The Borrowing Puzzle: Why Do FilipinoDomestic Workers in Hong Kong Borrow

rather than Dissave?a

Wooyoung Limb Sujata Visaria c

August 30, 2019

Abstract

We provide some observations and thoughts on the financial behaviour ofFilipino domestic workers in Hong Kong. Despite their predictable andregular incomes, they commonly finance large expenses through interest-bearing loans rather than savings. Our analysis of survey data and therecords of a credit cooperative for migrant workers suggests that this can-not be explained by their inability to save, by financial illiteracy, a shorttime horizon or limited liability. Instead, we speculate that the strict sched-ules and high interest rates of these loans create a disciplining effect thatthese individuals find desirable. This may help them avoid unnecessaryconsumption, or demands from their social network. However interven-tions should also consider the fact that members of the social network oftenprovide non-monetary reciprocal benefits.Keywords: migrants, savings, loans

aA large team of HKUST UROP students, ably led and supported by Arpita Khanna, Sheren Ku and Jimmy Santiagohelped collect the data for this paper. The Asian Migrants Credit Union kindly shared their records. Ethics approval wasobtained from HKUST. We are also grateful to Rina Lookman Jio for her terrific help analysing the data, and to UtpalBhattacharya, Clarence Lee, Dilip Mookherjee and Jane Y. Zhang for insightful conversations. This research was fundedby an HKUST Institute for Emerging Market Studies Research Grant.

bDepartment of Economics, Lee Shau Kee Business Building, Hong Kong University of Science and Technology,Clearwater Bay, Hong Kong. wooyoung@ust.hk.

cDepartment of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong. svis-aria@ust.hk.

1 Introduction

Since the early 1970s, Hong Kong has run a specific program to admit migrantsas domestic workers. This program has grown over the years. Migrant domes-tic workers made up 9.3% of Hong Kong’s work force in 2016. They perform arange of services for their employers, including cleaning, cooking, shopping forgroceries, babysitting, ferrying children to and from school and extra-curricularactivities, and caring for the employers’ aged parents and pets. Their servicesfacilitate the labour force participation of working-age Hong Kong women, es-pecially mothers with young children[Cortes and Pan, 2013].

Foreign domestic workers enter Hong Kong on a special visa category for“foreign domestic helpers”, which ties them to a single employer. The law stip-ulates a “minimum allowable wage” for them, that is set considerably belowthe equivalent minimum wage for the rest of the labour market. A person ona “foreign domestic helper” visa cannot earn the right to permanent residence.She can continue to reside in Hong Kong as long as she is gainfully employedas a domestic worker, but their employment contract and visa must be renewedevery two years.1 Therefore migrant domestic workers are temporary economicmigrants: they live in Hong Kong only for as long as they can be gainfully legallyemployed. Given the increased difficulty of doing menial jobs at old ages, theyare generally aware that they have a limited time span in Hong Kong, and ex-pect to retire in their home country.

The Philippines was one of the first countries to send workers toHong Kong as part of the foreign domestic helper program. As of2016, 54 percent of Hong Kong’s foreign domestic workers were Fil-ipino[Government of the Hong Kong SAR, 2017].

On the one hand, we know that migrants’ remittances raise the living stan-dards of their dependents. There is also evidence that remittances from overseasFilipinos finance entrepreneurial investments and the educational expenditureof their dependants[Yang, 2011]. On the other hand, these migrants earn lowerwages than most of the Hong Kong population, and have only limited access to

1If she becomes unemployed, the migrant domestic worker is required to leave Hong Kongwithin two weeks and may only re-enter after an employer has signed a new two-year contract.

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formal banking services. Hong Kong’s laws also put no restrictions on whetherand how much migrants can borrow from local moneylending companies.2

This paper focuses on Filipino domestic workers in Hong Kong and the waysin which they manage their finances, specifically focusing on their choices be-tween savings and loans. In 2017, we interviewed a sample of 136 Filipino do-mestic workers and asked about their employment history, wage income, re-mittances, savings, and loans. All 136 and an additional 5, for a total of 141subjects, also participated in a lab-in-the-field experiment where they allocateda given endowment among a set of options with differing risk and returns. Wealso draw on the records of a credit cooperative in Hong Kong that mainly catersto migrant workers.

We document a few facts. One, as expected, most Filipino domestic workersremit to their home country regularly. Often these remittances support not justtheir immediate nuclear family, but support educational and health expensesfor their extended family as well. Thus these migrants appear to take on theresponsibility of supporting several individuals back home.

Two, although the majority of migrants have bank accounts, they do not ap-pear to use them as a savings device. Bank balances tend to be low and monthlyinflows into the accounts are small. However this is not to say that their entiremonthly salary is consumed. Anecdotal evidence suggests that many of theminvest in “projects” in the Philippines, such as land purchase, house construc-tion, house renovation and repair, and small businesses.

Three, it is common for them to borrow from moneylending companies inHong Kong. On average these companies charge 25 percent interest per annum.The migrants repay these loans from their salaries in Hong Kong. Our data sug-gest that only a small fraction of these loans are used for unforeseen emergencyexpenses; the majority are remitted home for school fees, consumption needs orfor investment.

This leads us to the central observation in this paper: Filipino domestic work-

2In contrast, the Singapore government has recently put a limit on how much individualscan borrow from Singaporean moneylenders. Some have even argued that domestic workers’loan applications should be pre-approved by their employers(162019Ng and Tan).

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ers appear to routinely finance their investments through loans rather than sav-ing. Moneylending companies have standard contracts for loans to overseasworkers, where repayment begins the very next month after the loan is dis-bursed. The investments generally do not start generating immediate returns,so that we argue that the repayment is financed from the worker’s wages inHong Kong. These wages are contracted and regular, and therefore predictable.In theory therefore, it should be possible to save up the necessary amount aheadof the investment, and avoid paying the loan interest. We consider different ex-planations for why many migrants choose not to do this, and offer some evi-dence on the plausibility of these different explanations. Although we cannotconclusively accept or reject a particular hypothesis, we discuss possibilities forfuture research that could shed light on this issue.

