• Chart of the Week
  • August 6, 2018

A powerful incentive to save

Maciej Bledowski/Bigstock


Personal banking accounts are a common convenience in rich countries like the US, something millions of households use for depositing paychecks and storing cash for the proverbial rainy day.

Bank accounts could be a critical wealth-building tool in developing countries as well. The challenge is getting more people to use them.

A paper in the American Economic Journal: Applied Economics explored whether offering temporary high investment returns on bank accounts in Kenya was enough to encourage more aggressive savings practices years later.

Author Simone Schaner analyzed field experiment data in which individuals and couples were offered a range of annual interest rates up to 20 percent, a temporary promotion that lasted for only six months. Beyond the immediate impact on boosting short-term savings, Schaner wondered whether people would keep investing after the interest rate offer ended.

Figure 1 from Schaner (2018)


The figure above shows the impact that the higher interest rates had on individual and joint account holders over three years. The top panel shows the share of accounts that received at least one transaction within a given quarter and the bottom panel shows average account balances. The lighter colored lines represent accounts with higher interest rates while darker lines are at the low end.

In the short run, the incentives worked. The offer did spur people to open and use their accounts, with higher interest rates generating more account use.

What’s more, the impact amplified over the long run. Average balances for individual accounts at the 20 percent rate continued to grow for years after the offer ended, outpacing account holders who were offered lower interest rates. Schaner found that account holders with high interest rates were 26 percent more likely to save regularly 3.5 years after the interest rate expired. As a result, this group had more income and assets, and it wasn’t just that they had more capital to invest. Their financial behavior changed. They were more likely to budget for business expenses and stick to their financial plan.