NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Anyone who has ever tried to buy something at a small shop or market stall in Africa will have experienced this familiar scenario: Waiting while the retailer runs around the market or nearby shops to get change.

Like me, you may have had the annoyed reaction: “this seems incredibly inefficient, and a waste of my time, but there must be some rational reason why no one keeps change.”

Well, one of our grantees finally decided to study this phenomenon and – it turns out – we are right to be annoyed. There probably isn’t a good reason!

Jon Robinson, who is running the Gates Foundation’s four savings impact random control trials, (see summary here) and co-authors (Lori Beaman and Jeremy Magruder) did a study of 500 or so small and medium sized enterprises in western Kenya. They found that these small informal firms spend an average of two hours per week looking for change to complete transactions. This contributes not only to lost productivity, it means losing 5-8 percent of profits as a result of missed sales – just by not keeping enough change on hand. Robinson and his colleagues conducted two interventions, where they communicated the fact that they were losing money and time to the firms. They found that when firms were informed, they changed their behavior to keep more change and the lost sales moderated (indicating it was a problem of simply not recognizing the problem, rather than some other constraint.)

The complete study can be downloaded here (pdf).

The study’s results point to yet another cost of cash, and another benefit of electronic money, which has no lumpiness and can thus be divided into any denomination or amount you wish without having to make change.

The takeaway: Go digital!

Flickr image credit: 401(K) 2012