Chapter 5: Household Savings

It is commonly believed that many rural households in less developed countries, including the Lao PDR, are too poor to save. However, a considerable amount of research disproves this view. ¹⁷ In fact, the poor save constantly. However, most rural households in less developed countries, especially poor households, do not have ready access to savings facilities in banks or other formal financial institutions. Instead, they use alternative, informal vehicles for their savings, such as livestock, gold and other precious metals, jewelry, and housing materials or other stocks of physical goods. They also maintain cash at home, or may deposit savings with a friend, family member, or moneylender. Or they may participate in rotating savings and credit associations with trusted family members or neighbors. Many of these informal savings mechanisms involve high risk and high transaction costs, resulting in savings that are not easily turned into ready cash. For example, livestock may die and lose its value. If a household needs only $50, it may be required to sell a water buffalo for $400, and it may take time to find a buyer.

Much of the focus of governments in the past 50 years has been on delivering credit to rural households. However, experience has shown that households often value the availability of appropriate deposit services as much as, and sometimes more than, access to credit. Poor rural households, as do most households, value deposit services that are secure, have low transaction costs, and are appropriate to their needs (e.g., allowing for small deposits and quick withdrawals when necessary). Although these households prefer making a positive real return on their savings, they will accept small negative real returns in return for these other characteristics.

This chapter, therefore, presents survey results regarding savings behavior and preferences of Lao rural households as well as the savings vehicles available to them.

The Volume of Cash Savings

Table 5.1 shows that, extrapolating from the survey sample to the population, rural households in the Lao PDR in early 2004 held an estimated KN2,290.28 billion ($215.62 million) in cash ¹⁸ savings. Almost 90% of rural households reported holding some cash savings. Cash in hand was most frequently reported, with some amount held by 89% of surveyed households, although it represented only 39.75% of cash savings. Bank deposits represented the largest amount, at 55% of cash savings, but was held by less than 5% of rural households, suggesting a very low level of outreach by the Lao banking sector (including APB) in rural areas.

Of the balance, KN44.07 billion or 1.93% was held in rotating savings and credit associations (known as houay in the Lao PDR), ¹⁹ while smaller amounts of KN10.62 billion or 0.47%, and KN0.91 billion or 0.04% were saved in VSCGs and SCUs respectively.

Total estimated savings in the banking system from rural households in early 2004 was KN1,254.37 billion. BOL reported that the total savings in the banking system at 31 December 2003 was KN4,023.78 billion. ²⁰ Hence, an estimated 31.2% of savings in the banking system comes from rural households.

Figure 5.1 [ PDF 58.8KB | 1 pages ] shows total national cash savings for all rural households, as well as savings of the poorest and richest quartiles. Figure 5.2 [ PDF 58.8KB | 1 pages ] shows the percentages of households with cash savings of a particular type for all rural households and the poorest and richest households.

The figures illustrate that:

• Banks hold 54.78% of rural households' cash savings (KN1,254 billion), with a further 39.76% (KN910 billion) being held as cash in hand and the balance of 5.46% (KN125 billion) being held in houays, VSGCs, SCUs, and other ways.
• The richest quartile of households account for 81.30% (KN1,862 billion) of the cash savings held in banks, while the poorest quartile of households account for only 2.10% (KN48.4 billion) of such cash savings;
• Only 13.8% of households in the richest quartile and 1.5% of households in the poorest quartile maintain any savings in the banking system; and
• Savings mobilization by semiformal and informal MFIs (including houay) at the grassroots level is only KN55.6 billion, reflecting the low level of intermediation by these organizations.

The results suggest the potential to reduce the amount of cash savings held as cash in-hand by rural households and increase the levels of savings in licensed financial institutions if they can be more widely established.

Table 5.2 [ PDF 58.8KB | 1 pages ] shows the distribution of cash savings by survey stratum and wealth quartile. The table illustrates the marked differences between Peri-urban households with average cash savings of KN8.24 million, being:

• 4.03 times the average cash savings of Provincial Capital households;
• 11.67 times the average cash savings of Rural Mekong households; and
• 5.48 times the average cash savings of Other Rural households.

These variations are even more marked when savings are examined by wealth group. The poorest 25% of households had average cash savings of just KN213,000, compared to the richest 25% who had on average 38.58 times as much cash savings (KN8.21 million). The findings also reconfirm that Peri-urban and richer households are more likely to save in banks, while few of the poorest 25% of households hold savings in banks, or even in houay, VSCGs, and SCUs.

The Volume of Non-cash Savings

As discussed in the introduction to this chapter, rural households often save informally using in-kind savings vehicles such as livestock, gold, jewelry, or stocks of housing materials. Figure 5.3 [ PDF 83.1KB | 1 pages ] shows total noncash national savings for all rural households in the Lao PDR, as well as the poorest and richest quartiles. Figure 5.4 [ PDF 83.1KB | 1 pages ] shows percentages of households with non-cash savings of a particular type for all rural households and the poorest and richest households. The figures illustrate that:

• Livestock is the most common means of non-cash savings in Lao rural households, used by 98.2% of rural households and accounting for KN4,268 billion nationally;
• Livestock as a means of savings is more important for households in the poorest quartile where it accounts for 77.09% of non-cash savings, compared to 56.90% of noncash savings in the richest quartile; and
• Precious metals and jewelry are the second most common means of savings for households in the richest quartile (with 60.8% of households reporting savings in thisform), while housing materials were the second most common form of savings for poorest quartile households with 20.4% of households holding such savings.