2 Data Collection

In 2017, we enrolled 141 Filipino domestic workers to participate in our surveyand lab-in-the-field experiment. Of these, we have survey data from the 136 whosuccessfully completed the two parts of our interview.3 Below we describe theprocess by which this sample was created.

Migrant domestic workers in Hong Kong are required by law to live in theiremployer’s house. They usually work 6 days per week for unspecified hours,and then spend most of their weekly holiday outside the employer’s house.This makes it very difficult for investigators to survey them in their residence.Given the length of our survey and experimental sessions, we believed it wouldbe difficult to enroll participants by approaching them on the street or in pub-lic places.4 We therefore advertised our study through Whatsapp and Facebookwith certain nodal Filipino domestic workers, and asked them pass the adver-tisement on.5 Interested persons could click on a web link and answer a short en-

3All 141 participated in the first face-to-face interview, but only 136 could be contacted 4-8weeks later for a phone interview that asked about financial transactions that had occurred sincethe first interview, and asked additional questions that helped to compute loan interest rates.

4Relatedly, Barua, Shastry, and Yang [2018] found that domestic workers recruited in publicplaces in Singapore were unlikely to sustain participation in their study.

5These nodal persons were elected officers of the credit cooperative that we also use datafrom.

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rollment questionnaire. We then contacted these enrollees and reserved a studysession slot for them.6 In this way we created a respondent-driven sample.

The concern with a respondent-driven sample is that it may not be represen-tative of the underlying population of interest. The nodes that we began withwere not randomly chosen, and if we relied merely on them to spread the word,we might have only reached their friends. We therefore attempted to create a“snowball” by offering each participant a bonus per referred person who alsosigned up for our study. This created an incentive for every participant to spreadthe word to her friends. Again, to avoid swamping the sample with the acquain-tances of the more popular participants, we offered this bonus for only 4 refer-rals, and no more. In this way we hoped to make the sample as representativeas possible. In the appendix we compare the descriptive statistics of our samplewith a random sample of Filipino domestic workers from the 2011 Hong KongCensus. The statistics are largely similar. This reassures us that we did not drawan extremely skewed sample. However we are unable to speak to differences inunobserved variables. Our survey findings below should be interpreted in thislight.7

We also draw on the records of the Asian Migrants Credit Union, a HongKong credit cooperative that primarily targets migrant domestic workers. All in-dividuals who join the cooperative are provided a savings account. Six monthsafter they enroll, members become eligible to use the credit facility. First-timeborrowers may only borrow up to two times their savings. The entire loan iscollateralised by the savings balance of the borrowing member as well as thesavings of the guarantors, who are other members of the cooperative. The inter-est rate is set at 1 percent per month and repayment is on a monthly schedule.We look at the contracts of all loans that were approved by the cooperative in2017-18, to examine the stated purposes of these loans. We also analyse mem-

6Nearly all migrant domestic workers in Hong Kong use smartphones, and a very large frac-tion use social media, and so it was fairly easy for them to view and answer our enrollmentquestionnaire. Once we received their online submission we called them to explain the detailsof the study session and register them into a time slot.

7Of course, our experimental sessions randomly assigned participants to one of two treat-ment arms, and therefore we do not question the internal validity of those results. Admittedly,external validity could continue to be a concern.

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bers’ choices between saving and borrowing during the period 2011-18.8

Finally, we also draw on the findings of a lab-in-the-field experiment withall 141 subjects who participated in our study. The goal of the study was toexamine how participants respond to the rate of return when making savingschoices. Therefore all subjects were given an endowment of 100 tokens (1 tokenwas equivalent to $1), and in each round they were asked to allocate these tokensacross three accounts: a savings account that generated a sure return, an invest-ment account that would generate a return of 10 percent but with uncertainty,and a lottery account where each token would give them a chance of winninga handbag as a prize. Subjects were randomly assigned to groups and playedmultiple rounds within each group. Further details of this study are provided inthe appendix.

3 Some Facts

Table 1 presents descriptive statistics about the 136 respondents in our survey.The average respondent was about 40 years old. She had left the Philippinesfor work about 11 years prior to our study, and had been in Hong Kong for9 of those years. She had worked for her current employer for about 5 years.Reported education levels were very high, with 80% of respondents telling usthat they had been to college, and about half of them saying they had completedcollege. However we note that it is common for Filipino workers to report post-secondary education as “college”, and we did not probe to ascertain whetherthey had attended a degree-granting institution or not.

As we mentioned before, migrant domestic workers must work for only oneemployer. The minimum allowable wage was set at HKD 4310 for contractssigned between October 2016 and September 2017. The median worker in oursample received exactly that wage. The mean wage was a slightly higher HKD4566. Three-quarters had received their wages in cash, the others received themthrough bank transfers, cheques or other means.

Ninety-three percent of respondents had remitted money home within the

8Although we have the transaction records for the period 2011-18 for the credit union, weonly have access to the loan applications for 2017-18.

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last two months. On average, they remitted HKD 2119 or 46 percent of theirmonthly salary. The average participant supported 3.6 individuals through herremittances. This included not just her immediate family but the extended fam-ily as well. Fifty-six percent were supporting their parents, and 40 percentwere supporting other dependents, such as grandchildren, siblings, nieces andnephews, cousins or grandparents.

3.1 Savings

Nearly all respondents had active bank accounts at the time of the survey. Three-quarters had accounts in the Philippines, and 51 percent had accounts in HongKong. Nearly all bank accounts were single-holder accounts; only 9 percent ofaccount holders reported having joint accounts. However bank balances werelow. Across all her bank accounts in both places, the average respondent heldonly about HKD 7942 or 1.7 months’ salary in bank accounts. Net inflows intothe bank accounts were correspondingly small: those who had bank accountsplaced only HKD 255 or 16 percent of the average monthly salary in the bank.Other savings devices were not very common. Fifteen percent reported mem-bership in a paluwagan (the Filipino term for a rotating savings and credit as-sociation, or rosca), where they made a monthly contribution of HKD 318 onaverage. Nobody reported using a money-guarding arrangement.9

3.1.1 Savings Response to Rates of Return

Migrant workers may have held small bank balances because the accounts of-fered low rates of return.10 To examine whether migrants’ savings balances re-spond to interest rates, our experiment randomly assigned participants to a“savings product” with one of two rates of return: a low 3% rate, or a high 10%rate. Strikingly, we find no evidence that participants assigned to the high returncondition allocated more tokens into the safe account. Respondents in the lowreturn condition placed $53.3 out of $100 worth of tokens into the safe account,and those in the high return condition placed a nearly identical $51.7 (difference

9A money-guard is a person who holds money for the subject to help her avoid spending orlosing it [Collins, Rutherford, Morduch, and Ruthven, 2009].

