Academic journal article The Journal of Developing Areas

How Sustainable Is the Use of Different Savings Devices? a Study of Formal and Informal Finance in Benin

Academic journal article The Journal of Developing Areas

How Sustainable Is the Use of Different Savings Devices? a Study of Formal and Informal Finance in Benin

Article excerpt


Collins et al. (2010) detail various formal and informal devices poor individuals in the developing world can use to manage their savings. We analyze the determinants of the sustainability of three of these: banks, mobile bankers (tontiniers) and roscas. These devices are the most widely used in the urban context of Benin's largest city, Cotonou. Our sample covers both formal and informal banking and offers enough variation in sustainability for an empirical investigation. Tontiniers and roscas are informal in the sense that they take place outside of the market place and are made without any legal arrangement that could in any way be binding.

We look at the effect of income shocks such as health and funeral expenditure on the probability that individuals continue using these devices over a two-year period using longitudinal data from 2004 and 2006 surveys in Benin. We use a probit regression to analyze the effect of recent health and funeral shocks on the probability of sustained membership controlling for numerous individual and device-specific characteristics. Our analysis helps us to look specifically at threats to the sustainability of membership rather than using a panel regression to simply measure the determinants of membership over time. The determinants of rosca membership have already been subject to much investigation (Dagnelie and LeMay-Boucher, 2012) and for mobile bankers (Ashraf et al. 2006a). Rather than sticking to this same question, we focus on a subsample of users in 2004 and ask what drives the sustainability or termination of the use of a specific device over time.

The study focuses upon the effect of two different types of variable on the probability of sustained membership. We first analyze the effect of income shocks on the stability of participation. These shocks often represent a large drop in individual income and could therefore have the effect of prompting default if a savings mechanism is inflexibly structured. We compare the effect that health and funeral shocks have on continued participation in the three different devices, expecting to see that participation is less sustainable in those that are less flexible in terms of timing and magnitude of payments. Health shocks are often unforeseen and include any payment related to health expenditures (medication, hospitalization fees, etc.). Funeral shocks can often be anticipated, however. These are defined as any expenses linked to a funeral ceremony of someone from an individual's immediate or extended family. Both types of shock are amongst the most important. Compared to the average monthly income in this sample (based on 2004 data) of 53,430 CFA (median 40,330 CFA), individuals spent an average of 2615.25 CFA on funerals and 2138.73 CFA on illness (averages taken from the last six months). These two expenses represent 4.9 and 4 per cent of all monthly income respectively. We also control for other key variables at the individual level.

The second set of variables we study are the characteristics of the savings devices themselves and the effect that these have on continued participation. These are of particular importance for our two informal devices, roscas and mobile bankers, as banks offer a relatively homogenous savings experience. We investigate, among others, the impact of the possibility of loans and of changing contribution frequencies for both devices.

Our results suggest that sustained rosca membership is endangered by health shocks, whilst users of more flexible financial mechanisms, such as tontiniers and formal bank account holders, are relatively unaffected by these fluctuations. Kaleque (2010) concludes that the poorest savers are those most likely to demand the most flexible mechanisms available to them. Our results support theirs in some ways, as we show that rosca members with initial low income have a smaller likelihood of sustaining their membership over time. Comparatively, initial income has no impact on the sustainability of the other two financial devices (tontiniers and bank account). …

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