Coping with Shocks: The Role of Savings Groups in Rural El Salvador

Recent financial inclusion literature suggests that financial services may help poor households cope with shocks. I investigate the types of shocks faced by poor households in rural El Salvador, and the role of savings groups in helping members cope. Using in-depth interviews, surveys and econometric analysis, I find that nearly all households experienced a negative shock in the previous year, and that drawing on financial services like credit and savings (generally through informal channels) were the most commonly used coping strategies. Further, the presence of savings groups slightly increases coping ability by facilitating access to savings and social support. However, simple adjustments to savings group policies could additionally reduce vulnerability to shocks, particularly as the greater challenge for many households is not net income over the course of the year; it is managing cash flow so that shocks and short-term needs do not derail long-term well-being.