The Economics of Savings Groups

Abstract Millions of households worldwide rely on savings groups (SGs) to satisfy their financial needs, yet important gaps remain in our understanding of this novel financial institution. We show theoretically that, within an SG, the supply of funds could fall short or be in excess of its demand. Then, we use week‐by‐week records from 46 Ugandan SGs to show that most groups do not generate sufficient loanable funds. We conclude by proposing three interventions that, in light of our model, should ease credit rationing and improve the welfare of SG members: requiring SG members to publicly state their savings and borrowing goals, encouraging early savings, and linking SGs with formal financial institutions.