give a brief rundown of the story. It centers on Sahara India Financial Corp., a non-bank financial institution in India, with more than 42 million depositors. (By comparison, the State Bank of India, the country's largest lender, has 100 million customers). Sahara India Financial is a key property in the empire of Subrata Roy, a magnate whose group holdings are estimated to be worth US$10 billion. Sahara's savings business accomplishes such a reach in large part through its army of hundreds of thousands of agents who go door-to-door in largely rural and poor areas collecting as little as one rupee (about two U.S. cents) per day from its clients to apply to savings plans they hold with Sahara. A number of the products offered by Sahara are commitment savings plans that lock-up client deposits for many months or years, offering them their deposits, plus interest, back at the end of the time period. The appeal of commitment savings plans, which are popular in a number of developing countries, is that it commits people to save, thus enforcing savings discipline. (For a review of commitment savings products in developing countries, see this paper by researchers Nava Ashraf et. al.)

However, the Reserve Bank of India, the country's central bank, earlier this month ordered Sahara to stop taking deposits, charging the firm with putting the savings of depositors at risk in several ways. For one thing, the RBI said Sahara failed to invest a portion of its US$4.3 billion of deposits in required low-risk investments. (Sahara is required to invest all deposits in low-risk investments, such as treasury bonds). Also, the central bank charged Sahara with taking advantage of its customers - many of whom are illiterate - by cutting interest payments whenever they fell behind on installments. (Many depositors receive only one percent interest a year on their savings, according to a Wall Street Journal article). Thus, given that inflation in India has recently been running at more than 11%, many Sahara depositors appear to be paying a significant sum for having the firm hold their money for them). Moreover, the firm often keeps records of millions of deposits in "tattered paper notebooks," according to another Wall Street Journal article. In recent days, the central bank softened its stance and told Sahara that it can continue taking deposits, but only those that mature before June 30, 2011. This will effectively halt Sahara's savings plan business, according to a third story in the Wall Street Journal.

What struck me about Sahara was the massive scale of its outreach and modest size of deposits it typically collects. On the surface, by extending savings products to poor households likely passed over by banks, Sahara seems to be providing a useful service - enabling households to set aside money now that can be used later for investment or other purposes. However, in the end, it appears that Sahara treated its customers unfairly, and its business practices may have run the risk of destabilizing India's financial system.

As such, Sahara's case presents a couple cautionary points about regulating savings:

Regulators must regard ensuring the safety of deposits in financial institutions as of paramount importance. The failure - or even a perception of the potential failure - of a financial institution can cause it to collapse and erode trust households have in the entire financial system. Regulators must closely monitor institutions and, ideally, introduce some sort of deposit insurance, such as the Federal Deposit Insurance Corporation (FDIC) in the United States, which insures the first US$100,000 per depositor per bank.
Governments have an important role to play in promoting financial literacy and requiring financial institutions to explain in a clear, concise manner features of financial products. Also, it is critical that consumers (both literate and illiterate) can understand the concept of interest rates, and, more generally, the value proposition presented by various financial products (such as Sahara's commitment savings plans).

At the same time, Sahara's story raises a few questions that may be useful for bankers and microfinance practitioners to reflect upon with an eye toward figuring out how to give more people around the world the "luxury" of a low-cost savings account:

What is the value proposition that Sahara's tens-of-millions of customers saw in the company's savings products? My guess is that, for many, Sahara was the only game in town. Setting this aside, I would also guess that the convenience of an agent coming by regularly to collect a modest sum of money was attractive, in part because it enforced savings discipline. Moreover, even if there was a bank relatively close by, Sahara's customers may have felt more comfortable conducting transactions with an agent than with bank teller. (Research has shown that some poor people can be intimidated by banks, i.e. feeling they must dress-up to be treated fairly). Also, it appears that Sahara required little (perhaps too little) personal information from clients (as opposed to banks in some countries that require individuals to present a number of supporting documents - some of which individuals may not have - just to open an account).
How can banks make mobilizing small savings into a viable business? I find it hard to believe that, if no corners are cut, Sahara's business model is sustainable. This is because, even in a low-wage country like India, it is very expensive to go door-to-door to collect very small deposits. Operational expenses of such an outreach would be difficult for the financial institution to recoup by investing in low-risk (and thus likely low-yield) investments. Can a financial institution ever run a successful small-scale deposit collection operation that has the reach of Sahara (without exploiting their customers, or receiving subsidies from governments or donors)? A "yes" answer will likely depend on advances in technology, such as the ability to make deposits at retail outlets like pharmacies using point-of-sale (POS) banking terminals. But it may be worthwhile to think more boldly. One (admittedly dreamy) idea that jumps to mind is emulating an advertising-supported business model that Google has had so much success with by placing ads on the front of passbooks (or the shirts of deposit collectors, as my colleague Ellen Seidman suggested).

