29 October 2010

The Psychology of Savings

Dean Yang (University of Michigan) presented a study he conducted on farmers in Malawi to the Microfinance Innovation and Impact Conference last week. He divided the groups into a control group, a group with savings accounts and a final group with a savings and commitment account. The goal was to track the rate of savings against the farm seasons to see of the trend of more frugal spending prior to the next harvest would continue. In other words, the aim was to see if access to savings would iron out the volatility of income for farmers.

They found that during the pre-planting season, both of the groups with access to savings accounts left more money in their accounts. However, the commitment group saw a 61% higher sales and rise in food expenditures. They withdrew more during the planting season that the other groups which may mean that it cause better consumption smoothing during the hungry. Yang hypothesized this occurred because the commitment and savings accounts combined allowed for the reduction in sharing with a social network. As a result, the combination of the two reduced the transfers to other households. He also added that the impact was higher for those who made more transfers at baseline.

Yang found that the impact of facilitating “ordinary” accounts was not a large or statistically significant. In Malawi, commitment savings lead to a bump in the farmers’ savings between seasons as a result of less sharing with their social networks.


Ross Nathan of Opportunity Tanzania Limited spoke of his experience in implementing MFIs in Tanzania, Rwanda and his home country of India. He noted something that the other panel members did not mention by stating that there is a “persistence to save tomorrow.” By this he meant that people are apt to put off saving by saying they will do it tomorrow and end up never doing it. To him, the psychological understanding of savings is the nucleus of microfinance. The poor have a very vulnerable psychology, he stated, as they are influenced by forces such as faith, family, politics, etc. For the good of the sector, Nathan believes that MFIs must act to liberate the poor from the vulnerable psychology.

Having personal connections to commitment accounts as they were integral to the development of his own family, Nathan was encouraged to hear the findings of Yang as he sees commitment accounts as important and something which have been missed by the MFI community.