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How to finance without going through the banks? The African example

Why it is in Africa's economic interest to preserve the tontine, this old and effective financial alternative.

By Ibrahim Anoba.
An article from Libre Afrique

Either it's about susu (Ghana, Togo), Chilemba (Kenya, Zambia, Zimbabwe, etc.), Esussu (Nigeria, Liberia), variant variants of the tontine system in Africa are diverse and varied. It is still an informal community-based savings and credit system that predates the modern banking system. It is common among all categories of people: traders, students, etc. In other words, it is a common interest group with finance at its center.

In a tontine group, each member periodically pays an agreed amount into a virtual pot in the custody of a selected group member acting as a bank. At the end of a fixed deadline, often every week or every month, a member takes all the savings from the pot. At the next deadline, another member collects the savings and so on until all members benefit in turn. The cycle runs until the group agrees to end its tontine.

What is remarkable about this system is how it has survived for generations without major changes, while its success relies heavily on trust. Each member has no choice but to keep faith in the promise of others to pay their dues by the agreed deadline.

Perhaps we can find answers in the stories of millions of Africans who rely on the system to survive and who feed one of the continent's most prolific resources: the informal economy.

The African informal economy

The informal economy in sub-Saharan Africa is one of the largest in the world and accounts for 85.8% of total employment on the continent. In addition, 74% of women in non-agricultural jobs are in the informal economy, while 8 out of 10 African youth are also employed informally. And at the heart of this massive economy is the tontine.

Many traders in local markets depend on the tontine for their initial capital and sometimes for their loans as well. Individuals, including roadside mechanics, craftsmen, food merchants and others who rarely qualify for a bank loan, find it relevant to become members of tontine clubs. This flow of informal workers is very important. Already, more than half of the adult population in sub-Saharan Africa is excluded from the formal financial system for reasons ranging from lack of confidence in banks to poor financial education. And for generations, the tontine has played the role of the "affordable lender" that commercial banks and the state have failed to insure. For example, bank loans usually have high interest rates and sometimes prohibitive collateral demands for many traders. Similarly, government loans are difficult to obtain if an applicant is not on his political side.

This is why many Africans refuse to participate in traditional banking and credit systems but continue to rely on their traditional alternative. Although commercial banks and microfinance banks have an interest in modernizing the tontine, many have failed for obvious reasons.

Why modernization of the tontine is difficult

The tontine is a simple but delicate financial system. As it is usually geared towards solving a problem shared by a community, it will be difficult for a bank to manage the tontine without retaining the shared meaning of the community. The type of trust generated within such a community can not be easily created outside of it either. The inability to find acceptable alternatives to these two factors continues to make tontine the gold standard for savings, although banks also have unique advantages.

Indeed, with banks a customer does not need to belong to a community to participate in the tontine since the banks essentially create the connection. In addition, unlike the traditional tontine where contributions and payments depend on mutual trust, banks can guarantee each deposit in a timely manner, but Africans prefer the traditional system.

It is not because the banks are bad or their services are worse, but because humans react to incentives. People will always choose options that guarantee better services at the lowest cost. Unlike banks that charge customers for services by deducting from their deposits, traditional tontines still pay the total amount due. But we can not blame the banks for making profits. Modernizing the tontine is perhaps just one of those projects for which entrepreneurs need more experience before finding a marketable alternative.

A challenge for users

Like many traditional systems offering alternatives to Africans, unions and the state limit the economic benefits of the tontine. In local markets, traders are usually obliged to join some market associations that promise to defend their interests. In return, they must adhere to strict guidelines. Most are often detrimental to the competitiveness of small businesses. In addition, trustees of local councils and other public bodies extort merchant profits from royalty payments. Even in some countries, taxes are imposed at many levels.

For poor Africans who do not benefit much from the tontine, it will not be long before they lose what their profits should be for the benefit of the unions and the state. This is why the financial situation of many tontine participants takes time to improve despite their sacrifices. It is nevertheless in the economic interest of Africa to preserve this old and effective financial alternative.

On the Web– Article originally published in English by African Liberty – Translation by Free Africa – April 3, 2019.


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