Do Savings Accounts “Save”?: Evaluating the Compounding Interest in Savings Accounts for Poverty Alleviation

In theory, formal savings accounts can be instrumental in enabling households in poverty to accumulate assets over time, and therefore provide insulation against unexpected economic shocks. Furthermore, literature suggests that formal savings accounts may have positive externalities, such as sending and receiving of remittances among households in times of shock. I explore the relationship between formal savings and household experience of shocks (defined as pr to experience a shock, shock frequency and shock severity), using a 2 year field experiment conducted in Rural Malawi. This study does not find evidence that formal savings account adoption impacts the probability of reporting a shock nor shock frequency. There is suggestive evidence that formal savings may decrease the severity of shocks reported. Households with formal savings accounts are more likely to engage in remittance behaviors. Remittance behaviors are, however, extremely limited to the more literate, relatively economically stable, and wealthy households. This supports literature that formal savings are a microfinancing product with externalities not addressed with products such as credit or insurance. It also supports literature that the most vulnerable are not experiencing the touted benefits of remittances, and should therefore be directly supported with more direct policy interventions and further innovative design