Informal Insurance and Loans in Savings Groups: A Longitudinal and Quasi-experimental Approach Identifies the Role of the Welfare Fund for the Extreme Poor

Savings groups provide savings, loans, and a social welfare fund to low-income households. The social fund is an informal insurance mechanism of risk-sharing, which covers the costs of losses related to life-cycle events that affect the extreme poor without insurance. This study shows that the insurance mechanism of the welfare fund is associated to an increase in the number and amount of loans in savings groups. Panel regressions and augmented inverse propensity weighting are applied to a large- sample database of savings groups worldwide. The estimations are restricted to the first cycle of group operations to avoid the potential endogeneity problem that could arise if revenues from loans increase the amount of the welfare fund in the second and subsequent cycles of operations of the group. The results suggest that the welfare fund of savings groups protects members from disruptive idiosyncratic shocks and at the same time may encourage borrowing. Borrowing and informal insurance lead to wealth creation for group members, who lift themselves from poverty through informal insurance and higher investments in income- activities.