Insuring consumption against Shocks: The role of informal savings in Nigeria

In most low-income countries, households are exposed to a plethora of economic shocks with welfare-reducing consequences. In the absence of well-functioning financial markets, most households rely on informal savings through credit clubs/groups to reduce their vulnerability to these shocks. In this paper, we examine the extent to which participation in informal savings associations affects the ability of households to smooth their consumption in the face of both idiosyncratic and covariate shocks. Using a difference-in-difference fixed effects specification on the Nigerian household-level panel that spans four waves over eight years, with data collected in 2010/2011, 2012/2013, 2015/2016 and 2018/2019, we documented heterogenous effects of informal savings. The results suggest that informal savings help households to hedge consumption against rainfall shocks. We find heterogeneous effects of informal savings in insuring consumption against idiosyncratic shocks, depending on whether households live in urban or rural areas. These results provide new insights into the role of informal financial arrangements in sub-Saharan Africa.