The Debt Puzzle in Dhaka’s Slums: Do Poor People Co-hold for Liquidity Needs?

We observe the usage of the flexible savings-and-loan accounts offered by SafeSave, a microfinance institution serving poor slum dwellers in Dhaka, Bangladesh. We find that 59% of the clients borrow at high interest rates and simultaneously hold low-yield liquid savings. Our main finding is that this apparent behavioural anomaly cannot be attributed to liquidity needs. In contrast, we show that co-holders are more likely to be workers subject to low-income risk. An alternative explanation is that co-holders take up costly loans they do not need to escape forced solidarity vis-à-vis family members and friends.