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Interest Rates in Savings Groups: Thrift or Threat?

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  • le Polain, Maïté
  • Sterck, Olivier
  • Nyssens, Marthe

Abstract

Savings group (SG) models are praised for achieving financial inclusion for the poorest at a very low cost. Promoted by international NGOs, SG models are inspired by indigenous savings and credit associations (ROSCAs). SG models however differ in that they prescribe lending the pooled savings to group members for an interest. The interest rate aims to (1) boost capital accumulation, (2) allocate scarce capital efficiently, and (3) remunerate and incentivize savers. This paper builds on a six-month fieldwork conducted in DR Congo consisting of direct observations of SG meetings and interviews with SG participants and practitioners. We study the gaps between SG practitioners’ objectives and SG participants’ perceptions and practices related to the interest rate. Our research pays particular attention to the local context and local norms that interfere with SG practitioners’ objectives. Our analysis highlights three gaps. First, SG participants turn savings into credit for security purposes rather for rapid capital accumulation. Second, credit allocation decisions are guided by fairness and security concerns rather than efficiency. Third, SG participants often regard the accumulated interest as belonging to the group and to active borrowers rather than to passive savers. Our results invite development actors to pay greater attention to the potential risks of the SG approach for its participants. Despite the common appellation “savings groups”, this microfinance innovation builds upon credit and strongly encourages its members to go into debt.

Suggested Citation

  • le Polain, Maïté & Sterck, Olivier & Nyssens, Marthe, 2018. "Interest Rates in Savings Groups: Thrift or Threat?," World Development, Elsevier, vol. 101(C), pages 162-172.
    • Handle: RePEc:eee:wdevel:v:101:y:2018:i:c:p:162-172
    DOI: 10.1016/j.worlddev.2017.09.001
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    Citations

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    Cited by:

    1. Pilar López-Sánchez & Elena Urquía-Grande & Cristina Campo & Andrés L. Cancer, 2022. "Delving into the Determinants of Default Risk in Savings Groups: Empirical Evidence from Ecuador," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 34(6), pages 2625-2650, December.
    2. Alfredo Burlando & Andrea Canidio & Rebekah Selby, 2021. "The Economics Of Savings Groups," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(4), pages 1569-1598, November.
    3. Gonzales Martinez, Rolando & D’Espallier, Bert & Mersland, Roy, 2021. "Bifurcations in business profitability: An agent-based simulation of homophily in self-financing groups," Journal of Business Research, Elsevier, vol. 129(C), pages 495-514.
    4. Emmanuel, Bukuwa Nambale, 2022. "The determinants of participation in savings groups and the impact on input investment among smallholder farmers in Sironko district, Uganda," Research Theses 334746, Collaborative Masters Program in Agricultural and Applied Economics.
    5. Panman, Alexandra & Madison, Ian & Kimacha, Nyambiri Nanai & Falisse, Jean Benoît, 2021. "Saving up for a rainy day? Savings groups and resilience to flooding in Dar es Salaam, Tanzania," LSE Research Online Documents on Economics 114610, London School of Economics and Political Science, LSE Library.
    6. Girma Jirata Duguma & Jiqin Han, 2018. "Effect of Deposit Mobilization on the Financial Sustainability of Rural Saving and Credit Cooperatives: Evidence from Ethiopia," Sustainability, MDPI, vol. 10(10), pages 1-23, September.

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