Finding the Headwaters of Formal Savings

Researcher: Michael Callen (UC San Diego), Craig McIntosh (UC San Diego), Suresh De Mel (University of Peradeniya, Sri Lanka), Chris Woodruff (University of Warwick, UK) 
Location: Sri Lanka

Project Description


In recent years, there has been a strong push — in developed and developing countries alike — to provide financial services that bring the savings of the unbanked into formal institutions. Half of adults worldwide remain unbanked, but 35 percent of the unbanked report obstacles to saving that can be overcome by improvements to products and regulation. Several recent studies show remarkably large positive effects on household expenditures resulting from increased access to standard savings accounts. But little is known about the source of the savings that are accumulated, and the channel through which the effects are realized.

This study aims to fill this gap. It offered weekly, door-to-door savings deposit collection services to a randomly selected subset of a sample of individuals in rural Sri Lanka. Savings were collected by an agent of a large national savings bank in Sri Lanka. Using a wireless point of service (POS) terminal, agents provided a receipt for the deposit showing the new account balance on the spot. Starting five months before the collections began and continuing 13 months afterward, researchers collected detailed monthly survey data, including income, expenditure and labor-market activity.

Results show the weekly POS deposit collection service leads to large increases in savings, not just into program accounts but into bank savings and overall savings as a whole. The number of transactions with formal financial institutions per month quadrupled as a result of the treatment, the flow of savings into bank accounts almost doubles, and overall savings increase by more than 15 percent per month, or about US$7, according to the study’s findings.

The surveys reveal that the source of the funds newly flowing into formal savings is an increase in income driven largely by increases in labor effort, rather than forgone expenditures or a change in intra-household transfers. The headwaters of formal savings are to be found in sacrificed leisure time: households work more, and work more on the wage market, when savings options improve. These results suggest that the labor allocation channel is an important mechanism linking savings opportunities to income.