10Hong Kong savings interest rates are nearly 0%. At 0.1%, interest rates in the Philippines areonly slightly higher.

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= 1.6, p=0.68). The rate of return on savings also did not affect the allocation tothe other two accounts.11

To understand whether this behaviour can be explained by migrant charac-teristics, in Table 2 we examine whether respondents with different characteris-tics respond differently to the change in the rate of return. Our data consist of 324person-round level observations across the 141 respondents who participated inthe experiment. We run a regression including dummy variables for the round inwhich the allocation was made. This controls for round-specific effects, or learn-ing over time. In column (1) we include as an explanatory variable a measureof the respondent’s risk aversion.12 As expected, we find that more risk averserespondents placed a larger number of tokens in the safe return box. In column(2) we add a dummy variable for whether the respondent faced the 10% returnon savings. Controlling for risk-aversion, we do not find that respondents whofaced a higher rate of return placed more tokens than comparable respondentswith a lower rate of return. Finally, in column (3) we interact the risk-aversionmeasure with the dummy variable for the high-return treatment. There is noevidence that more risk-averse individuals responded differently to the rate ofreturn than the less risk-averse. In columns (4)-(6) we consider heterogeneouseffects by the respondent’s financial literacy.13 Again, there is no evidence thatfinancial literacy levels affected how participants responded to the rate of re-turn. To the extent that these results can be translated into their behaviour indaily life, it does not appear that migrants’ disinterest in saving is driven by thelow rates of return.

Note also that the credit cooperative paid considerably higher dividends (1to 3% per annum) than the Hong Kong commercial bank interest rate duringthis period. Despite this, we find a low savings rate among members of thecredit cooperative. The average member made a net deposit of only HKD 44

11Investment account: $32.2 in the low savings return condition v. $30.5 in the high returncondition (difference = 1.7, p=0.64); Lottery account: $23.3 v. $24.4 (difference = 1.1, p=0.73).

12Risk preferences were elicited using an incentivised Lowry list method where participantswere asked to choose between a safe option and a lottery with a high and a low payout, wherethe probability of the high payout successively increased. In line with Yu, Zhang, and Zuo[2019], respondents were encouraged to choose a single switching point from safe option tolottery.

13In Section 4.3 we describe how we measured financial literacy.

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per month into her account. There is also no evidence that the members’ sav-ings rates responded to dividends. In Figure 1 we plot the monthly net depositsper member against the dividend rate that the credit union paid in the previ-ous year.14 There is no indication that members saved more per month whendividends were higher.

3.2 Credit

Loans allow individuals with small cash inflows to consume or invest in thepresent, instead of having to postpone or forego these activities. They can alsohelp smooth consumption in the face of negative shocks. Below we examine thenature of borrowing by our sample subjects.

Forty-six respondents (or one-third of our sample) reported that at the timeof the survey they had an outstanding loan from a lender in Hong Kong. Amongthem, they had 49 loans. When we compute their monthly repayment obligationwe find that on average they had committed to paying 60 percent of their salaryin loan installments each month. Table 3 also shows that 80 percent of the loanshad been taken from moneylending companies. Employers, friends and rela-tives and the aforementioned credit cooperative each provided an additional 6percent of the loans. Loans from moneylending companies were the largest ofall: the average principal amount was HKD 25063. Loans were for a 12-monthduration on average, the interest rate was 25 percent per annum, and paymentwas due on a monthly basis.

Employers gave zero-interest loans. An average loan given by an employerwas for HKD 15,000 on average, or just over 3 months’ salary. Employers alsotook payment on a monthly basis, usually by garnishing the worker’s salarypayment. Loans from the credit cooperative were on average HKD 14,000 andcharged less than one-third the interest of the moneylending companies.15 Loansfrom friends and relatives were significantly smaller, and although many sub-jects expected to repay on a monthly basis, the repayment schedules were more

14Each year’s dividends are announced at the end of the year and depend on the credit union’sprofits during the year. Arguably members could not have known the dividend when they madethe saving decision, but they could have used the previous year’s dividends as a predictor.

15The cooperative capped the loan principal at 2 times the borrowing member’s savings bal-ance in the cooperative.

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likely to be flexible.

In keeping with our finding that respondents had received loans fromfriends and relatives in Hong Kong, 14 percent of our survey respondents toldus that either friends or relatives in Hong Kong owed them money at the cur-rent time. Of the 27 such loans, 5 represented a sharing arrangement where therespondent had taken a loan from a moneylending company and then shared itwith another domestic worker.16 Another 3 were given out by a single respon-dent to three different friends at 10 percent interest over a 6 month duration, or1.67 percent per month.

Thus the survey data suggest that it is common for Filipino domestic workersto borrow. In fact, the records of the credit cooperative suggest that migrantsneed not borrow as much as they do. We present below evidence that a largeproportion of cooperative members “co-hold” loans at the same time as theyhold liquid savings that could be drawn down instead.

