Around the world, many people rely on informal ways of managing money, borrowing and lending within their social circles. A better understanding of these networks helps explain how local economies work and could play a role in reducing poverty.
A study from MIT highlights a notable case of informal finance in East Africa, where money moves differently depending on whether people’s social groups are based on family ties or on age-based peer groups. While much of the world is organized around extended families, millions of people in Africa belong to societies that emphasize age-based cohorts. In these groups, people go through rites of passage together and maintain strong bonds with their peers throughout life, often closer than their ties to family. This difference also affects how money flows.
Social ties matter
The MIT researchers found that social structure matters a lot when it comes to financial relationships. In age-based societies, when someone gets a cash transfer, the money is shared mainly with others in their age group, but not with older or younger family members. In kin-based societies, the opposite happens: money is passed between family members across generations, but not with age peers.
These financial patterns have real-world effects, especially on health. In kin-based societies, older people often share their pension with younger family members. For example, in Uganda, an extra year of pension payments to a senior in a kin-based group reduces the risk of child malnutrition by 5.5%. In age-based groups, where money stays within peer circles, there’s no such effect across generations.
The researchers studied Kenya’s Hunger Safety Net Program (HSNP), which started in 2009 and covered both types of social groups. In age-based groups, recipients used the money to help others in their peer group, with no extra cash flowing to older or younger generations. In family-based groups, the money was shared across generations, but not with others outside the family.
In Uganda, where both social structures exist, the study looked at the Senior Citizen Grant (SCG) program, a monthly cash transfer of about $7.50 to elderly people. The results showed that in kin-based societies, the pension money helped improve child nutrition, but in age-based groups, this positive effect wasn’t seen.
Implications for social policy
These findings have important implications for social policy. The researchers argue that understanding how social structures influence financial relationships is key to designing better poverty-reduction programs. Social policies aimed at reducing poverty among children and the elderly must take into account how money is shared within different communities.
In kin-based societies, where older and younger generations support each other, there’s less inequality between age groups. But entire families may do much better or worse than others. In age-based societies, the young and old can be more vulnerable, as financial support stays within peer groups rather than flowing across generations.
The lesson is clear: social policies work best when they consider how communities are organized. Programs that don’t account for these differences may fall short, leaving some of the most vulnerable people behind.
