Timing is Everything
“There will come a time when you have nothing, and then you can take out your savings to buy maize… or pay for an emergency or serious illness….”
- Juan, 33. Flor del Muerto, El Salvador.
Savings groups might help poor farmers like Juan get through the hungry season or a medical emergency. They could also potentially help him build up assets or increase income to further protect his family. But it’s only likely to happen if he gets his payout at a time when he is hungry or strapped for cash, or has investment opportunities… and that’s where things don’t always line up. For the past three years, I have been researching rural savings groups in El Salvador, and I’ve come across a few surprises.
As in other rural areas, vulnerability and cash flow here are inextricably linked to agricultural cycles. The first planting happens in May, and farmers piece together loans (from friends and family) and savings (stored in the home) to buy fertilizer – arguably the single largest predictable expenditure these households face. Income from the August harvest can be used toward the second planting immediately thereafter, and the second harvest follows in December. Then households prepare for the long wait until the next harvest.
The hungry season starts around April (or even earlier if the rains fail, as has happened recently) and lasts until August. So one might expect groups to disburse savings in May, when food and cash from the December harvest are long gone, fertilizer expenses are looming, and neighbors are less able to help out during emergencies. But almost all of the groups disburse in December. When asked why they chose that date, they say “because of Christmas”, or “that’s what the partner/promoter told us to do”, or “it makes sense to wrap things up at the end of the year”. But doesit make sense?
How are people using their savings?
One of the biggest strengths of the savings group model is that the participants themselves decide how to spend their savings – it is their own money, after all, and who are we to tell them how to use it? Enjoying a special Christmas dinner with friends and family might be a highlight of the year (and — for those grinches out there — a potentially useful investment in social capital). So getting their money back in December makes sense if people want to save up for Christmas. However, while over 80% of respondents said their payout was intentionally timed to coincide with Christmas, less than 20% actually spent those payouts on special Christmas meals or gifts. Instead, the majority spent their savings on day-to-day staple food and clothing: reasonable expenditures for people facing frequent food insecurity, yes – but why in December? Food is relatively abundant and household cash is flowing. School fees, once due at the turn of the year, have been abolished in El Salvador.
So if not for Christmas, or planting season, or school fee deadlines, or hungry season … why get payouts in December? Maybe people are using their savings to buy sacks of grain at seasonal low prices to stockpile for later. Or they want to invest in a cow or a bicycle at a time when they won’t be tempted to spend the money on food instead. Or they want to manage their household cash flow better so they can hang on to their harvests until prices are favorable. But it turns out that very little of this is actually happening: so far, few participants here have invested their savings in assets, and most farmers sell their maize immediately after harvest — at low prices — only to buy it back for home consumption a few months later, at much higher prices. So does a December payout really make sense?
A small minority of members (6%) did use their savings to deal with health emergencies (sometimes withdrawing before the group payout date) or to buy ag inputs (7%). Might more people do so if they got their money at a different time? In some regions, group members might meet these needs through loans rather than savings. But this was another interesting finding among the El Salvadoran groups: most respondents were hesitant to take loans, and less than a quarter had done so. Indeed, half of the groups didn’t even offer loans, citing fear of indebtedness, lack of trust, and an eagerness to avoid any problems. Most of the study groups had been functioning 1-3 years, and some respondents indicated that their groups might consider adding loans sometime in the future. Others, like a 33-year-old woman from San Miguelito, said, “We don’t want to give loans. Just each person with her own money saved up.” One of her neighbors added, “We don’t give loans in order to not have any problems.” Likewise, very few groups had emergency funds at this stage. Loans for doctor bills or fertilizer might be a future step, but doesn’t it make even more sense to allow people access to their own savings when they are most likely to need them?
Many groups have gotten the hang of the basic rules and procedures; now is the time for them to revisit their policies. All the while, new groups keep starting up, and they can begin by designing rules that fit their own needs, rather than accepting default options. Promoters can help by facilitating an open discussion with members. What are their personal savings goals? What are the times of year when money and food are scarcest? When will they need money for agricultural investments, other big seasonal expenditures, or important life cycle events? Then, given those personal goals and cash flow patterns, when does it make the most sense to get their payouts?
Mature groups might even allow different members to withdraw personal savings at different times during the year (at pre-determined dates, or as needed to help people cope with emergencies or take advantage of unexpected opportunities). Young groups might prefer stricter rules to facilitate record-keeping and help ingrain a regular savings habit. Either way, groups and promoters need to be sure that payout dates – like other policy decisions – are in line with members’ goals and needs.
Elke Jahns is a PhD Candidate at The Fletcher School of Tufts University, conducting her dissertation research on shocks, coping strategies, and the role of savings groups in rural El Salvador. For more details on interim findings and recommendations, please see the paper entitled Savings Groups and Coping Strategies in Rural El Salvador, August 2012.
This research was carried out in collaboration with Catholic Relief Services, with funding from the Howard G. Buffett Foundation.