By Brock Mutic, Queen’s Economics Department
A PhD student research profile featuring Frédéric Tremblay, who completed his PhD at Queen’s in 2021 and is currently a postdoc at Queen’s for the NSERC One Society Network. Image provided by USAID.
Frédéric Tremblay’s research on savings groups grew out of work with Limestone Analytics on projects for organizations such as USAID and World Vision. Such organizations want to quantify the impact of their international development programs, but traditional tools for measuring such impact tend to underestimate the benefits of financial inclusion interventions. In his PhD dissertation, Tremblay proposed a new method for modelling the welfare gains from savings groups in developing countries.
Savings groups (SG) are institutions where small groups of people come together to save and take out loans. These simple, member-owned institutions can provide rudimentary financial services to communities who are marginalized or otherwise lack access to such services, often in the developing world. Queen’s Economic Department (QED) postdoc and former PhD student Frédéric Tremblay developed a model of SGs capable of capturing their core features and design elements in his PhD dissertation. His research has policy relevance for NGOs and policymakers hoping to better understand these institutions, and how they can help the most marginalized communities around the globe access basic financial services.
Globally, “the share of the world’s population with access to financial services has been growing steadily in the last decade,” with “the share of the world’s population with an account at a financial institution […] grown[ing] from 51% in 2011 to 62% in 2014 and 69% in 2017” . However, much work remains to be done as significant gender and wealth gaps remain. Additionally, the empirical analysis of the effects of this increase in access to financial services globally has found mixed and sometimes disappointing results, with low or even negative effects being found for economic and social outcomes .
The Appeal of Savings Group Interventions
SGs operate differently from traditional financial services. Central to their institutional design is the use of a cyclical period. During each period, members regularly meet, generally on a bi-weekly basis. At these meetings, members must buy a mandatory minimum number of shares of the SG, but no more than a set maximum, so as to avoid inequitable capital ownership of the SG. Members can borrow from the collective pot at each meeting, and repay the loan at the end of the SG cycle, often at the end of the year. At the end of the period, shares of the SG are paid back to the members in an event called a ‘share-out’, in which equity is returned to members based on the number of shares they bought throughout the year. Via this simple mechanism, people, often in underserviced areas, can access basic financial services such as loans. To this end, SG interventions have been found to increase the financial resiliency of communities, particularly communities in the developing world , and SG interventions, which involve NGOs establishing and providing support to foster and grow SGs within communities, have shown promise in overcoming some of the short-comings  of the increasing access to traditional financial services globally.
With the potential of SGs to increase economic outcomes and financial resiliency in marginalized communities around the globe, the work of modelling their theoretical underpinnings has real world and policy implications. Previously however, SGs’ theoretical underpinnings were not well understood in the literature; of the models that did exist, they were unable to capture the intricate design features of many modern SGs . For this reason, Frédéric Tremblay sought to fill this knowledge gap, by developing a model of SGs capable of capturing their core features and design elements, with relevance for policymakers and NGOs around the globe.
Modelling the Institutional Constraints to Understand the Incentives they Create
Tremblay knew that in order to understand the benefits SGs could offer, their institutional constraints, stemming from their design, needed to be understood and modeled. Specifically, the cyclical design features of SGs, including features such as the mandatory repayment of loans at share-out, the proscription of share selling before share-out, limits on share purchasing, mandatory purchase of at least one share in all periods, and unique per-share share-out price regardless of purchase timing pose several previously theoretically not well understood constraints on economic agents.
Tremblay’s research builds on previous modelling and uses a heterogenous agent dynamic equilibrium model with storage and idiosyncratic income shocks, that has features from life cycle models, to capture the share-out cycle,  accurately and realistically incorporating and modeling the model’s institutional constraints. The model was calibrated using data from Uganda dealing with SGs which were part of a randomized control trial, as well as from household expenditure surveys.
The model developed helped close the knowledge gap; it found that institutional constraints significantly affected the borrowing and saving behaviour of agents. Features of modern SGs design such as mandatory purchase of equity and the mandatory repayment of loans at share-out were modeled in Tremblay’s theoretical framework, showing that such features prevent agents from accumulating their optimal level of precautionary savings and easily accessing them when the need arises . In spite of these constraints however, economic agents were found to be significantly better off through participation in a SGs overall  in the model.
Tremblay’s Research Provides Insight into Connection Between Welfare and SG Interventions
After modelling, Tremblay’s research assessed the impacts on welfare of the SG intervention using two different welfare measures,the consumption equivalent variation (CEV) — which is the benchmark measure of welfare in models with incomplete markets — and the financial value (FV) — a novel measure developed by Tremblay to value financial inclusion interventions. It was found that, on both metrics, agents were better off through participation in a SG. The research also found that the FV measure, which values the intervention by comparing it against a plain vanilla cash transfer intervention more accurately captures the benefits of the intervention than the CEV .
Due to the expected long timespan of the intervention and their low cost, SG interventions were also found to be cost effective in Tremblay’s research.
Insights Did Not Stop There: Research into Ideal Intra-SG Interest Rates
Tremblay’s research also studied the optimal interest rate for SG borrowing. It found that the optimal interest rate depended on the welfare measure chosen: the value one places on the economic benefits of a SG going mainly to low-income state agents, or more equitably to all, will affect the ideal interest rate, as setting the interest rate to facilitate benefits mainly going to low-income agents can decrease welfare experienced by those in high-income states.
Alternative Designs for the Future
Finally, Tremblay’s research considered changes that could be made to improve the design of SGs. Two possible alternative SG designs were considered: one design was a standard cyclical SG, but members could repay their loans with the equity they received at share-out. The other design was one in which the cyclical period itself was abolished, where the SG continuously operated and members could withdraw their equity, save, or borrow in any period. The benefit of the former design was that it allowed members to borrow against their SG equity, especially in later periods. The latter design had several benefits, as it did away with the traditional institutional constraints of SGs associated with the SG cycle. Both alternative designs were found to increase the welfare of the SG intervention . For full results, see .
Going forward, Tremblay hopes the research will be applied in the real-world in a randomized controlled trial to determine empirically the effects of both alternative designs.
Overall, savings groups are a promising economic intervention that have demonstrated ability to increase financial literacy and economic outcomes where applied. They are especially important because their cost-effective nature means they have the potential to be applied within the most marginalized communities globally. Prior to the doctoral research of Tremblay, however, their theoretical underpinnings were not well understood. Tremblay filled a knowledge gap in existing research, developing the first theoretical model of SGs capable of capturing their design elements. Additionally, he used the model to estimate the welfare impact of SG interventions and produced research into the best welfare measure to use for assessing them. He also considered alternative designs for SGs, which showed theoretical potential for increasing welfare in SG interventions. His research has real-world and policy relevance to NGOs and government officials hoping to better understand SGs as interventions capable of providing financial services to underserved communities, and may help in the global effort to increase economic outcomes for the most marginalized communities through its theoretical and design analysis contributions to the literature.
References Tremblay, Frederic. (May, 2021). Savings Groups: Model, Welfare and Design. Queen’s Economics Department Thesis.