Social capital and household financial participation

Insights from the UK Savings Bank Movement

Many households around the world still do not use banks, even though barriers to access have been reduced or removed entirely in many regions. While the economics and finance literature has studied the role of access to finance and has generally found a positive effect in terms of financial inclusion, the factors that increase a household’s propensity to become banked – and continue to participate in financial institutions – have not been studied. Despite the benefits for households of opening a bank account even in the absence of credit, such as interest payments, the accumulation of liquid wealth and security of funds, there is still a sizeable unbanked population across both developing and developed countries.

This raises the important policy question of what can be done to encourage account uptake by households. This project aims to investigate what motivates households to open a bank account by collecting and analysing not-previously-used data on the UK Savings Bank Movement of the 19th century, which is one of the earliest examples of formal household participation in banks, and which saw over a million previously unbanked depositors open accounts. The project seeks to reveal not only why households begin to use financial products and services, but also what may be behind their decision to continue to use them in the long run, including the potential explanatory factors of trust, social capital, religion and other cultural factors.


United Kingdom

The challenge

Limited participation by households in banking products and services continues to be a challenge around the world in both developing and developed economies. Without the support of basic financial services such as bank accounts, low-income households struggle both to escape poverty and to build financial wealth and resilience to negative income and wealth shocks. In aggregate, the effects of significant numbers of unbanked households may also have serious implications for a country’s economic and financial development. While much has been done to understand and improve access to banks, what drives sustained financial participation by households has not yet been explored by the development economics and finance literature.

The intervention

This research hypothesises that household financial participation is a function of trust and social capital, and studies the question of household financial participation empirically using the setting of the UK Savings Bank Movement. The trustee savings bank system in the UK, which by 1850 numbered 573 banks with over a million depositors and the equivalent of approximately £3 billion in deposits in today’s money, and which continued growing into the 20th century, has received little attention in either the development economics or the finance literature. This is despite these savings banks playing significant roles in local communities and serving as the first formal financial institutions accessible to the so-called “industrious poor” of the UK. This scenario, along with the rapid expansion of trustee savings banks across the UK, makes this a useful setting to study household decision-making around becoming banked and evaluating the relationship between depositors and financial institutions.

The study will explore whether social capital, including social capital built through religious networks in a community, can help to explain what drives previously unbanked households to open and maintain bank accounts. The movement started as a response to deficiencies in the existing Poor Law system largely by church leaders, who viewed saving as a virtue and thrift as a means to gain financial independence and escape poverty. Many savings banks were founded by local church members and promoted through the church. Hence, there is an opportunity to measure social capital through church membership at a local level. Broadly, the savings bank movement suggests an important cultural underpinning for household consumption and savings decisions. Using rich depositor and bank archival records, along with the full UK census, this research will investigate how the savings bank movement gained traction among households and encouraged sustained participation in banks using a century of data.

The potential impact

Building monetary wealth and financial resilience are crucial for development and have been shown to affect employment, entrepreneurship and, more broadly, economic and financial development. However, microfinance interventions have often been unsuccessful in achieving the intended goals of building the financial wealth of households in developing countries over the past several decades. This work will focus on the role of social capital in facilitating trust between depositors and banks, and the important role that religious affiliation and cultural norms may have in encouraging financial resilience among low- and middle-income households. Hence, this project has important policy implications for financial inclusion and designing microfinance interventions in developing countries today.