Informal Safety Nets, Networks, Risk Management: Role of Social Capital in Egypt

“Implement nationally appropriate social protection systems and measures for all’ is one of the targets linked to the first Sustainable Development Goal (SDG): ‘End Poverty in all its forms everywhere’. Social protection is gaining increasing attention among development practitioners and researchers to counter households’ high vulnerability during economic hardship. Different social protection instruments, such as social assistance and insurance, are part of a broad framework of risk management that includes risk reduction, risk mitigation and coping with shocks. Risk is a key factor that could generate welfare losses pushing households below poverty lines or trapping them in a vicious poverty cycle.

In absence of formal social protection programs that are sufficient in coverage and benefit level, households rely heavily on informal social safety nets provided through nuclear family members, extended relatives and the larger community. This commentary describes different informal mechanisms used by households in Egypt to mitigate risks and sheds light on the role played by informal social safety nets in coping with shocks.

Informal saving as a risk mitigation tool

In this context, social capital refers to the resources (cash and in-kind) available and accessible to households through social relations like kinship and friendship. Risk sharing and the use of social capital take several forms including labor pooling (mostly sharing labor in farms), provision of gifts and assistance, loans, child fostering, exchange information on job opportunities and supporting funeral costs.

Nonetheless, heavy reliance on social capital and informal safety nets as means for social protection intensify inequalities by restricting access to opportunities to members of an established network or when generic shocks affect all members of the network (such as a drought that affect all members in a knit community).

Saving is identified as a risk mitigation strategy that reduces the probability of exposure to shocks.In the absence of sufficient formal financial services, poor households make their own informal arrangements. Therefore, informal saving is common in developing countries where financial and insurance markets are largely exclusionary to the poor.

Analyzing data from the Egypt Labor Market Panel Surveys (ELMPS) showed that the share of individuals who save informally out of those who have any savings had remarkably increased from 55 percent in 2012 to 69 percent in 2018. Different mechanisms of informal savings include saving at home (cash, , gold, jewelry, assets), reciprocal lending and participating in Rotating Savings and Credit Associations (ROSCAs). Forming ROSCAs, with 10 to 20 family members, friends and work colleagues, is the most commonly used informal saving mechanism, followed by saving gold and cash at home. In 2018, around 43 percent of those who had any savings were members in ROSCAs. The primary motivation for participating in ROSCAs was to prepare for marriage or cover medical emergencies, which underscores the significance of using informal saving mechanisms to mitigate risks of life cycle events.

In general, men have a higher tendency to save formally while women save more informally. The higher percentage of informal savings among women holds across all educational levels, wealth quintiles and locations. Despite the higher percentage of informal savings across all wealth quintiles, poor individuals tend to save more informally (82 percent reported saving informally compared to 18 percent who reported formal saving), while their formal saving is concentrated in the post office. As Egyptians get richer, informal savings decrease in favor of saving formally in bank accounts (Figure 1). By the same token, informal savings are more common in rural areas compared to urban areas were formal savings are dominant.

Figure 1: Percentage of Formal and Informal Saving (out of those who save) by sex and wealth quintiles, Age 15+ (2018).

Source: Authors’ calculation based on ELMPS (2018), N.B. multiple saving forms are possible.

Coping with shocks by informal social safety nets

In addition to mitigating risks of exposure to shocks, social capital plays a crucial role in coping with shocks after occurrence. Informal social safety nets are dominated by vertical transfers from richer to poorer households or horizontal transfers between poor households. According to a study by Helmy and Roushdy (2019), economic shocks, such as reduced income or loss of employment, were the most common type of shocks experienced by Egyptian households during 2017-2018. As expected, these shocks were particularly high among poor households.

To cope with shocks and food insecurity, households had strongly depended on their social capital. Almost a third of households who were exposed to shocks reported getting assistance from relatives or friends while 28 percent borrowed from their family and friends. Surprisingly, reliance on informal social safety nets and networks remained strong among households benefiting from formal public social assistance and cash transfers compared to households covered by social insurance, health insurance or pension schemes; hence, pointing out to the insufficiency of some formal social assistance programs in mitigating risks and alleviating the repercussions of shocks.

The way forward

Evidence on Egypt show that poor households had mostly relied on social capital to mitigate risks and cope with shocks through informal borrowing, receiving cash or in-kind assistance and use of informal saving mechanisms including ROSCAs. Informal social safety nets and risk mitigation mechanisms might not be effective and robust enough to adequately support the poor and build resilience of Egyptian households during the time of economic hardship.

Accordingly, formal social safety nets should be extended to all poor households while offering adequate levels of assistance to substitute the high reliance on informal risk mitigation and coping strategies. Social capital could complement the functions of formal safety nets, yet becoming a substitute will lead to the social exclusion of vulnerable households in favor of dominant networks.

Fostering formal risk mitigation strategies entails building an inclusive financial system. Therefore, improving proximity and outreach of formal institutions, reducing transaction costs and simplifying procedures and product features are possible incentives to boost formal saving among poor households. Using technology, such as smart cards and mobile payments, could facilitate introducing innovative saving products in Egypt. Overcoming cultural barriers that decrease the uptake of formal financial services could be addressed by offering financial literacy programs, particularly among women and low educated persons. Furthermore, offering gender sensitive products tailored to the needs and constraints of women is crucial.

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