Since the interest cost on these loans (1 percent per month) is considerablyhigher than the return on savings (AMCU dividend rates range from 1 to 3% peryear), it is in the members’ interest to take the smallest loan necessary to financetheir need. However, in 17.5% of the 200 loans that the cooperative gave out overthe period 2011-2017, the member held larger savings in the cooperative than theamount borrowed, at the time that the loan was granted. Clearly it would havebeen cheaper to instead withdraw these savings and avoid the loan altogether.Instead, by taking the loan and securing it with part of her savings, she both tookon an additional interest expense, and rendered part of her savings illiquid.17

Second, even when the member’s savings were smaller than her loan

16This is an informal arrangement where the individual who is formally listed as the borrower“shares” some of the loan principal with a friend. Often this friend is either the reference personor the guarantor for this loan. Both friends then pool together to make up the monthly payments.In case of default the moneylender first contacts the borrower and then contacts the referenceperson/guarantor. They may also contact the employer of either or both domestic workers anddemand payment from them. It is possible that this informally-created joint liability improvesloan repayment for both the borrower and the sharer. Moneylenders offer “VIP status” to bor-rowers with good repayment records. VIPs earn in-kind rewards and rebates on their own loanpayments in return for referring new borrowers to the moneylending company.

17The cooperative limits a member’s loan amount to twice her total savings balance at thetime of the loan application. This savings balance secures the loan and cannot be withdrawnwhile the loan is outstanding.

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amount, the evidence suggests she could have borrowed less than she did.Specifically, she could have withdrawn part of her savings, thereby reducingthe loan size and interest cost, while still financing the expense. To see this, notethat one-half of the loan is secured by the member’s savings and therefore can-not be withdrawn. Call this her illiquid savings, i. The remaining savings isliquid; denote this by l. Thus total savings s = i + l. If the expense is e then weknow that e − l = 2i. We can then calculate her illiquid savings as i = e − s,so that the remaining l = 2s − e can be withdrawn. By withdrawing the entirel, a member would take the smallest loan necessary to finance the expense. Forexample, a member who needs to finance an expense of $1000 and has $700 insavings should maintain a savings balance of $1000 - 700 = $300 to take a loanof $600, and withdraw the remaining $400.

We find that in 62.5 percent of the credit cooperative loans, the loan principalwas less than two times the member’s savings balance at the time.18

The data thus suggest that it is common for Filipino domestic workers to fi-nance their investments and perhaps even their families’ consumption expensesthrough loans, rather than saving. In what follows, we consider different expla-nations for why they may do so.19

4 Explanations for Indebtedness

We start by examining some common explanations for the high incidence ofdebt.

4.1 Debt due to Migration Costs

It is widely reported in Hong Kong that domestic workers bear alarge financial cost to get a job placement. This appears to apply

18Our methodology and findings are similar to that used by Laureti [2018] in her analysis ofthe clients of SafeSave, which provides flexible savings-and-loans accounts to slum-dwellers inDhaka, Bangladesh.

19When a cooperative member over-borrows, she takes a larger loan than necessary, but alsosecures a larger fraction of the loan with her own savings, thereby relying on a guarantor tosecure a smaller fraction. If she instead withdrew her savings and took a smaller loan she wouldstill need a guarantor to secure the exact same dollar amount. Thus over-borrowing does notreduce dependence on the guarantor.

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both to workers located in the Philippines looking to migrate, as wellas workers located in Hong Kong who are in between employers.PLUDWHK and Hong Kong Federation of Asian Domestic Workers [2016] re-ports on an investigation where researchers made anonymous phonecalls pre-tending to be domestic workers in search of employment. They found that mostemployment agencies charge workers a sizeable illegal fee for the placementservice. If the worker is unable to pay the placement fee upfront, the employ-ment agency often refers her to a lending company. Job applicants can also takeloans in the Philippines and repay them from Hong Kong. It is reported that theaverage Filipino domestic worker takes 6 months to pay off this loan.

Thus, migrants might be arriving in Hong Kong already in debt, and maycontinue to be indebted for a significant duration of their first contract. If theyincur a placement fee again when they switch employers, then they may need totake another loan and could be indebted for part of their first contract with thenew employer. If they faced any large unexpected consumption or investmentexpense during this period, they may need to take another loan, possibly settingthem on a path of repeated indebtedness.20

If indebtedness is explained by the placement fee expense, then we shouldsee greater indebtedness among migrants who are in their first contracts, thanmigrants who have been with their current employer for longer.21 In fact, only29% of our sample who were in their first contract currently had a loan in HongKong, versus 37% of those who had been with their current employer for longer(difference statistically non-significant).22

20Recently, three major moneylending companies appear to have started sharing informationabout their clients’ loan records; in informal conversations domestic workers report that theycan no longer take multiple loans from different moneylenders.

21Recontracting with the same employer is a relatively easy process, and most domestic work-ers do not rely on employment agencies for it.

22The low incidence of loans among those in their first contract may seem puzzling. Notingthat it is illegal to charge placement fees to workers, it is possible that more experienced workersare more aware of this rule, or can find employment more easily through word-of-mouth orother means, rather than using an agency. We therefore test, but reject the hypothesis that newarrivals to Hong Kong are more likely to be in debt. This could be because their loans were takenin the Philippines and are therefore are not being reported as Hong Kong loans. In any case, thisdoes not suggest that migration-related costs are causing the indebtedness we observe in HongKong.

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4.2 Unexpected Expenses

We have referred above to the possibility that negative shocks may induce mi-grants to borrow to smooth consumption. If migrants are using the bulk of theirincomes to support the regular expenses of their families, then even a migrantwho saves regularly may simply not have enough saved up to cope with ashock. However, the data from the credit cooperative suggest that this cannot bea complete explanation. When we analyse the stated purpose of the 40 loans thatmigrant domestic workers took from the credit cooperative in the year 2017-18,we find that nearly two-thirds were for expenses that could have been antici-pated: land purchase, home renovation, or school fees for children back home.Only 21% of loans were for the medical expenses of relatives.23 Of course, thereis the question about how much we can trust the stated purpose of the loan.However the credit cooperative has an informal policy of providing faster cus-tomer service for emergency loans. Therefore we do not believe there was anyincentive for borrowers to under-report the true incidence of emergencies. Weconclude that the bulk of the loans are not being used to smooth shocks.

