The Economics of Savings Groups∗

Poor households worldwide rely on savings groups (SGs) to satisfy their financial needs, yet very little is known about these groups’ ability to meet them. In this paper we develop a theoretical model illustrating the basic trade-offs in the functioning of SGs, and present stylized facts derived from the financial accounts of a sample of Ugandan SGs. The main conclusion from the theoretical model is that SGs lack a mechanism to ensure that supply of internal funds equals its demand. Consequently, SGs may be unable to generate sufficient funds to meet the demand for loans of their members. The model also highlights the importance of encouraging early savings, that can be lent out multiple times and ease the rationing of funds. Empirically, we find that groups do generate a significant flow of funds between members and provide a high return on savings. However, we also confirm the main theoretical predictions by showing that loans are rationed for a large fraction of the lending cycle. We conclude by discussing ways in which this mismatch between demand and supply of funds can be improved. JEL classification: O12, O16