How sustainable is the use of different savings devices? A study of formal and informal finance in Benin

There are several types of savings device, both formal and informal, available for households in Cotonou, Benin. Different savings mechanisms have very different features; some are more flexible whilst others act as commitment devices to ensure sufficient saving. There is evidence in the literature for a demand for both such devices, though each have their shortcomings. For example, a high degree of device flexibility may result in low overall saving whilst membership of commitment savings products may be difficult to sustain in the face of shocks. In this paper we consider the membership sustainability of savings devices with different levels of flexibility. The devices chosen are those most widely used in Benin’s largest city, Cotonou. Our sample covers both formal and informal saving: the formal device considered is a bank account whilst tontiniers and roscas are the informal savings products studied. Using survey data for the years 2004 and 2006, we analyze the stability over time of the use of each device in the face of health and funeral shocks. We estimate the impact of these shocks on the probability of membership in the second wave of the survey given use of this particular device in the first wave, controlling for individual and device-specific characteristics. Our analysis helps us to isolate threats to the sustainability of membership rather than using panel regressions to simply measure the determinants of membership over time. We conclude that devices that offer flexibility to their clients are more resilient in the face of unexpected shocks. Rosca membership appears to be the most affected by negative income shocks for this reason. Furthermore, shocks that can be anticipated may increase the membership sustainability of more flexible devices since members may seek to put more money aside to prepare for such occurrences. Our results indicate that device flexibility can aid the sustained use of savings mechanisms in developing country contexts. A move from informal to more flexible formal devices could benefit individuals with a very varied income stream by allowing them to smooth their income in the face of shocks and to accumulate more savings in the long term through sustained membership.