Learning by Doing:Can Savings Lotteries Build Financial Capability?Martin Kanz, World Bank

Introduction

• Two key challenges in building financial capability– How to increase [access to and] active use of formal banking services?– For those who have access, how to incentivize saving?

• Evaluation of a savings promotion in Nigeria– Savings incentive program run by a private sector bank– Incentivizes saving through “learning by doing”– Wide appeal through lottery features

• Question: how useful are savings lotteries in…– Building financial capability by incentivizing savings– Serving as a stepping stone into formal banking?

What are prize linked financial products (PLPs)?

• Prize linked financial products– Financial product that offers regular returns + lottery component– Typically used in combination with savings products

• PLPs are not new: widely and successfully used throughout history– French state used “prize bonds” to finance deficit left by Louis XIV– UK Premium Bonds introduced in 1931, popular form of saving

• More recent examples: commercial savings lotteries– South Africa: First National Bank’s Million-a-Month Account– Zambia, Tanzania, Gambia, Malawi. Ecobank “WinBig”

Works like a “commitment savings product” commercially viable for the bank no downside risk for the client

The “I-Save-I-Win” Lottery in Nigeria

The “I-Save-I-Win” lottery in Nigeria

Program rules

– Savings lottery ran from April 4, 2011 to October 31, 2011

– Program rules deliberately simple to attract widespread participation

– Keep balance of N50,000 (US$300) for minimum of 90 days– Both existing and new account holders are eligible– Lottery applies only to dedicated savings accounts

– Qualifying account holders eligible for cash and non-cash prizes– Prizes were drawn in 6 regional and 1 national prize drawing

The “I-Save-I-Win” lottery in Nigeria

Prize drawings

– 7 prize drawings between July and October 2011– 6 Local prize drawings, staggered in time– 1 Drawing for “Grand National Prize”– 611 lottery winners

Regional Prizes– 20 x N10,000– 10 x N20,000– 10 x N50,000– 10 x 32” LCD Television– 1 x Toyota CorollaNational Prize– 1 x Apartment in Lagos or N15,000,000

Program Evaluation

Program Evaluation: Data

> > Detailed micro-data on 1,830,311 savings account holders

1. Demographics and Location

2. Account balances– All 1,352,690 account holders that could qualify for ISIW– 477,621 account holders from a control bank that had no savings

promotion during this time period– Daily balances Oct 1, 2010 – Aug 30, 2012– Total of 957,252,653

3. Use of financial Products– List of all financial products (cards, loans etc.) used by each customer– Evolution over time, at program and control bank

Program Evaluation: Data

4. Regional and national prize winners

– List of all 611 prize winners– Amount, type of prizes won– Branch, location– Date of drawing

Questions– Does ISIW encourage saving? How do savings balances respond?– Does ISIW promote banking relationships? Do we see greater use of

financial products over time?

2

6

3

2

6

3

1

6

332

3

5

2

1

6

2

4

4

44

4

1

1

6

1

1

5 55

5

1

3

4

6

64

Results: savings balances

Table 1: Δ in Savings Balances [7 day window]

• Estimation strategy: use regional variation in drawings• Estimate balance changes around lottery draws• Strong short-term effect on savings balances

%Δ Balance Coefficient SE 95% Confidence Interval

Afterdraw 16.75*** [2.33] 11.19 20.32

Female 7.64*** [2.43] 2.93 12.45

Married 10.89*** [3.34] 4.23 17.55

Age -.94 [.67] -2.24 .34

Observations 25,364,445

R-squared, adj. .005

Results: transactions

Table 2: Transactions

• Positive effect on frequency of transactions• Economically small due to large number of inactive accounts

Δ Transactions Coefficient SE 95% Confidence Interval

Afterdraw .015*** [.000] .0144 .0148

Female -.005*** [.00] -.0053 -0.0049

Married -.004*** [.00] -.0043 -.0037

Age -.002*** [.00] -.0020 -0.0023

Observations 25,364,445

R-squared, adj. .006

Results: Long run use of financial products

Table 3: Change in number of products used pre/post

• No effect on long term use of formal banking services• How to incentivize persistent change? • Policy challenge familiar from other financial literacy contexts

Coefficient/SE Coefficient/SE Coefficient/SE

Δ All -0.015***

[.0003]

Δ Cards -0.0002***

[.0004]

Δ Other, non-savings -0.006***

[.0001]

Observations 2,178,216 2,178,216 2,178,216

Summary and Policy Implications

• Evaluation of a “savings lottery” to build financial capability

– Significant short-term effect on savings– Lottery is effective at generating awareness about saving– Intervention is cost-effective and commercially viable– Lottery provides “actionable” incentives that change behavior– “Learning by doing” may be more effective than learning by teaching

• Results on longer-term effects highlight policy challenges

– Longer-term effects on use of financial products limited– …similar to findings on financial education through teaching – How to generate persistent changes in behavior?