Paper short abstract:

Savings groups are increasingly being encouraged to form relationships with formal financial institutions. We investigate the influence that linkages with formal financial institutions have on the financial performance of savings groups.

Paper long abstract:

Using a matched sample of data on 3598 savings groups from 32 countries, this paper is the first to carry out a rigorous empirical investigation of the relationship between financial linkages and savings groups' financial performance. Our empirical analysis is based on a sample extracted from the Savings Groups Information Exchange (SAVIX), a global data set that collects standardized data on over 250,000 savings groups. We find that linkage through savings significantly enhances the performance of groups as evidenced by the increase in savings per member and the return on savings. This suggests that members gain confidence in the safety that an account with a formal financial institution provides. This is, however, achieved at a cost as the fund utilization rate, i.e. the share of the available fund that is lent out to the members, reduces for savings linked groups probably due to the fact that group funds are now "locked up" in a formal financial institution. On the other hand, credit linkage significantly reduces the savings per member and the return of savings which suggests that the infusion of external capital into the group is detrimental to the financial performance of these groups and thus curtails the wealth-creation of individual members. We complement the empirical study with a qualitative field study to better understand the statistical results obtained.