Savings groups (SGs), including VSLAs, generally self-fund all their activities, including the provision of loans to one another through the accumulation of group savings. Successful groups are capable of meeting all internal capital needs, allowing members to satisfy the credit needs of their families and their income generating activities. In practice, however, many VSLAs are formed by rural poor with limited access to capital, and they often face significant financial barriers, with members unable to accumulate enough savings to meet the financial needs of their members (Burlando et al, 2018). In addition, groups also face the possibility of theft from their savings, which itself could create distortionary behavior; for instance, it could induce people to reduce savings, or to over-lend at the end of the cycle to reduce the amount of cash in their savings box. In this context, linkage programs with external financial providers that provide loans to VSLAs could alleviate these financial barriers.
In this study, we propose to carry out an evaluation of a randomized control trial implemented in 2015-2016 to measure the impact of introducing formal banking products to members of savings groups in Uganda. The main question we are interested in addressing is whether savings groups participants benefit from an enhanced access to external (bank) credit. The study partnered a research team with a financial services provider (FSP), two local implementing partners with ties with savings group, and the Stromme Foundation. OBUL developed two financial products specifically targeted to savings groups: a group saving account, and a group loan. In our study, we randomly assigned savings groups to three interventions: a loan intervention, in which groups receive access to loans and group savings; a savings intervention, in which groups receive access to group savings only; and a control. This PAP covers the analysis of midline data; this analysis will inform our plans for an endline, and we plan to create a new PAP that covers the endline.
Access to external credit also affects incentives to join and remain in savings groups. The groups may become more attractive to households seeking larger loans, or less attractive to more risk averse members. We will monitor the composition of groups across cycles.
The inclusion of a savings intervention serves two purposes. First, it allows us to understand the importance of providing savings groups with a safe place to store excess funds. If concerns over the safety of savings leads to over-lending at the end of each cycle (which is something some group members have hinted at to us in the past), or if money saved in the bank is not easily accessible to members, we expect bank lending to be lower in this treatment. Second, the presence of the savings intervention allows us to cleanly separate the effect of credit from the effect of bank savings. That‚Äôs because OBUL loan products require groups to maintain a savings account, which makes it impossible to evaluate a lending program without a savings component.
The group saving account allows savings groups to keep part or all of their balance deposited in a mobile-money linked OBUL saving account. The loan product involves a financial transfer to the group saving account. Loans carry a 2.5\% monthly interest rate, and repayments occur monthly according to a payment schedule. Repayment is initially set at 3 months. The bank also charges a search fee‚ and application fee to each loan; these fees are rolled into the payment schedule. Finally, a one-time ‚ financial card application fee‚ is applied to groups for the purpose of obtaining Bank of Uganda permission to receive credit.