Bank-insured RoSCA for microfinance: Experimental evidence in poor Egyptian villages

Abstract

Microfinance institutions (MFIs) have continued to grow over the past few decades, both in numbers of clients and portfolio sizes. The growth of these MFIs has enabled greater access to credit in many of the world's less developed nations. However, recent studies have shown that very many of the poor -especially Muslims -remain unbanked, and many who have access to banks remain credit constrained. Confounding this problem in many Muslim countries is the poor's propensity to reject microfinance, when available, on religious grounds. In this paper we propose an alternative microfinance model built on the familiar rotating savings and credit association (RoSCA) model that is Islamically accepted, and test its performance against sequential Grameen-style microcredit provision in a "laboratory experiment in the field" conducted in poor Egyptian villages. Our model of bank-insured RoSCAs is shown to solve coordination-failure problems that may otherwise prevent the spontaneous development of informal RoSCAs in practice. Empirically, our guaranteed-RoSCA model generated significantly higher takeup and repayment rates than the Grameen model, suggesting that this model can be a useful alternative for Islamic countries where many of the poor have rejected conventional modes of microfinance.

Islamic Finance: An Introduction

“…Islamic finance innovations can also benefit the society when used as a developmental tool to include those who are typically financially excluded. The only experimental paper on this issue, by El-Gamal et al (2014), performs a framed-field experiment to test for a new microfinance model that is based on RoSCAs (Rotating Savings and Credit Associations). Random RoSCAs are shariah compliant since they involve no interest.…”

Islamic Credit Union: An Inclusive Financial Institution to Meet the Needs of the Community

“…In Afghanistan, they are called Islamic Investment and Finance Cooperatives (IIFCs), while in Indonesia, Islamic credit unions / Islamic financial cooperatives are known as Bait ulMaalwatTamweel (BMTs). In Egypt, the Savings and Credit Association is known as the gam'iya (El Gamal et al, 2011).…”

Untitled

“…Many studies showed that the majority of Muslim population * around the globe has significant rates of rejection of traditional microloans, and still unbanked or facing constraints in case of going to get banking services (El-Gamal et al, 2014). As quoted El-Gamal et al (2014) also, "recent studies have also included survey results that show Muslims to be highly excluded from access to banking products and services, with exclusion rates reaching as high as 88% in Pakistan" (Obaidullah & Khan, 2008). "Even for Muslims with access to microloans, surveys have suggested that up to 40% reject such loans on religious grounds" (Mylenko, 2009).…”

“…The Egyptian experience disseminated in many Arab countries as Jordan (Al Ajlouni, 2015). In spite of that, just a tiny scientific research has been done to explore this socioeconomic phenomenon in Egypt (Alonso, 2015;El-Gamal et al, 2014) 2 . The current study, according to the researcher's knowledge, is one of the first studies that investigate such phenomenon in an Arabic community.…”