How Do Savings Groups Respond to Agricultural Shocks?

Abstract

Negative aggregate shocks lead to persistent rural poverty. Access to credit and insurance can help, but is often lacking. How do informal financial institutions, dependent on locally sourced capital, respond to shocks? We study the response of savings groups—locally run financial associations mostly embedded in rural agricultural communities—to aggregate shocks. We explore this by combining group‐level performance data for 9328 savings groups primarily in five sub‐Saharan African countries with local drought data. We use two‐way fixed‐effects and heterogeneity‐robust difference‐in‐differences analyses to assess how these informal financial groups respond to drought shocks. Groups mobilise credit during shocks by increasing the number of loans they provide. The counter‐cyclical credit response is concentrated among groups shocked in the later stages of their savings cycle, where accumulated capital permits additional lending, confirming a capital‐constraint prediction. The social fund, designed for idiosyncratic shocks, is not mobilised during droughts. We discuss implications for integrating informal savings groups into climate‐risk management strategies.