Banker my neighbour: Matching and financial intermediation in savings groups

Abstract

Efforts to promote financial inclusion have largely focused on microcredit and micro-savings separately, less so on promoting financial intermediation across poor borrowers and savers. Village Savings and Loan Associations (VSLAs) may enable borrowers and savers to meet each others' needs, by combining a borrowing and a commitment savings technology. On the other hand, frictions such as imperfect information and enforcement may limit VSLAs’ ability to attract both borrowers and savers into the same group. To investigate whether VSLAs provide effective financial intermediation, we use a large-scale survey of mature VSLA groups in rural Malawi. We find that VSLAs mobilize large quantities of savings that are then lent to individual members at high interest rates, yielding savers a large return on their savings. We examine whether this process is assisted by the sorting of members across VSLAs. We find that present-biased individuals tend to group with time-consistent members, consistent with the hypothesis that the former gain a commitment savings technology by lending to the latter. In contrast, members of the same occupation sort into groups together, indicating unrealised intermediation possibilities between farming and non-farming households. This has implications for the design of such groups.