4.3 Lack of Financial Knowledge

It is possible that domestic workers do not understand the financial cost of bor-rowing. In other words, they may not realise that by using their savings in-stead of borrowing, they can avoid paying the interest on the loan. To examinewhether this can explain the observed behaviour, we examine whether indebt-edness varies by financial literacy levels. Our measure of financial literacy comesfrom two questions we asked in our survey. In each question, the respondentwas presented with two alternative hypothetical loans and needed to determinewhich loan was cheaper.24 The respondent’s financial literacy score takes a value

23The rest could not be cleanly classified into emergency or non-emergency purposes. Forexample, house repair could be an urgent expense in response to sudden damage, or could be anon-urgent expense that was planned ahead.

24In question 1, the two loans had an identical duration but differed in the principal and theinterest. Thus respondents would have needed to work out which loan was cheaper per dollarof principal. In the second question, the two loans had identical principal and duration, but theloan installment size and installment frequency varied. Thus they would have needed to workout which loan required the larger repayment amount. The exact questions are reproduced inthe Appendix. For each pair of loans we asked them two questions: which loan was cheaper,

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of 0, 1 or 2 depending on whether she correctly identified the cheaper loan innone, one, or both of the questions.

First, our data do not suggest that respondents are generally unable to evalu-ate the cost of a loan. Fifty-one percent of respondents answered both questionscorrectly, and 40 percent answered one correctly. However 37% of those whoanswered both questions correctly reported having an outstanding loan, com-pared to 30% of the others. This difference is not statistically significant. Thissuggests that their behaviour may not be stemming from an inability to com-pute the financial costs.

4.4 Lack of Self-Control or Other-Control

Hong Kong is a consumerist society, and shopping opportunities are every-where. It could be argued that this creates the temptation for Filipino migrantsto purchase goods that may not be strictly necessary. Excessive consumption ofthese goods could prevent them from building up their savings, so that theymight need to borrow to finance large expenses.

Alternatively, migrants could lack complete property rights over their earn-ings. In other words, they could be remitting larger sums than they had plannedto, or purchasing items that they did not plan to, not because they lack self-control but because others in their social network make demands on their in-comes. For example, their families back home may demand gifts, or ask forlarger remittances. Similarly if they have surplus cash, their friends in HongKong may request loans or treats and these may not be repaid or reciprocated.

Either of these two mechanisms could lead them to have low savings, neces-sitating that they borrow to finance large expenses. Although our current datado not allow us to validate these explanations, we will discuss these mecha-nisms further below.

and which loan they would prefer to take.

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5 Explanations for Over-borrowing

As we discussed above, the puzzle is not only that savings tend to be low onaverage, but that often individuals choose to borrow, instead of withdrawingtheir savings. We now discuss some explanations for this behaviour.

5.1 Limited Liability

Recall that the stated purpose of most credit cooperative loans was often aproductive investment such an educational expense, property purchase or con-struction, or a business investment. These are potentially risky investments. Ifloan contracts offer borrowers limited liability, then by financing the investmentthrough a loan, the migrant worker transfers the downside risk to the lenderand protects her savings.

The fact is however, that neither moneylending companies nor the creditcooperative offer limited liability. Most loans had rigid repayment schedules,and significant additional costs in case of default. For example, it is commonfor moneylending companies to call the borrower, her guarantor or referenceperson, and/or their employers to demand payment for an unpaid installment.Employers who receive these phone calls may fire the domestic worker, thuscutting off her income. The credit cooperative recovers unpaid loans by seizingthe borrower’s and/or her guarantor’s savings. Short of running away, it is dif-ficult for a worker to default on a loan from her employer since her paymentsare deducted from her salary. It thus seems implausible that MDWs borrow inorder to avoid the downside risk of their investment projects.

5.2 Short Time Horizon

Although repayment is enforced quite strongly in Hong Kong, moneylendersmay be unable to enforce loan contracts once the worker leaves Hong Kong. Ifa migrant worker is uncertain about how much longer she will stay in HongKong, this may effectively lower her cost of the loan.25

25To our knowledge, there is no mechanism to prevent migrants from leaving Hong Kongwhile they are in debt. Moneylenders are aware of this risk, and partly mitigate this by schedul-ing loans to mature before the worker’s current employment contract ends. Thus to avoid re-

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Migrants who have been re-employed by the same employer multiple timesmay be more secure about their job. This would be consistent with findinggreater indebtedness among migrant workers with a shorter tenure in their job.Instead, Figure 2 suggests that indebtedness rises as the number of years withthe current employer increases. This is likely connected to the fact that lendersreward workers who have a more secure job by offering them better loan terms.But it does not match the pattern we would expect if workers’ indebtedness wassolely caused by the insecurity of their jobs.

5.3 Loans as a Device to Solve Control Problems

The fact that individuals take loans even when they have the savings to helpavoid some part of the loan, raises the following question. The same monthlysalary that will be used subsequently to repay the loan could be used to re-build the depleted savings instead. If individuals choose not to do this, thissuggests they expect to find it difficult to rebuild their savings. Indeed, in in-formal interviews Filipino domestic workers agree that it would be better tosave than to borrow. However they report it is difficult to save, because thereis always a reason to spend the money instead. This self-reported inabilityto save has been documented in several other contexts as well. For example,it has provided a rationale for the success of simple savings technologies inKenya [Dupas and Robinson, 2013]. However, access to savings products doesnot seem to make it easier for our subjects to save.

In turn, this suggests that loans may serve an additional purpose. The major-ity of the loans that we found in our survey data have strict repayment sched-ules, and so borrowers are committed to pay monthly installments until the loanis paid off. Since default carries large penalties, this could create a credible ra-tionale for avoiding other expenses. The prospect of default could help to resistthe temptation to buy oneself an unnecessary consumption good, or the pres-sure to purchase such items for one’s family or give gifts and treats to one’sfriends. Migrants who are sophisticated about their lack of control may then

paying the loan by leaving Hong Kong, the borrower would either have to run away, or hercontract would have to be terminated prematurely. Both employers and workers have the rightto terminate the contract at any time, with one month’s notice or one month’s payment in lieuof notice.

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actively choose to take a loan even if it were not financially necessary. Indeed,Baland, Guirkinger, and Mali [2011] argue that members of a credit cooperativein Cameroon borrow more than they need to, so that they can “pretend to bepoor”.