I don't want to extrapolate too much from the case of one financial institution in one country. Indeed, I believe there is a political component to Sahara's case that I don't have insights on. Yet, if nothing else, it may be interesting for someone to pick apart the details of Sahara's savings mobilization business model and see if there are any lessons that can be extracted and applied in a safe, legal, and socially responsible way by financial institutions in India and further afield.

The Debate over Negative Returns on Savings

Jamie Zimmerman — Mon, 23 Jun 2008 19:36:00 -0400

Our newly released report on thrift in the United States has gotten some good play in the media but has also sparked internal and external debate, domestically and internationally, on the importance of savings and thrift relative to credit and consumption. The report advocates a culture of thrift and a renewed focus on savings (as opposed to our current focus on credit and culture of indebtedness). As a team, the Asset Building program promotes these goals and others heavily in our domestic work as well as internationally through the Global Assets Project.

In recent weeks we've received a lot of feedback (from within our organization and among practitioners and policymakers in microfinance and related fields) wondering if, in a time of higher inflation, we're advocating irrational behavior among our target populations. For instance, Sherle Schwenninger, the director of the Global Economic Growth program here at New America, challenged the asset building team's focus on pushing people to save when typical interest rates on savings accounts are lower than the rate of inflation. That basically means that people are losing money on their savings, instead of gaining interest over the long run on their deferred consumption. On popular microfinance listservs like MicroFinancePractice and DevFinance, the report sparked similar debates over encouraging thrift in developing or emerging economies, which are typically less stable than advanced economies. In India, many savers are earning 1% interest or less on their savings in an 8% inflation climate. In Zimbabwe's hyper-inflation, money not used today is tomorrow's fire kindling. But that is an extreme example. Essentially, the argument is that, in the absence of better products, we are irrationally encouraging people to save up, but to nothing.

Or so it seems, if you don't look at the bigger picture:

Yes, the poor, low and moderate income populations, particularly those traditionally excluded from low-cost, appropriate and mainstream financial services do indeed need and deserve access to more attractive savings and investment options, one's that do not deteriorate their financial assets, but protect and build them.
However, in the U.S. but most especially in many parts of the developing world, the poor lack access to a safe place to put away their savings in the first place. Experience in the micro-savings field has shown that the poor are quite often willing to pay a fee to have someone or some institution safely hold their savings, as it's a much safer prospect than stashing the money under the mattress. They are much less concerned with making a return on their savings than the prospect of loss or mismanagement that comes with not having it safely locked away until needed. Where these options don't exist, you face a potentially tumultuous and threatening environment where even small lump sums are not safe. This isn't just a problem in the developing world. Here in the United States, unbanked Latino immigrants are increasingly targeted for robbery, as because of their undocumented status, they are often paid in cash and lack access to a bank account to store their money.
And for those among this population who do have access to basic savings products, the fact of the matter is that the vast majority are not saving with the intent to make a return on those savings. They need lump sums to pay for certain expenditures like marriage, education, property and even funerals; they need a nest egg to protect them against economic and environmental shocks to which they are disproportionately more vulnerable.

Losing money on savings is very much a bad thing and seems an irrational choice. But then again we must consider all the options from which certain populations get to choose. I mentioned negative return on savings in India, a sad case that turns ever sadder when considering that over 50% of India's population has absolutely no access to formal savings products in the first place, something the government in India is aggressively trying to change.

