ABSTRACT
Using data from Bangladesh, this article finds that the liquidity premium – the difference between the interest paid on illiquid and liquid savings accounts – is higher in commercial banks than in microfinance institutions. One possible interpretation lies in the higher prevalence of time-inconsistency among the poor. The observed difference in liquidity premia could be due to poor time-inconsistent agents willing to forgo interest on illiquid savings accounts in order to discipline their future selves.
Acknowledgements
The authors thank Ilan Tojerow and Stéphanie Collet for helpful discussions. They are grateful to Alexandra van Marcke de Lummen who provided efficient research assistance.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 Interestingly, these findings are gender-sensitive. Dupas and Robinson (Citation2013) find that most women actively take up the savings account offered by a village bank in Kenya while men do not. Possibly, women are more attracted to accessible commitment devices than men are because they are poorer than men on average, enjoy less autonomy in financial decision-making (Guérin Citation2006), and are sometimes discriminated against by financial institutions (Agier and Szafarz Citation2013).
2 Data collected in June 2012.
3 Admittedly, the sample could be subject to a selection bias since it is confined to institutions that publicize their savings conditions.
4 The data on total assets were retrieved as of 31 December 2011 for all institutions except Rajshahi Krishi Unnayan Bank, Bangladesh Krishi Bank, SafeSave, Jagorani Chakra Foundation (as of 30 June 2011), and Buro and Grameen Bank (as of 31 December 2010).
5 All Islamic banks are private.
6 In theory, since illiquid savings protect a bank against liquidity shortages and since competitive markets reward deposits at their marginal benefit, the liquidity premium in a competitive market should be unaffected by the demand side. In contrast, if a bank enjoys market power, it can exploit the savers’ reservation prices, and the liquidity premium would depend negatively on the proportion of time-inconsistent agents among the savers (Laureti and Szafarz Citation2014).