Micro-Savings & Informal Insurance in Villages: How Financial Deepening Affects Safety Nets of the Poor, A Natural Field Experiment

This paper uses a large natural field experiment to identify the effects of formal savings on interhousehold transfers in villages, and the spillover impacts of service-expansion on de facto ineligibles residing in the same community. Despite widespread interest in microfinance, spillover effects on the very poor of expanding formal financial services remain largely unexplored. This study helps fill this gap by examining evidence from an experiment which uses an information intervention that mimics naturally-occurring institutions to increase formal service adoption. It also contributes to an emerging literature on the indirect impacts of policy interventions in developing countries, often evaluated solely on the basis of how they impact direct participants and beneficiaries. In developing regions, households vulnerable to extreme poverty often rely on local safety nets based on transfers from relatives and friends, which help them smooth consumption across food-deficits and household shocks. To date, little is known about how these pre-existing practices are affected as community members begin adopting newly available formal financial services. Using a panel dataset of over 2,000 households collected during a rapid expansion of formal savings services in Central Malawi, this paper shows that experimentally boosting use of formal savings in rural areas sharply increases inter-household transfers during peak periods of hunger. The impact on transfer receipts is strongest among the poorest households, a de facto financial services-ineligible group, among whom the effects are also linked to significant changes in welfare. The strong impacts of formal savings expansion on non service-users suggests that formal finance can have much greater immediate-term effects than would be suggested by focusing exclusively on impacts experienced by service-users. The findings also highlight the sensitivity of traditional safety nets and welfare outcomes among the highly vulnerable in villages to expansion of formal financial markets.