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Household Saving Behavior in Rural Ethiopia: Challenges and Policy Options

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  • Elias, Hailu
  • Beshir, Mohammed
  • Mehare, Abule

Abstract

Despite remarkable progress in increasing domestic saving over the last two decades, it has been unable to keep pace with investment rates. Hence, it is crucial to identify and implement feasible policies to mobilize more domestic savings to reduce the financial gap. To this end, dependable empirical evidence is imperative. This study aims to identify the major drivers of saving in general, and in-cash and in-kind savings in particular among rural households. We rely on both primary (panel data sets, key informant interviews, and focus group discussions) and secondary (data collected from Micro Finance Institutions (MFIs) and the National Bank of Ethiopia) sources. Descriptive and econometric approaches were employed to analyze the data and answer the research questions posed. The results show that about 75% and 77% of surveyed households saved in formal or informal financial institutions in 2014 and 2022, respectively. Nominal savings per household have increased in the past decade, but most of the improvement has come from in-kind savings which are destined for informal mechanisms. As a result, the main source of finance for rural households, MFIs, faced difficulty meeting the loan demands with their own savings. The rise in inflation, especially in recent years, forced households to reduce cash savings and hold assets. Our econometric analysis shows that ensuring access to formal financial services, financial knowledge, and building trust in formal financial institutions (FFIs) and their services significantly increases cash saving. Therefore, improving access to FFIs and diversifying financial products will improve the rate of savings and therefore, the rate of investment in Ethiopia. The results also show that building trust in the services and products of formal financial institutions (FFIs) can help bring in-kind savings and informal cash savings to formal cash deposits in financial institutions.

Suggested Citation

  • Elias, Hailu & Beshir, Mohammed & Mehare, Abule, 2022. "Household Saving Behavior in Rural Ethiopia: Challenges and Policy Options," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 31(02), October.
    • Handle: RePEc:ags:eeaeje:343259
    DOI: 10.22004/ag.econ.343259
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    References listed on IDEAS

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