Savings Groups: Model, Welfare and Design

Abstract

Savings groups (SGs) are a low-cost way of providing access to financial services to the most marginalized in the developing world. We develop a model of SGs—a Bewley-Huggett-Aiyagari-type heterogenous agent model—that captures the main distortionary features of VSLA-type (Village Savings and Loan Association) SGs. Calibrating the model to data from Uganda, we find that SGs provide benefits equal to 1.38% of consumption (consumption equivalent variation; CEV) or US$2.76 (financial value; FV) per member per month relative to autarky, which easily justify the low implementation costs. The optimal interest rate on borrowing is found to differ significantly across measures of welfare, with the CEV peaking at 2.46% at an interest rate of -9.5% and the FV peaking at US$2.77 at an interest rate of 4%. Alternative designs of SGs are considered. Loosening the cash-flow constraint by al- lowing members to repay their loans using their share-out equity increases the CEV to 1.76% and the FV to US$3.04. Finally, a continuous SG design that eliminates the share-out cycle and its associated distortions raises the CEV to 3.86% and the FV to US$6.75.