Should informal financial groups at the bottom of the pyramid be linked to banks? A comparative analysis of linked and un-linked groups

Ku Leuven

Présentation de Bert D’Espallier - KU Leuven - Belgium

Abstract: Savings groups are small informal financial institutions operating at the bottom of the pyramid in developing economies. Increasingly such groups are being encouraged to form relationships with formal financial institutions in order to enhance the groups’ relevance for their members. We investigate the influence that linkages with formal financial institutions have on the financial performance of savings groups. Applying a difference-in-differences methodology to a matched sample of data on 2832 savings groups from 30 countries, we contribute to the literature by investigating the differential effect resulting from a credit linkage and a savings linkage. Overall, results indicate that a savings linkage is beneficial to the groups as it enhances group financial performance in terms of increased savings per member and return on savings. There is, however, a reduction in the fund utilization rate following a savings linkage. The savings linkage, hence, brings benefits for net savers but not for net borrowers as the increased return on savings reflects an increase in the interest rates charged on the group loans. On the other hand, a credit linkage largely has a negative effect on the financial performance of the groups. This is observed through a reduction in the member savings and return on savings following a credit linkage. The findings offer guidance for international development organizations, policy makers and banks currently recommending bank linkage for savings groups.

Co-Authors: Linda Nakato and Roy Mersland