The structure of rural financial institutions displays great variety. One of the main distinctions already has been noted, that of institutions that only lend versus those that take deposits as well. While most informal rural financial intermediaries commence operations as purely lending entities, particularly those supported by NGOs, it is important to provide them with incentives and support to facilitate the eventual transition to institutions that can mobilize savings, for the sake of their long-run viability.
95. Joseph Stiglitz, 'The Role of the State in Financial Markets', Proceedings of the World Bank Annual Conference on Development Economics, 1993, The World Bank, Washington, DC, USA, 1994, pp. 37-38.
Some small-scale financial institutions, including those of the greatest antiquity, are born with both a deposit-taking and lending capacity. Diverse cultures throughout the world have incubated small mutualist financial groups that are increasingly referred to by the generic term 'rotating savings and credit associations' (ROSCAs). Their size is restricted, ranging from a handful of people to about 60 at a maximum; 12 and 24 persons are common groupings. Normally, they are organized among persons who are brought into daily contact for other reasons, as in the case of neighbors or employees of the same firm, but they can be groupings for former schoolmates or be organized around any other factor of social cohesion. The members of a ROSCA make regular, usually monthly, contributions to a central fund, and withdrawals from the fund obey fixed rules. A common variant is that one member, in rotation, takes home all of the monies in the fund each month. Other arrangements allow for lending portions of the fund. In Korea, this kind of organization is known as kye; in Mexico, tanda; in Bolivia, pasanaku; in Egypt, gamaiayh; in Mozambique, xitique; in Ghana, susu.97 Although simple, their structures have certain elements of sophistication. For example, in Korea different positions in a kye correspond to net lenders or net borrowers, and likewise the implicit interest rate (±) varies by position. According to their desires or needs, Koreans can look for a kye with for example, the number 9 position open, or the number 2, etc. In Korea at least, most members of kye are women.
ROSCAs work on the basis of peer pressure to enforce compliance with the rules, although occasions in which it is necessary to apply that pressure vigorously are by no means unknown. In their original form, they are not replicable on a larger scale. However, the principles that drive a ROSCA are found in some other credit organizations, including credit cooperatives and credit unions, and they have been applied in the suc cessful lending technologies of institutions such as the Grameen Bank.
Although their structure prevents their attaining a significant scale of operations, ROSCAs illustrate the ability of societies to develop their own institutions in response to the need for a place to deposit savings and the need for short-term credit. The existence of an indigenous matrix of financial relationships and institutions also underscores the need to adapt new financial institutions to the local context.
In a study of village finance in the Gambia, Nagarajan, Meyer and Graham analyzed the role played by two international NGOs and found that one of them debilitated local, traditional financial institutions (kafos) which provided insurance (a fund for contingencies) and savings mobilization as well as lending. These indigenous institutions also arranged for labor sharing and other joint community activities. Their interest rates were at market levels. One of the NGOs carefully adapted its operations in order to complement the role of the kafos, while the other one entered the villages with a prior agenda of targeted and subsidized credit. The authors concluded that:
the targeted loans ... at subsidized interest rates using external funds seem to negatively influence kafos by eroding their carefully built institutional safeguards. As a result, since [this NGO] only partially substitutes for kafo activities, it may well reduce aggregate village welfare because the gains realized by some may not offset the losses of others.98
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