Roscas also help overcome the difficulty of saving. Gugerty [2007] reportsthat western Kenyan rosca members believe that the collective element givesthem the “strength to save”. In our context, roscas are not very common. Thisis probably because rosca members need to trust each other. This trust is morelikely when they have information about each other and can enforce promises.These conditions are unlikely to develop organically in a population of transienturban migrants who only meet once a week in a public location.26 Even amongrosca members, we do not find that roscas replace loans altogether, most likelybecause the rosca pot is limited by the savings capacity of its members.27

In contrast, moneylending companies offer much larger loans. Access to theloans is easy, and to apply a domestic worker only needs to show her HongKong identity card and employment contract, and provide the phone numberof a reference person, or bring along a friend as a guarantor.28 The high interestrates and strict repayment schedules effectively limit future liquidity and flex-ibility to smooth consumption shocks, and in extreme situations can cause theworker to lose her income. Possibly these features actually make these loans at-tractive. Morduch [2010] discusses the case of a South Indian woman who tooka high-interest loan that she could have avoided. She believed the high interestrate incentivised her to pay back the loan much more quickly than she couldhave saved up the same amount.

26Recall that 15% of our survey respondents belonged to roscas. The majority belonged to thesame island in the Philippines and likely knew each other well.

27Thirty percent of rosca members had a currently outstanding loan from a moneylender.Their mean loan size (HKD 25,500) was also similar to the mean loan size for those who did notbelong to roscas (HKD 23,149).

28Migrant domestic workers who either have a good repayment record or who have beenwith their current employer for longer than 5 years do not even need a reference person or aguarantor.

16

6 Conclusion

Our research has benefitted from a large literature that precedes it. Manyscholars have noted that the poor do not save as much as they could[Banerjee and Duflo, 2011]. However others have also argued that borrowingremains an attractive choice for many poor individuals, even when they havethe wherewithal to save [Collins et al., 2009, Morduch, 2010]. This is because thehigh interest costs or the penalties for non-repayment induce the borrower to re-pay the loan and make it possible to avoid consumption, in a way that voluntarysavings mechanisms do not.

An important question in this context is: what are the compulsions that pre-vent Filipino domestic workers in Hong Kong from saving successfully, but atthe same time allow them to repay loans regularly? A possible explanation isthe lack of self-control in the face of consumption opportunities. Certainly thereare abundant shopping opportunities in Hong Kong that might test an individ-ual’s self-control, and there are anecdotes about domestic workers who splurgeon consumption goods that might seem excessively expensive given their lowwages.

A second explanation points to the role of “kin taxes” or insecure propertyrights over one’s earnings and savings. Many of the Filipino workers we sur-veyed were earning considerably higher wages than their kin in the Philip-pines and were remitting money home regularly to support their expenses.Anderson and Baland [2011] argue that women participate in roscas in orderto wrest control from their husbands who might spend on unnecessary items.Ashraf, Aycinena, Martinez, and Yang [2015] find that El Salvadoran migrantsin the US deposited more into savings accounts when they had sole control overwithdrawals, than when they shared control with their relatives back home. Ina lab-in-the-field experiment Jakiela and Ozier [2016] find that Kenyan villageresidents are more unwilling to publicly reveal their earnings to a room fullof fellow residents, when a larger proportion of the fellow residents are theirkin. Baland et al. [2011] argue that Cameroonian credit cooperative memberstake loans instead of withdrawing their savings so that they can “pretend tobe poor” and avoid gifting or contributing to their friends and relatives. The

17

Kenyan savers in the work by Dupas and Robinson [2013] also say their savingsboxes help them hide their money from their social network.

In informal interviews, Filipino domestic workers do report that their fam-ilies back home sometimes make unreasonable demands for money, and haveunrealistically rosy ideas about their financial situation in Hong Kong. How-ever, many also state that providing for their family is their responsibility, andis an important reason why they are working in Hong Kong. Thus, although theliterature portrays the demands made by relatives as “taxes”, these relationshipscould be more complex in reality. Admittedly financial support tends to flow inonly one direction from the migrant to her family members back home. How-ever the spouse, siblings, aunts and cousins in the Philippines are often lookingafter the migrant’s children or elderly parents, overseeing house constructionand repair, or running the small business that the migrant has invested in. Thusthese may also be reciprocal arrangements, where one side provides financialsupport while the other provides manpower and facilitates peace of mind. Sim-ilarly, although friends in Hong Kong may borrow or request gifts, they alsolend in return and make gifts when the individual herself is in need. In futurework we will investigate the role that these social networks play in shaping theborrowing choices of Filipino domestic workers.

Ideally, possible interventions should be evaluated in the light of these possi-ble mechanisms. Commitment savings products that restrict the individual fromwithdrawing until a target date or savings balance is reached may be suitablefor individuals with present-biased time preferences [Ashraf, Karlan, and Yin,2006]. Those who wish to flexibly finance the expenses of their families may bebetter suited to a contractual savings product that requires them to replenishtheir savings after they have drawn them down [Morduch, 2010]. In a creditcooperative this could take the form of a combination loan-and-savings prod-uct where each month the borrower both repays the loan and makes a savingsdeposit. In future research we hope to investigate the effectiveness of these al-ternative products.

18

References

Siwan Anderson and Jean-Marie Baland. The economics of roscas and intra-household resource allocation. The Quarterly Journal of Economics, 117(3):963–995, 2011.

Nava Ashraf, Dean Karlan, and Wesley Yin. Tying oddyseus to the mast: Ev-idence from a commitment savings product in the philippines. The Quar-terly Journal of Economics, 121(2):635–672, 2006.

Nava Ashraf, Diego Aycinena, Claudia Martinez, and Dean Yang. Savings intransnational households: A field experiment among migrants from el sal-vador. The Review of Economics and Statistics, 97(2):332–351, 2015.

Jean-Marie Baland, Catherine Guirkinger, and Charlotte Mali. Pretending tobe poor: Borrowing to escape forced solidarity in cameroon. Economic De-velopment and Cultural Change, 60:1 – 16, 2011.

Abhijit Banerjee and Esther Duflo. Poor Economics. Random House, 2011.