While designing and offering short and medium-term higher-yield savings products for the poor and underserved around the world is important work and an ultimate goal, it will be of little value until we 1) can provide effective access to banking services and 2) increase understanding of the value of savings and thrift for long-term financial growth and asset building for those populations who have for too-long gone underserved and excluded.

I'm glad that this new report on thrift is forcing us to acknowledge these realities and to think more deeply on how to get people not only into, but benefiting from, formal financial systems.

Savings: What’s Culture Got to Do With It?

Jeff Meyer — Fri, 30 May 2008 15:04:00 -0400

Is there such a thing as a culture of savings? This is a question I have been thinking about for almost a year now since undertaking research into savings accounts for children around the world. Bankers in countries from Sri Lanka to Papua New Guinea to Kenya told me in interviews that their banks are offering child savings accounts (CSAs) with an intention of "inculcating" a habit of savings among young people, or "nurturing" a savings culture. (Of course, these banks are primarily offering the accounts to attract and retain young customers, who will hopefully build their balances as they grow older).

In one conversation, a banker in Sri Lanka told me that Asians are more thrifty than people elsewhere. "We tend to save a lot," a tendency that he said was inculcated into the country's children. Conversely, an executive at an international children's charity told me that Ethiopia, where the charity recently started a child savings program, doesn't have a very strong savings culture. In Ethiopia, the executive said, the people that save, save primarily for death (i.e. through burial societies). Moreover, a banking executive at a multinational bank that operates in the South Pacific told me, in part because of a hot and humid environment, there is no such thing as a habit of savings in the region. If you get something today, you better consume it today, the executive said of the mentality there.

It was with these conversations in mind that I listened to a talk earlier this month given by Sheldon Garon, Professor of History and East Asian Studies at Princeton University, about savings in a global and historical context. Professor Garon, who is writing a book about thrift, asked if the post-war thrift in East Asia was due to cultural influences, such as Confucianism. He then took the audience through a series of historical trends that reinforced what I took to be his point that institutions are a key determinants of savings behavior. The stops on his historical tour included the origin of savings banks in Europe about two centuries ago; the regional disparities in the use of savings accounts in the United States early in the 20^th century (which he attributed to widely varying number of financial institutions in the regions); and the large footprint of postal banks in countries such as Japan. (Postal banks also have extensive networks in places such as China, Germany, and Kenya). Coming out of Professor Garon's talk, I found myself thinking that, instead of grouping countries as either having a culture of savings or not, perhaps it is more constructive to think about how governments can help promote a habit of savings among their citizens.

A question I have going forward is: Where does all of this leave developing countries that lack the infrastructure of bank branches to collect savings at? One intriguing possibility is transforming pharmacies, retail outlets of cellphone operators, and even mom-and-pop snack shops into mini-banks. The idea of conducting banking transactions with a third-party is often called using "banking agents." The CGAP Technology Program has done extensive research on the subject, including an overview of early experiences with branchless banking (which includes banking agents and cellphone banking), and a list of frequently-asked-questions on banking agents.

One sociological issue that arises when discussing banking agents (in addition to several regulatory ones) is if there is something lost by not dealing with a professional banker. Ideally - though this may seem naïve nowadays - bankers are supposed to help clients choose the most suitable financial products for them. For example, banks offer many types of savings accounts, and a person unfamiliar with banks in the first place would likely have difficulty understanding the features of each. One way to address this is for governments to encourage or mandate banks to offer a simple, low-fee starter account, which consumers can opt-out of if they wish. Another question is whether a person would trust "mom" or "pop" with their deposit. Getting at this question, in a lecture last week, Kabir Kumar of CGAP showed a photo of a pharmacy in a slum in Pakistan that has been equipped with a point-of-sale (POS) banking terminal. Mr. Kumar then noted that pharmacies make for particularly good banking agents because of the trust pharmacists typically command in a community.

So, in the future, can banking agents pull the same (or more) weight as postal banks historically have in terms of broadening access to financial products? My answer is "yes," though that it will take clever thinking by banking regulators to ensure that transactions with banking agents are safe for consumers. Such a development would seemingly enable all countries - even those thought by some not to have a culture of savings - to allow many more of their citizens to reap the benefits of being hooked into the formal financial system.

