Pascaline Dupas, Sarah Green, Anthony Keats, and Jonathan Robinson (2011). Prepared for the NBER African Successes Conference, Zanzibar, Tanzania, August 3-5. September version.

This randomized evaluation of access to financial services in Kenya highlights that demand as well as supply factors are important determinants of service uptake.

The availability of banking services in Sub-Saharan Africa remains extremely limited.    As of the early 2000s, only approximately 20% of Sub-Saharan households had access to banking services.  Recent surveys confirm that these figures remain low, hovering between 15-21% for rural households in Kenya, Malawi, and Uganda.

Limited access is an important problem in terms of consumption smoothing, coping with health and other emergencies, and investing in businesses and farms.  It is reasonable to expect, as the authors state, that “expanding access to even very basic savings and credit services could have large effects” (2).  Unfortunately, the evidence on this front is mixed.  Several studies have found that increased microloan access has limited effects on most outcomes.  More positive findings include that improved access to both credit and savings services improves welfare in India and Mexico.  Access to savings services alone also has had beneficial effects on business investment, income, and women in Kenya and Nepal.

While these findings are helpful, the authors point out that “From a policy standpoint, in addition to understanding the impact of financial inclusion, a critical question is how to achieve it” (2).  Three approaches stand out.  First, barriers to accessing existing financial institutions can be reduced.  Second, “correspondent” or “agent” banking can expand access by allowing individuals to deposit and withdraw money from their bank account through agents such as retail stores.  Such services are increasingly being made available through mobile phones.  Third, some banks have employed vehicle-based “banks on wheels” that visit towns.  More traditionally, other banks have simply expanded branch and ATM coverage.

However, studies and interventions to date have focused almost exclusively on the supply side of banking.  The quality of the financial services provided has important effects on rural demand.  The authors argue that “If people are not banked because they do not trust banks or banking agents, because they find services to be unreliable, or because account maintenance or withdrawal fees are prohibitive, then expanding such flawed services is unlikely to be appealing.  On the demand side, little attention has been paid to understanding reasons other than access for why people may choose to stay out of the formal banking system” (3).

The authors use survey and experimental data from a multi-village study conducted in Western Kenya to address this question.  Banking services in the study area are limited, and the cost of traveling to another village for financial services is prohibitive.  Two banks operate in the area, both of which have large minimum balance requirements and withdrawal fees and no interest paid on small accounts.

A census of nearly 2,000 individuals conducted in 2009 revealed that only 20% of households had a bank account and that only 60% of adults were familiar with the two banks operating in the area.

The roughly 1,500 unbanked individuals became the experimental sample.  55% of these were randomly offered a free account at either of the two banks.  The study provided the opening fee and minimum balance but did not waive withdrawal fees.  Takeup of the offer was over 60%.  However, utilization lagged behind, with only 28% of those who opened an account making two or more deposits in the year after opening. 

This prompts an interesting question--“Why didn't the other 80% of those selected to receive a free account actively use it?” (4).  Survey results show that embezzlement, service unreliability, and transaction fees discouraged individuals.  The authors note that “interestingly, these concerns were reinforced by exposure to the bank: those who did use their account were more concerned with both the risk of fraud and the lack of reliability than those who did not use the account” (4).

A similar pattern was found for loans.  Loans were available at quite reasonable rates in the study area, at 16-19% APR which ranks them cheaper than those offered by many microfinance banks.  A randomized intervention provided information about loans and a voucher to lower eligibility requirements.  Most individuals accepted the vouchers, yet only 40% redeemed them and only 3% had even begun to apply six months later.  Surveys suggest that the fear of losing collateral is the main deterrent of loan uptake, consistent with findings in other regions.

The conclusions of this study are rather pessimistic.  The authors report that “Overall, our data reveal a number of challenges with the current supply of financial services.  Simply expanding those existing services is not likely to massively increase formal banking use among the majority of the poor unless quality can be ensured, fees can be made affordable, and trust issues are addressed.  Our results also suggest that marketing could be improved—a large percentage of people lack even basic information about banking options” (5).

Service quality, fees, and trust remain problematic, and are a key reason that there is low demand for financial services in rural Sub-Saharan Africa.  Policy interventions should address the currently overlooked sources of low demand as well as the traditional supply aspects of financial services for the poor.