Rashmi Barua, Gauri Kartini Shastry, and Dean Yang. Financial education forfemale foreign domestic workers in singapore. Technical report, 2018.

Daryl Collins, Stuart Rutherford, Jonathan Morduch, and Orlanda Ruthven.Portfolios of the Poor: How the World’s Poor Live on $2 a Day. PrincetonUniversity Press, 2009.

Patricia Cortes and Jessica Pan. Outsourcing household production: Foreigndomestic workers and native labor supply in hong kong. Journal of LaborEconomics, 31(2):327–371, 2013.

Pascaline Dupas and Jonathan Robinson. Why don’t the poor save more? ev-idence from health savings experiments. American Economic Review, 103(4):1138–1171, 2013.

Mary Kay Gugerty. You can’t save alone: Commitment in rotating savings andcredit associations in kenya. Economic Development and Cultural Change,55(2):251–282, 2007.

Pamela Jakiela and Owen Ozier. Does africa need a rotten kin theorem? exper-imental evidence from village economies. Review of Economic Studies, 83:231–268, 2016.

Carolina Laureti. Why do poor people co-hold debt and liquid savings? Journalof Development Studies, 54(2):213–234, 2018.

Government of the Hong Kong SAR. Foreign domestic helpers and evolvingcare duties in hong kong. Research Brief, 2016-17(4), 2017. Office, Legisla-tive Council Secretariat.

19

PLUDWHK and Hong Kong Federation of Asian Domestic Workers. Betweena Rock and a Hard Place: The Charging of Illegal Agency Fees to FilipinoDomestic Workers in the Philippines and Hong Kong. 2016.

Jonathan Morduch. Borrowing to save. Journal of Globalization and Develop-ment, 1:?, 2010.

Desmond Ng and Cheryl Tan. Borrowing, brokering, lend-ing: Inside the tangled web of maids and moneylen-ders. Channel News Asia, CNA Insider, 2019. URLhttps://www.channelnewsasia.com/news/cnainsider/maids-domestic-workers-moonlight-brokers-moneylenders-borrowing-11304566.02 March.

Dean Yang. Migrant remittances. Journal of Economic Perspectives, 25(3):129–152, 2011.

Chi Wai Yu, Y. Jane Zhang, and Xuejing Zuo. Multiple switching and dataquality in the multiple price list. Review of Economics and Statistics, 2019.Forthcoming.

20

Figure 1: Average Monthly Savings Per Member in the Credit Cooperative ver-sus Previous Year’s Dividend Rate

020

4060

8010

0

1 1.5 2 2.5 3Dividend in previous year

Monthly net deposits per member versus dividend rate

21

Figure 2: Indebtedness versus Tenure with Current Employer

.1.2

.3.4

.5H

as a

n ou

tsta

ndin

g lo

an

0 10 20 30Years with current employer

Indebtedness as a function of job tenure

22

Table 1: Descriptive Statistics of Survey Respondents

Mean Standard error(1) (2)

Age 39.80 0.71Education

Less than high school 0.09 0.02High School 0.11 0.03Some College 0.39 0.04College Graduate 0.41 0.04

Number of children 1.67 0.12Number of dependents 3.58 0.16Years since left Philippines 11.3 0.77Years in Hong Kong 9.1 0.69Years with current employer 5.1 0.45Mean salary (HKD per month) 4565.9 95.8Paid in cash 0.76 0.04Food provided 0.88 0.03Food allowance provided 0.15 0.03Remitted in past 2 months 0.93 0.02Mean remittances (HKD) 2119.2 125.8Percent of income remitted 0.46 0.02Remittance method

Bank 0.21 0.03Money service operator 0.60 0.04Online 0.01 0.01Other 0.15 0.03

Has bank account 0.90 0.03HKD account 0.51 0.04PHP account 0.76 0.04Has single-holder account 0.97 0.02Has joint account 0.09 0.03Total bank balance (HKD) 8853.5 1278.9Mean savings per month (HKD) 255.1 117.2

In a paluwagan 0.15 0.03Uses a moneyguard 0.00 0.00Has outstanding loan 0.34 0.04If yes:

Total amount borrowed 23455.5 1874.1Total repayment amount 28966.5 2516.50Monthly repayment amount as % of salary 0.54 0.04

Has outstanding credit 0.14 0.03

23

Tabl

e2:

Het

erog

eneo

usTr

eatm

entE

ffec

tsof

Hig

hR

ate

ofR

etur

non

Toke

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lloca

tion

Ris

k-av

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onFi

nanc

iall

iter

acy

(1)

(2)

(3)

(4)

(5)

(6)

Cha

ract

eris

tic

1.49

5***

1.49

4***

0.54

60.

724

1.01

7-1

.369

(0.5

09)

(0.5

09)

(0.8

26)

(2.0

51)

(2.0

73)

(3.2

55)

Hig

hin

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-19.

563*

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56-1

2.87

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)(1

1.80

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.484

)(1

0.59

5)C

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cx

Hig

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526

4.01

6(1

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.223

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onst

ant

35.1

82**

*37

.081

***

47.2

67**

*49

.712

***

51.0

57**

*56

.475

***

(5.8

94)

(6.2

55)

(9.3

75)

(5.3

60)

(5.5

40)

(7.9

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24

Table 3: Loan Characteristics

Overall Money-lendingco.

Coop. Employer Friend /Relative

(1) (2) (3) (4) (5)

Fraction of loans: 1.00 0.80 0.06 0.06 0.06

Principal 22019.4 25062.9 14000.0 15000.0 4166.7(12281.5) (1832.0) (1000.0) (5000.0) (2920.2)

Repayment amount 31621.7 14504.1 15000.0 4166.7(2501.18) (1102.2) (5000.0) (2920.2)

Interest rate 0.20 0.25 0.07 0.00 0.00(0.17) (0.03) (0.00) (0.00) (0.00)

Monthly schedule? 0.98 1.00 1.00 1.00 0.67(0.02) (0.00) (0.00) (0.00) (0.33)

Loan duration (months) 10.1 12.2 6.0 – –(5.5) (0.58) (1.15)

25

A1 Appendix

A1.1 Lab-in-the-Field Experiment

Each subject participated in a single experimental session each. Each sessionconsisted of 8-15 participants who sat at individual computer terminals. Eachsubject was randomly assigned to a group of 4-5 members, and played 4-5rounds of the decision-making experiment with this group before randomly be-ing assigned to a new group. At no point could they identify their group-matesamong the participants in the room.