Battle of the Bulges: Obesity, Financial Illiteracy and the Role of Behavior

Jamie Zimmerman — Wed, 28 May 2008 21:56:00 -0400

I've recently been thinking about the similarities between our national epidemics of obesity and financial illiteracy. Both are socio-cultural phenomena created through generations of misinformation, misunderstanding and perverse incentives. Factors like (but not limited to) easy credit and encouraged consumerism without proper consumer disclosure and easy access to abundant, cheap astonishingly unhealthy foods has created a culture of overindulgence on so many levels. Both problems tend to fall disproportionately on poor, low and even some moderate-income households, which lack easy access to alternative options (like banks red-lining disadvantaged neighborhoods; public school cafeterias serving french fries most everyday yet not offering physical education classes). And both are believed to have huge social and economic costs that are now reaching epic proportions. If similar forces are causing and/or driving these problems, then shouldn't efforts to tackle both childhood obesity and financial illiteracy also be similar? Only recently has this become apparent to those fighting the battle of such rhetorical bulges.

At the high-level International Conference on Financial Education host this month by the US Department of Treasury and the Organization of Economic Cooperation and Development, INSEAD Professor Klaus Wertenbroch presented his research on psychological biases in financial decision-making. He told a story of how explaining to a high school aged girl how much money she could save (and earn through compound interest on savings and investments) if she did not buy that one Coke each day out of the vending machine at school. He explained this as "a message that clicked" with the student that she can make good financial decisions just by changing her attitude toward money. But the message about the coke in the vending machine everyday "clicked" with me in another way - it's the same sort of message those in the fight again obesity make as well. Overall, the messages are similar - yes, knowledge is important, but healthy habits (behavior) stem also from attitudes. We seemed to reach this consensus at the OECD/Treasury Conference but failed to come up with any agreement on concrete solutions to the financial literacy glut in the United States. The problem is, creative messaging to change attitudes will only go so far if access to more "healthy" options (access to financial services; physical education classes and salads in schools) are not - and have not traditionally been - readily available.

However, one buzzword that had stemmed from new insights of behavioral economics might offer an innovative approach - Nudge, as recently made popular by the new book by Thaler and Sunstein. The power of the "nudging" (some wonks like to call it libertarian or soft paternalism) people in the right direction and the idea seems to be catching on in both health and financial education circles. As Dr. Wertenbroch put it "we need to create choice environments to coax people in the right direction." And while he referred explicitly to financial decision-making, this could obviously be applied to healthy eating and living habits as well. For instance, why don't we do more to default people into the more "healthy" options (healthy school lunches offered; auto-defaults into retirement accounts or other financial products such as savings accounts)? Why not use new media more actively to "nudge" people toward physical and financial fitness? Marcin Polak presented on the Polish government's investment in "edutainment," which used popular mass media and internet to launch an effective campaign against financial illiteracy, is actually quite amazing. I don't see why we couldn't emulate something similar in the United States.

It seems like experts and policymakers alike are finally realizing that in order to win the fight to effectively change unhealthy behaviors - and the perverse environments our society has created that enable and indeed encourage such behaviors - some creative and active "nudging" back in the right direction is going to be necessary.

Can You Name All of the Tax Breaks to Support Higher Education?

Reid Cramer — Mon, 12 May 2008 18:21:00 -0400

The tax code is a mess. Even those pointy-headed economists that can bicker about anything (except the gas tax) agree that it is too complicated. They cry in virtual unison that the growth of tax deductions, credits, and deferrals leads to inefficiencies and market distortions (yikes!).

To confirm these fears, we need look no further than the education arena. Do you know how many tax provisions there are designed to support post secondary education and workforce training? It's a long list.

There are tax breaks for contributions to specific accounts and savings plans such as Coverdell education savings accounts, section 529 college savings plans, pre-paid tuition plans, and penalty-free withdrawals from IRAs. Further, there are other tax breaks that cover the treatment of educational expenses. These include the Hope Credit, Lifetime Learning Credit, deduction for tuition and fees, and the deduction for interest on student loans. So, that's a count of at least 8.