Table 5.3 [ PDF 48.6KB | 1 pages ] illustrates how non-cash savings are held in the most prevalent forms of precious metals and jewelry, livestock, and housing materials, by survey stratum and by wealth quartile.

Differences in non-cash savings across strata are less pronounced than differences across wealth quartiles. Other Rural households hold, on average, the greatest amount, primarily in the form of livestock. Peri-urban households hold proportionately more precious metals and jewelry and less livestock. Households in the richest quartile held on average 6.05 times the value of non-cash savings held by households in the poorest quartile.

Comparing Cash and Non-cash Savings

A comparison of the savings reported above indicates that total non-cash savings (KN6,291.7 billion) of rural households nationwide exceed cash savings (KN2,290.3 billion) by a factor of 2.75; i.e., non-cash savings account for 73.3% of total rural savings in the Lao PDR. Figure 5.5 [ PDF 155.7KB | 1 pages ] illustrates the importance of non-cash savings in the Lao PDR across all strata and all wealth groups, especially for the poor and most remote households.

For example, for the poorest quartile of households, noncash savings constitute 91.48% of total savings; for the second poorest quartile, 89.85% of savings, for the second richest quartile, 86.08%; and for the richest quartile, 62.71%. Similarly, for Other Rural households, non-cash savings comprise 84.00% of total savings; for Rural Mekong households, it comprises 90.17% of total savings; for Provincial Capital and Peri-urban households, non-cash savings comprise 76.02% and 40.68%, respectively, of total savings. As shown in Table 5.3, the importance of livestock across all groups is evident, though it declines with wealth in favor of precious metals and jewelry.

Savings Vehicle Preferences

Although household preferences are revealed to some extent by actual practices illustrated above, underlying preferences for various savings vehicles may differ from practice depending on the availability of options. For example, the frequent use of livestock (by 98% of households) as a savings vehicle may reflect the dearth of other options rather than a preference for saving this way.

Table 5.4 [ PDF 68.5KB | 1 pages ] shows the preferences of rural households for different types of cash savings. In the survey, 99.11% of households expressed a first preference, 89.26% expressed a second preference, and 59.76% expressed a third preference.

for them. In the case of SCUs, this low preference is likely due to the lack of familiarity with this model, as only a small handful of SCUs exist in the Lao PDR. By comparison, VSCGs have been widely established and are a familiar model. ²¹ However, there appears to be little preference for them. A much stronger preference was expressed for simply keeping cash in hand as a savings vehicle: 14.62% expressed a first preference for this, and 49.36% expressed some preference for this.

Among non-cash alternatives, livestock is clearly the most preferred vehicle for savings, with preferences on the same order as that for banks. More than a quarter of all households (27.97%) stated that livestock was their first preference for savings, and 56.6% expressed some preference for this savings method. A further 8.55% expressed a first preference for saving in housing materials, while 22.68% expressed some preference for this savings vehicle; and 3.33% expressed a first preference for precious metals and jewelry, while 16.87% expressed some preference of this method.

Traditional non-cash methods of savings continue to be the first preference of about half of Lao rural households, and despite APB's extensive branch network, it is less preferred as a savings vehicle when compared to other commercial banks, cash in hand, or livestock. This provides some evidence of the limited success of APB in providing savings services that rural households value.

Figure 5.6 [ PDF 155.7KB | 1 pages ] and Table 5.5 [ PDF 108.6KB | 1 pages ] break down rural households' first savings preferences by stratum and wealth quartile. The evident pattern is a more frequent preference for noncash instruments (especially livestock) as savings vehicles amongst the poorer and more remote households, and a greater preference for APB and other commercial banks amongst richer and less remote households. While only 17.60% of the poorest quartile expressed a first preference for APB or other commercial banks as a savings vehicle, 41.78% of the richest quartile expressed a first preference for saving in the banking system. However, 30.36% of the richest quartile preferred other commercial banks and only 11.42% preferred APB.

Across the strata, it is noteworthy that Rural Mekong households were least likely to express a first preference for APB–only 7.5% compared to 14–15% of households in the other strata. As APB's traditional mandate has been to serve rice farmers who are primarily located in the Rural Mekong area, this result should give pause to policy makers regarding the success of APB in fulfilling its mandate.

Savings Characteristic Preferences

In the survey, rural households were asked to state what characteristics were important to them when choosing how to save. (Households were not asked to rank characteristics or express them in any order of preference) Figure 5.7 and Table 5.6 show the characteristics that rural households considered important in choosing how to save.Consistently, across all wealth groups, the ability to retain or increase in value was the most frequently cited characteristic in choosing a savings product. Almost three quarters of households said this was an important factor in choosing a savings product. Liquidity and low risk of loss were also very important factors. Other factors were of much less importance across all strata and wealth quartiles.

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