2.1 Saving Theories in Context
The reasons why people save can be grouped into three categories, namely life cycle, precautionary and bequest motives (Horioka & Watanabe, 1997). Unlike the bequest motive which is assumed to be inspired by intergenerational altruism, both the lifecycle and precautionary motives are inspired by temporary imbalances between income and expenditures albeit with different expected periods of inversion. The lifecycle motive assumes a regular and foreseeable inversion period whereby savings are used to manage the household balance sheet through purchasing relatively more durable assets such as a house or land or to invest in long term needs such as education, retirement and marriage. On the other hand, the precautionary motive assumes an irregular and unforeseeable inversion period, where savings are used to manage the household cash flow and cushion against fluctuations in immediate or basic needs such as food and shelter. The precautionary motive is inspired by uncertainties surrounding income stability due to unpredictable economic environment, nature of employment, health issues and unforeseen climate and other disasters among other factors. Such fluctuations which threaten food security are rather frequent and often severe in sub-Saharan Africa (Clover, 2003; UNECA & FAO, 2018; Dodo, 2020; Giller, 2020).
Although the overlap between the lifecycle and precautionary motives of saving is apparent, informal saving mechanisms applied in the context of sub-Saharan Africa relate more to the latter motive. The sub-Saharan African context is particularly peculiar because incomes are low and unstable due to overreliance on informal employment and highly volatile agricultural and commodity incomes (OECD, 2016; Jayne et al 2020), institutional savings are low as a result of underdeveloped financial and credit markets, high cost of participating (Demirguc-Kunt & Klapper, 2012) and lower financial literacy (Klapper et al, 2015) and uncertainty is higher due to a higher proportion of fragile states (McKay & Thorbecke, 2019).
To evaluate the relevance of risk preference in choosing between informal mutual and informal individual saving behaviour, we consider a household that earns an uncertain and risky income, has poor or restricted access to formal financial markets for saving and credit and the decision maker within the household either trust or do not trust rendering money or resources for intra-group (mutual) sharing and management to cushion against consumption variability. Those that do not trust group management, adopt individual saving mechanisms. Thus the household portfolio choice between holding savings using informal mutual or informal individual mechanism depends on the level of trust they bestow on their mutual partners (Marth et al., 2020). We presume individuals who save exclusively in groups to bestow a high level of trust in their mutual partners and to be relatively more risk-loving, while those that save exclusively using close at hand, individual methods to be relatively less risk-loving (Ksoll et al., 2016; Hofmann et al., 2017).
2.2 Hypotheses formulation
Whereas formal savers consider the risk of loss and expected return when choosing an investment portfolio, informal savers emphasize assured and timeous delivery of desired amounts (Collins et al., 2009). Group or mutual saving mechanisms are governed by soft informal rules which anchor on trust thereby enabling flexibility a hallmark of attractive informal cash management arrangements (Collins et al., 2009; Marth et al., 2020). However, the absence of formal regulation makes such arrangements susceptible to hazardous consequences (Marth et al., 2020) such as fraud, defections, conflict (Sabitzer et al., 2018), mismanagement and bankruptcy, among other risks that an individual contributor has no control over, the probability of which increases with the increase in membership. On the other hand, although informal individual saving mechanisms are susceptible to theft, depreciation, or diseases (Finn et al., 1994) the probability of such risks occurring is within the control of the owner who can choose to invest in security against such risks. Thus we hypothesize that risk preference is a redundant variable in choosing informal individual saving mechanisms. This leads us to our first hypothesis which we subdivide into two:
H1.1: A preference for risk increases the probability of holding informal mutual saving mechanisms.
H1.2: A preference for risk has no effect on the propensity of holding individual saving mechanisms.
The majority of households in sub-Saharan Africa, live on the margin and securing food is a daily struggle. One of the most severe impacts of falling income among poor communities, where social protection is either inadequate or absent, is hunger and starvation. When faced with irregular food supplies and shortages due to falling income and random shocks, households employ various strategies to cope with the shortages and ease the impacts on their livelihoods (Dercon, 2002). Among the coping strategies that are usually employed to ease the impacts of a fall in income on consumption is the usage of savings and credit (Udry, 1995) before more extreme measures such as abridged diets and skipping of meals (Banerjee & Duflo, 2007; Coates et al., 2006; Gash & Gray, 2016) can be adopted which causes hunger and starvation with deleterious effects on health and income-generating capacity. In poor communities, where incomes are unstable and households can hardly access social security and formal insurance and credit, informal savings tend to be the most viable and in some instances the only option to insulate consumption from falling income. Thus we hypothesize that poor households with access to informal savings fare better in coping with falling income and random shocks to ameliorate food insecurity through avoidance of negative coping strategies (Udry, 1995; Sen, 1999; Dercon, 2002; Gash & Gray, 2016), reduction in hungry days (Entz et al., 2016; Ksoll et al., 2016) and consuming variety (Brunie et al., 2014; Sherbut et al., 2022). This leads us to our second hypothesis linking informal savings and food security:
H2: Access to informal savings increases the probability of the household being food secure.
Experimental evidence shows that a large proportion of individuals exhibit present bias in making high stakes decisions (e.g. Ariely & Wertenbroch, 2002; Gine, Karlan, & Zinman 2010). These findings are further corroborated by evidence from behavioural economics (e.g. Oster & Scott Morton 2005; Ashraf, Karlan & Yin 2006; Gugerty 2007; Collins et al. 2009) and neuroeconomics (e.g. McClure et al., 2004; McClure et al., 2007; Magen et al., 2014) which asserts that willpower to suppress the desire for immediate gratification is taxing and susceptible to lapses creating a time inconsistency problem (Bauer et al., 2012) even for those with a high probability of having strong willpower (Magen et al., 2014). On the other hand, if individuals participate in mutual arrangements through regular payments and group meetings (Ariely & Wertenbroch, 2002), it increases pressure to maintain or elevate their social status among peers by conforming to a standard withdrawal regime (Duesenberry, 1949) and encourage them to overcome present bias by augmenting their willpower (Bauer et al., 2012). As a corollary, individuals who open commitment accounts in mutual arrangements experience better welfare (Ashraf, Karlan & Yin, 2006; Ariely & Wertenbroch, 2002) through reserving their savings for use in bigger crises situations rather than habitual withdrawals. Therefore, we hypothesise that in the absence of mutual commitment which imposes both a nudge to delay withdrawals through encouragement from peers and a social sanction on habitual dissavings, ‘present biased’ individuals are not restrained to dissaving given the slightest hint of inadequacy in their incomes, even if the situation is not dire, which reduces resources available for more dire situations thereby compromising overall welfare. This leads us to our third hypothesis:
H3: Households that use informal mutual saving mechanisms are more likely to be food secure compared to those that use individual informal saving mechanisms.