Many of these overlap and as such they cause a great deal confusion among consumers. Last week the House Ways and Means Commitee held a hearing on this topic and I sent in some testimony that offered my take on the matter.

I’m in favor of serious tax reform. We probably need to consolidate and simplify. That said, we have learned a great deal with the experience of 529 college savings plans over the past few years which provides a blueprint for how to construct an attractive savings platform for education and training. We need to stop adding tax breaks to support savings for a growing number of purposes and spend more energy looking at how to create the institutional supports that maximize savings. I'll gladly make this point again when serious tax reform is put back on the political front burner.

The Cellphone as Asset Builder? Maybe One Day

Jamie Zimmerman — Wed, 07 May 2008 17:05:00 -0400

I consider my cell phone an asset. With all those hi-tech capabilities packed into a little handset, it keeps me simultaneously connected, productive, on-time, en route, entertained and informed. And I'm not alone - more than 3 billion people around the world (almost half of the global population) have a cell phone. But what if this gadget that seems capable of reaching almost anybody and doing almost anything could also provide a mechanism for savings and asset building for individuals around the world? Despite seemingly limitless potential and enthusiasm for such an innovation, it will unfortunately be some time before this is a reality.

I've been following developments in mobile banking for some time. For years, excitement has been brewing about its potential to bank the unbanked, reach the unreachable. I've been to the events, the conferences, read the blogs and become a believer that this technology will one day help every person on the planet have a bank account, a financial identity, and an opportunity for wealth creation through access to low-cost, simple financial services. Sound hopelessly optimistic? Just check out the April 13 New York Times article "Can the Cellphone Help End Global Poverty?" or the CGAP announcement of its most recent focus note "Mobile Banking to Transform Microfinance." Pretty exciting stuff.

But after reading the CGAP report "the Early Experience with Branchless Banking," I see that the hype doesn't exactly match reality. Some disheartening observations discussed in this excellent report show that mobile banking is:

Mainly used for payments, not savings or credit;
Not actually used by or targeted to the poor, the unbanked, or those lacking access (geographic or otherwise) to the extent expected or hoped (less than 10% of all branchless banking customers);
Offered to Bottom of the Pyramid (BOP) markets primarily as a result of competition among mobile operators, not by initiatives led by banks or governments;
For regulatory, cost or other reasons, largely exclusive of MFIs (which are most capable of reaching the poorest of the poor), and;
Because of strict Know Your Customer regulations (which require specific documentation for opening accounts), is unlikely to reach the poorest and most remote customers in the developing world, particularly those without any proof of identity.

Given all the promise and excitement around mobile banking, imagine my disappointment to read that it has "yet to demonstrate pro-poor, pro-growth impacts for households, communities and national economies."

Nonetheless, my enthusiasm for the potential of asset building via mobile phone is not tempered by these new findings. By most accounts, the capabilities are there, and so is the interest of financial institutions, governments and the development community. And the potential (and the need, and in some cases the demand) outweighs the obstacles. Eighty percent of the global population falls within range of a cell phone network and 68% of cell phone subscribers are in the developing world, but just a fraction of either of those populations have any sort of effective access to banking services. And the industry is slowly but surely finding creative ways to overcome certain obstacles. The CGAP report highlights numerous interesting examples of this, such as how South Africa's Exemption 17 from the Know Your Customer (KYC) requirements resulted in a gangbusters expansion of their mobile-banking poster child, Wizzit. And to be fair, in many cases, outcomes of mobile banking launches have largely surpassed expectations. According to the NYT article, for example, Kenya's m-pesa mobile banking program "aimed to add 200,000 new customers in the first year, but got them within one month." Now, m-pesa has over 2 million customers.

So I realize there is a ways to go before the cell phone can be used to effectively achieve financial inclusion of the poor and excluded, particularly in the developing world, much less facilitate simple, low-cost opportunities for savings and asset building. But my sense is still a hopeful one of not if but when. I encourage the asset-building field to seize upon the opportunities created by momentum around mobile banking to think deeper and more creatively about how to innovate within this space.