In each round, participants were given an endowment of 100 tokens andasked to allocate them across three accounts (or “boxes”): the blue safe box thatwould give a certain return of x percent, the red box where, if the “investment”option was exercised the return would be 40% with probability 0.8 and zerootherwise; and the green box, that would generate a fixed in-kind return with aprobability proportional to the number of tokens placed in the box.

We experimentally varied the rate of return in the blue box to either be 3%or 10%. Experimental sessions were randomly assigned to one or the other rate.

The decision of whether to invest the amount in the red box was made by adifferent player in the group; we only analyse rounds where the participant wasnot investor. Also, to avoid endogenous token allocation in response to whatothers in the group did in previous periods, we only analyse the first round thatthe participant played with each group.

Each token placed in the green lottery box gave a 0.5% probability of suc-cess, so that if the participant placed 10 tokens in this box she would have a5% probability of winning a hand-bag as a prize. The total earnings from eachround were displayed to the player at the end of the round. At the end of thesession one round was randomly chosen and implemented, with an exchangerate of 1 token = $1. Thus the participant received the cash payment equal toher earnings, as well as the handbag, if she had won it in the randomly selectedround.

A1.2 Financial Literacy Questions

Question 1 Suppose you need to take a loan here in Hong Kong. There are twochoices. Loan A: You will get $10,000 for 6 months. You will have to payback $10,500 at the end of 6 months. Loan B: You will get $20,000 for 6months. You will have to pay back $20,800 at the end of 6 months.

Which loan is cheaper?

1

Which loan would you prefer?

Question 2 Suppose you need to take a loan of $10,000 here in Hong Kong.There are two choices. Loan A: You can get $10,000 for 6 months. You haveto repay $2,000 every month for 6 months. Loan B: You can get $10,000 for6 months. You have to repay $600 every week for 24 weeks.

Which loan is cheaper?Which loan would you prefer?

A1.3 Comparison of our Sample with a Random 1% Samplefrom the 2011 Hong Kong Census

The 2011 Hong Kong Population Census involved a complete headcount of allpersons in Hong Kong, and collected detailed socio-economic data from 10% ofthe households in Hong Kong. We use the 1% sample of the micro-data releasedby the Census and Statistics Department, and consider the sub-sample of indi-viduals whose relationship to the household head is “live-in domestic helper”,and nationality is Filipino. We check that this sub-sample plausibly consistsof Filipino domestic workers: all the individuals report that they are currentlyworking, their economic activity as “employees”, their industry as “domesticpersonnel” and occupation as one of the following three categories: “cleaners,helpers and related workers”, “personal care workers” and “drivers and mobilemachine operators”.

The table below provides a comparison of the variables that we collected in-formation on in our survey and are also measured in the Census. The data arecomparable to the extent that we believe that the population of Filipino domes-tic workers in Hong Kong remained in steady state during this period, so thatpopulation characteristics did not change significantly. There have been no ma-jor policy changes to Hong Kong’s immigration policy vis-a-vis the Philippinesor the Philippines’ emigration policy vis-a-vis Hong Kong during this periodthat we are aware of.

Age is reported in both our survey and in the Census as a numeric valueindicating the number of years completed, or that have elapsed since birth.Our sample respondents were on average 40 years old; the Census average isa very similar 38. In our study, we asked respondents to self-report the educa-tion level they had completed, but did not probe about the type of educationalinstitution they attended or whether they had received a degree, a diploma ora certificate. The Census classifies education into much finer categories. We ag-gregated these educational categories to identify persons who had received apost-secondary-school diploma, certificate or degree, and call this class “col-lege graduate”. The Census data suggests that 24 percent of Filipino domestic

2

workers in Hong Kong are college graduates, which is somewhat lower than the41 percent that we find. It is possible that domestic workers report completionof any post-secondary-school educational course as graduation from college,whereas the Census uses a stricter definition.

Both studies asked the number of years the respondent had lived in HongKong. However whereas we recorded all answers in numeric value, the censustop-codes all respondents who report a stay longer than 20 years. We thereforepresent the mean number of years for those who report living in Hong Kongfor 20 years or less, and the percentage of respondents who have been in HongKong for 21 years. The Census finds only 5 percent, but we find that 11 percentof our sample had lived in Hong Kong for longer than 21 years. However amongthose who had lived here 20 years or below, both datasets show that respondentshad lived in Hong Kong for a very similar 6.5-6.8 years. Finally, we calculatethe ratio of the workers’s reported salary to the contemporaneous minimumallowable wage set by the HKSAR government at the time of the survey. In oursample, the average respondent was earning 1.08 times the minimum allowablewage; the census reports a very similar 1.05.

Thus there appears to be broad agreement on many observable characteris-tics in our sample and the representative sample of Filipino domestic workers inthe 2011 Census. The notable difference is that 11 percent of our sample reportedhaving lived in Hong Kong for more than 21 years; compared to the Census’s5 percent. However most conventional hypotheses would suggest that work-ers who have been in Hong Kong for a shorter duration should be in greaterdebt, thus we do not think that our findings can be attributed to this possibleover-representation of workers who have stayed longer.

3

Table A1: Comparison of Our Sample with Census Data

Our Study Census(N=136) (N=5947)(1) (2)

Age 39.8 38.1(0.71) (0.01)

College graduate 0.41 0.24(0.04) (0.01)

Years in Hong Kong* 6.5 6.8(0.48) (0.07)

Fraction stayed longer than 21 years 0.11 0.05(0.03) (0.003)

Salary as ratio of minimum wage 1.08 1.05(0.02) (0.002)

Notes: Statistics for Census are authors’ calculations based on a1% sample of the 2011 Hong Kong Census. *Among those whohave lived in Hong Kong for 20 years or less.

4