Not Just for a Rainy Day: Some Findings on the Role of Savings from the Financial Diaries in Malawi
Savings accounts hold strong potential as a financial instrument for low-income households to cope with economically difficult times, according to a major new research study from Malawi. Savings perform this function not only by helping such households ride out economic turbulence driven by external shocks (e.g., illnesses, weather events, poor harvests).
Savings are also the primary means by which poor people meet the need to amass relatively large sums of cash, a need that is routine and yet, more often than not, is completely unsynchronized with their income.
In fact, the study, conducted by Microfinance Opportunities (MFO) under a grant with The IRIS Center at the University of Maryland—College Park, found that erratic cash flow is one of the biggest challenges facing such households. Both income and expenses arrive at unpredictable times and in unpredictable amounts, creating chronic financial stress. The study's subjects used informal mechanisms, including "mattress money" (broadly defined as cash hidden at home or stored on the person), far more frequently than they did formal savings accounts despite some evidence that use of formal services correlates with steadier quality of life during difficult times. This disconnect suggests that a market opportunity exists for banks who can deliver savings products that meet the needs of low-income households and can market those products as the desirable solution.
MFO's study ran from July 2008—December 2009 among hundreds of low-income Malawians. It used the Financial Diaries methodology, tracking the transactions for 172 households and 257 individuals each week over that 18-month period, yielding almost 231,000 records documenting the economic behavior of the participating households.
The data was then analyzed for insights into several questions of priority interest, including the role of savings and the value proposition of formal versus informal savings. The findings suggest that for the study population, savings were not so much a way to hedge against some hypothetical rainy day as they were a means of coping with common irregularities in both income and expenses. Whether their savings were kept in a bank account or the far more prevalent scenario of cash hidden at home, dipping into savings was standard procedure for Financial Diaries households.
