Emerging Voices: Vishnu Sridharan on Cash Transfers and Financial Inclusion

This article is from Vishnu Sridharan, program associate with the Global Assets Project of the New America Foundation. Sridharan analyzes efforts undertaken so far to link cash transfers for low-income families to financial services, such as bank accounts. This approach promises large development gains, he argues, but early experience is mixed.

Perhaps unsurprisingly, one of the most successful ways to fight poverty in a variety of contexts is to give low-income households regular cash payments. Though this may sound simple, as late as 2004, seasoned aid workers described the fear of giving money to beneficiaries as “almost pathological.” Since then, however, a “quiet revolution” has taken place against “giving aid to government bureaucrats and consultants.” Instead, programs are increasingly giving cash “directly to poor people so they can pull themselves out of the poverty trap.”

One way that many countries have approached direct cash payments is through a social contract, in which families receive “conditional” cash transfers in exchange for ensuring that their children attend school and regular health check-ups. As a result, these payments not only ensure a basic level of consumption among recipients but help facilitate investment in the human capital of the next generation.

Since the advent of Mexico’s first conditional cash transfer program PROGRESA (now known as Oportunidades) in 1997, social policymakers from Nicaragua to Nigeria have adopted similar models for alleviating poverty. In fact, the New America Foundation’s Global Savings and Social Protection Database--which currently focuses on Latin America, Africa, and Asia--has identified over 90 cash transfer programs in 45 countries in the developing world, with over half a billion beneficiaries. Of these programs, as the map above shows, 15 have been started, expanded or redefined in the past 3 years alone, which shows how rapidly the landscape of cash transfer social protection is evolving.

As successful as these programs have been, one persistent critique has been that they foster dependency on behalf of beneficiaries because they do not enable them to save money in the medium term. Recent research by the New America Foundation’s Global Assets Project shows that breakthroughs in payment technologies, among other trends, has made addressing this critique all the easier. By linking payments to formal financial services--like bank accounts--beneficiaries can more easily store funds, be prepared for emergencies, and invest in opportunities that could lead to economic security.

Cost-saving innovations like mobile telephones and biometric IDs are revolutionizing how government-to-person payments are taking place, with more and more governments, aid agencies, and multi-laterals making the switch from cash payments to electronic. To take two examples: from 2009 to 2011, Colombia invested in advanced payment infrastructure so that it could cut the number of individuals receiving cash payments from 76 percent to nine, and, on the financial institution front,  the Fijian government committed to shifting all social welfare payments from vouchers into a bank accounts to promote savings in 2010.

What are the results of these trends? Electronic payment systems are clearly more convenient for beneficiaries, as they are able to access their funds at the time of their choosing and without crowds at distribution points. And although initial investments are often necessary to build out payment infrastructure for electronic transfers, governments do benefit from a subsequent decrease in administrative costs and an increase in transparency.

But results are mixed in the incorporation of low-income households into the formal financial sector. The central challenge is not necessarily in teaching low-income households to save more money: from the work of Stuart Rutherford, founder of the microfinance organization SafeSave, as well as the pioneering efforts of the Gates Foundation, it’s clear that poor families do want to save, and they often do so in ingenious (and risky) ways.  Instead, the challenge is in encouraging families to make full use of financial tools. Countries such as India have seen that simply providing the poor with ‘no-frills’ bank accounts is insufficient--up to 90 percent of them remain dormant and unused. As a result, countries are now experimenting with how to raise awareness of the benefits and safety of bank accounts while at the same time incentivizing their participation.

Over the past couple of years, Colombia has conducted an extensive impact study on which approach to promoting savings works best. In 2008, Colombia started making payments for its social protection program Familias en Accion through deposits in savings accounts, and it attempted to promote a culture of savings through a pilot program called Programa de Promocion de la Cultura de Ahorro (PPCA, or Culture of Savings Promotion Pilot). The impact study was incorporated into the design of the pilot, with some participants receiving financial education, others receiving a cash incentive for savings, and some receiving both.

The good news was that the provision of accounts did lead some cash transfer recipients to save. What’s more, evidence suggested that the greatest savings occurred among those who received both financial literacy education and a cash incentive to save. On the other hand, early results showed little difference between different treatment groups on whether or not the recipients withdrew their entire monthly payment at once, with an overwhelming 91 percent choosing to do so. The reasons for the withdrawals varied: not knowing that accounts allowed for savings, fear of losing eligibility, distrust of bank fees, and even transportation costs. Regardless of their particular reasons, however, the beneficiaries’ collective experience showed that introducing households into the formal financial system is far from straightforward.

Cash transfers have demonstrated a remarkable ability to both protect households from extreme hardship and promote long-term development. As the emphasis on helping beneficiaries graduate from poverty increases and electronic payment methods become more widespread, there is a great potential to enhance the impact of these transfers even further by linking them to savings opportunities (and eventually to other financial services such as insurance and loans). The potential of this linkage, in the eyes of many in the field, presents a “transformational opportunity” to take conditional cash transfer programs to the next level. Early experience, however, suggests that there’s a lot left to be done before we get there.