The importance of informal saving

Saving is a fundamental aspect of financial management that ensures individuals and households can cope with unexpected expenses, invest in opportunities, and secure their financial future. While formal saving mechanisms like bank accounts and investment portfolios are widely discussed, informal saving methods play a crucial role, especially in low-income and developing communities. Below is a detailed discussion on the importance of informal saving, challenges, and integration with formal saving.
What is Informal Saving?
Informal saving refers to methods of saving money outside of traditional financial institutions. These methods can include:
- Saving at home: Keeping cash hidden in various places around the house.
- Community savings groups: Such as Rotating Savings and Credit Associations (ROSCAs) and Accumulating Savings and Credit Associations (ASCAs).
- Saving in kind: Investing in livestock, jewelry, or other tangible assets.
- Microfinance: Informal lending and borrowing within communities.
The Prevalence of Informal Saving
Informal saving practices are widespread, particularly in regions where access to formal banking services is limited. According to the World Bank, approximately 1.7 billion adults globally do not have a bank account. In Sub-Saharan Africa, only about 43% of adults have an account with a financial institution or a mobile money provider, leaving a significant portion of the population relying on informal saving methods.
The Importance of Informal Saving
- Accessibility and Convenience: Informal saving methods are often more accessible than formal financial services. In remote or rural areas where banks are scarce, informal saving provides a convenient alternative.
- Cultural Relevance: Many informal saving practices are deeply rooted in local traditions and cultures. Community-based savings groups, for example, foster a sense of solidarity and mutual support.
- Low Barriers to Entry: Formal financial services may require identification, proof of income, and minimum balances, which can exclude many individuals. Informal saving typically has lower barriers to entry, making it more inclusive.
- Financial Discipline: Participating in community savings groups can encourage regular saving habits. Members commit to contributing a certain amount regularly, promoting discipline and financial planning.
- Emergency Funds: Informal saving provides a readily accessible pool of funds for emergencies. Whether it’s a medical expense, a sudden loss of income, or an urgent need, having cash saved informally can be a lifesaver.
Case Studies and Examples on the Importance of Informal Saving
- ROSCAs in Kenya ROSCAs are common in Kenya, where members of a community contribute a fixed amount of money to a common pool on a regular basis. Each member then takes turns receiving the total amount collected. This method helps individuals access lump sums of money without the need for formal loans. A study by the Consultative Group to Assist the Poor (CGAP) found that 27% of Kenyan adults participate in ROSCAs, highlighting their importance in local financial systems.
- Livestock as Savings in Mongolia In rural Mongolia, many families save in the form of livestock. Livestock serves as a store of value and can be sold or traded in times of need. This form of saving is not only culturally significant but also practical in an economy where access to banks is limited.
- Jewelry as Savings in India In India, gold jewelry is a traditional form of saving. Families invest in gold, which can be easily liquidated during financial emergencies. This practice is especially prevalent among women, who may have limited access to formal financial services.
Challenges and Risks of Informal Saving
- Saving cash at home or in informal groups can be risky due to theft, loss, or destruction (e.g., fire or natural disasters).
- Unlike formal savings accounts, informal saving methods typically do not earn interest, meaning the value of saved money can diminish over time due to inflation.
- Informal saving methods often lack the growth potential of formal investments, such as stocks or bonds.
- Informal savings groups operate outside the formal financial system and are not regulated. This can lead to issues of trust and potential fraud.
Integrating Informal and Formal Saving
There is a growing recognition of the need to bridge the gap between informal and formal saving mechanisms. Financial inclusion strategies aim to integrate informal savers into the formal financial system, providing them with the benefits of security, interest accrual, and financial growth.
Mobile banking and microfinance institutions play a crucial role in this integration. In countries like Kenya, mobile money services such as M-Pesa have revolutionized access to financial services, allowing individuals to save and transfer money securely and conveniently.
Educating communities about the benefits of formal saving and how to access these services is vital. Financial literacy programs can empower individuals to make informed decisions about their savings and investments.
Governments can support the integration of informal and formal saving by creating policies that encourage financial inclusion, such as subsidizing the costs of opening bank accounts or offering incentives for formal saving.