When I traveled in Peru with my bicycle I had planned on buying panniers in Lima. Even though cargo racks were easy to find, panniers were more expensive than they would have been at home. So I made my own using locally available materials (you can find these in any bigger city in Peru: Lima, Cusco, Arequipa, etc that has a SodiMac or other hardware store. The same holds true for most of Latin America.). They ended up being quite whimsical, easy to remove and sling on my back as actual backpacks again which is great for sudden bus or car travel (even though I got quite a few odd looks for my choice of children's bags) and held almost as much as regular panniers. They never caused me any difficulties and gave me quite a few laughs. But I think the local dogs were convinced I was abducting a creature on my wheel what with the ears on my one bag!
Our panniers were a hit with other bicycle tourers, too. You can find a description from some fellow bicyclists I met in Ollantaytambo here, about 3/4 of the way down the page: http://www.contoursofacountry.com/encounters/peru/
Step 1: The goods
Pictured are the materials you will need for (1) pannier (one side). For both sides you need to double some of what is pictured.
If you have scissors already and a few old tubes and aren't picky about how fun your panniers look, a set of rear panniers will cost you about $20-$25 (much cheaper than the $80-$120 they are in stores in Lima!). The materials can be found in Sodimac or the equivalent hardware store in Latin America (send your suggestions for other areas of the world!) and large supermarkets like PlazaVea often have deals on bookbags. You might even already have some of these things lying around or be able to ask for them on a networking website :)
Step 2: Clip the pannier frame to the cargo rack
This is pretty self explanatory. Clip the frame from the top of the cargo rack. Make sure it covers the top of the derailleur on the drive-train side, which might mean it doesn't hang perfectly vertical. That's ok.
Keep in mind that if you attach them too far forward, the bag might hang down where it could interfere with your pedal stroke.
Step 3: Zip tie the pannier frame to the cargo rack
Once you have clipped the top of the frame to the rack, zip tie several points of it down to the cargo rack and possibly also add a point of attachment to the bicycle frame. try to get it so that the frame does not easily move. Then trim the ends of the zip ties.
The zip ties are difficult to see in this photo, but are clear colored. The ends have not yet been trimmed.
Step 4: The bookbags
In order to attach the bookbags, you will likely need to cut the ends of the straps as depicted. This way you can take the top, padded portion of the strap and "weave" it through the pannier frame, starting at the top. You will then tie the padded portion and the non padded portion together, likely after looping the non-padded part through the pannier frame a few times for added security.
Tie the unpadded and padded portions together and trim any remaining excess strap beyond a few inches/8 cm
You might want to make sure the water bottle pockets are -not- on the pedal side, as with a large water bottle they might interfere with your pedal stroke.
Step 5: Check everything!
Once you have attached both bookbags, check to make sure there are no loose ends that could get caught in your spokes. If you have a lighter, seal the ends of the bookbag straps so they don't fray from repeated dis-attachment. If you are going to be putting a lot of weight in your bags, see how that effects how they sit on the cargo rack, and maybe add elastic crossing over the top if they sink too much.
In the picture the bookbag straps have not been adjusted yet, and excess of the non-padded portion is still hanging down
Make sure you can ride the bike without the bags interfering with your pedal stroke. Now is the easiest time to make adjustments.
Step 6: Ready to roll
Pictured are two complete bikes with handmade panniers, ready for a 4 day, 70+ km/day trek in Peru! The one in the front still had its bags attached 3 months of off-road use later, although they had a couple of holes and were not as vibrant anymore.
Pro-tip: the pannier frame plus cargo rack makes a great derailleur protector when traveling with your bike in a box on a plane.