5. A great deal of microfinance

Tradition of credit provision and financial self-help groups

Authors: Peter Futo, Marton Gosztonyi, Mehdi Hasan

Traditional forms of lending. Credit provision has existed in various forms for many centuries in every society. Lending has been organized in the form of family or individual business, from small petty moneylenders to substantial bankers. In many societies credit provision and money changing services were aligned along ethnic and family lines. Interest rates, usury and the obligation to pay back the loan were regulated by ethical and religious considerations. Loans were usually granted on personal recommendation and based on written contractual guarantees to persons well known to the moneylenders, sometimes against securities such as jewelry or land

Informal lenders do not rely on financial laws and regulations; their contracts are not supported by the legal system of the country, i.e. the contracts of informal lending cannot be enforced by legal means. Frequently the lending agreements exist only in verbal form. Informal moneylenders are still active in many societies. The rates of informal moneylenders are normally extremely high, sometimes up to 100% or much more. Informal lending can be understood only by taking into consideration some social and cultural factors, i.e. how and to what extent the lender and the borrower are embedded into their respective social networks. In many societies, for example in China, start-up companies are predominantly financed by non-usurious loans provided by friends and relatives, and only a small, negligible fraction of loan agreements ends with disputes.

A financial self-help group is a collective, in which individuals, families or households form a group where they jointly develop the necessary actions to ensure their financial survival, or improve their living conditions through mutual assistance. Members accumulate a common fund by regularly putting aside small amounts of money. Financial self-help groups are informal financial institutions, because they frequently lack the legal or contractual basis. In spite of this, they are able to meet financial needs that formal financial institutions (e.g. banks) are less able to deal with. Financial self-help groups play an important role in the informal financial markets in the developing countries among low-income households. This is shown by the fact that the funds that are collected by the groups constitute a significant proportion of the country's national GDP.

Geographical presence of financial self-help groups. Worldwide there are hundreds of thousands of financial self-help groups. Such groups operate in many parts of the world. They can be found in China's rural areas, in the slums of India, in the islands of Indonesia, in North- and South Africa, and in Central- and South America as well. Financial self-help groups differ very much, depending on the local adaptation of the basic principles.

Models of financial self-help groups. Financial self-help groups can be divided into various types, depending on how the group obtains its capital, on who is eligible to become saver and borrower, e.g. on whether the group can give loans to outsiders or not. Some groups provide funds for "crisis expenditures", i.e. they also have some insurance functions as well.

Rotating Savings and Credit Association (ROSCA) is the most widespread form of financial self-help group. These groups offer saving possibilities also borrowing options for their members at the same time. Thus the participants simultaneously become savers and creditors during the operation of the group. Group members do savings at regular time intervals, and they collect the savings in a common fund, which is distributed partly or entirely between the group members. Most ROSCAs are financially independent social institutions, because during their operation they use funds neither from the state, nor from the civil sector, nor from the financial market.

Name of ROSCA in various countries. ROSCA groups have different names from country to country and from culture to culture. These local names indicate the different main functions of the groups. In some countries the name of the group indicates that it has a sacred or secret nature: in Malaysia it is called “Kongsi”, which means “secret society”. In other countries the name refers to the financial service performed by the group: “Tonti, Tontines” in West Africa (meaning: “savings bank”), in Egypt “Sande” (meaning: “box”), in Sudan “Khatti” (meaning: “to put aside”). In other cultures the name indicates the community nature of the group, or highlights the mutual trust: “Oha” in South Africa (meaning: joint contribution), in Sudan “Gameya” (meaning: “association”) , in Jamaica it is called “Partners”, on the island of Java: “Arasian” (meaning: “mutual assistance”).

Discussion points:

When, under what conditions would you enter a financial self-help group?
What is the highest level of interest rate, which you consider as fair?

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A hitelezés hagyományai és a pénzügyi önsegítő csoportok (HUN)