The Economics of Savings Groups

Abstract

Millions of households worldwide rely on savings groups (SGs) to satisfy their financial needs, yet important gaps remain in our understanding of this novel financial institution. We show theoretically that, within an SG, the supply of funds could fall short or be in excess of its demand. Then, we use week-by-week records from 46 Ugandan SGs to show that most groups do not generate sufficient loanable funds. We conclude by proposing three interventions that, in light of our model, should ease credit rationing and improve the welfare of SG members: requiring SG members to publicly state their savings and borrowing goals, encouraging early savings, and linking SGs with formal financial institutions.

Profit-Generating Entities or Cash-Management Vehicles? Unpacking the Financial Performance of Savings Groups Worldwide

“…On average, for each US dollar saved, .95 is converted into loans (FUR). This supports earlier findings by Burlando et al (2021), that given the resource constraint posed by the funds available in the cash-box, FUR is close to 1. In terms of members, each member takes an average of .71 loans, which means that at any given point in time, some 71% of members hold loans and 29% do not.…”

“…Improving the profit-generating capacity of the group means increasing its fund utilization. Burlando et al (2021) refer in this regard to restricted resource availability, since groups are tied to the money available in the cash-box. From a financial perspective however, relaxing the personal borrowing constraint (i.e.…”

“…Specifically, we present data evidence on a number of relevant performance dimensions such as savings capacity, borrowing conditions and profit-generating capacity, thereby offering insight into how groups manage the funds and whether they ensure higher returns on invested savings for their members. Following findings by Burlando et al(2021), it also allows us to detect possible implementation restrictions inherent to the SG model that impact the welfare potential for member. Evidently, a disadvantage of our approach is that it fails to capture the strong inter-group differences inherently part of the SG-movement.…”

“…So far, comprehensive impact studies show mixed results on financial inclusion and poverty reduction (Beaman et al, 2014;Karlan et al, 2017). Similarly, Burlando et al (2021) show that SGs may be unable to accommodate the needs of their members due to potential mismatch between supply and demand for funds. An excess of funds is associated with lower returns on savings, whereas fund scarcity results in loan rationing (Burlando et al, 2021).…”

“…Similarly, Burlando et al (2021) show that SGs may be unable to accommodate the needs of their members due to potential mismatch between supply and demand for funds. An excess of funds is associated with lower returns on savings, whereas fund scarcity results in loan rationing (Burlando et al, 2021). Although this scarcity results in high returns on savings (since funds are not left in the cash-box unused) it also discourages members to save since their leverage potential is limited.…”