MICROFINANCE PAPER WRAP-UP: Bank-Insured RoSCA for Microfinance: Experimental Evidence in Poor Egyptian Villages; By Mahmoud El-Gamal, Mohamed El-Komi, Dean Karlan, Adam Osman; Published by Rice University Department of Economics

By Mahmoud El-Gamal, Mohamed El-Komi, Dean Karlan, Adam Osman; published by Rice University Department of Economics; April 2011; 27 pages; available at http://www.uh.edu/~achin/workshop/EMF-04-11.pdf

The authors of this paper argue that despite advances made by microfinance in facilitating access to finance for poor people across the world, many remain unbanked, most notably Muslims. The authors suggest that the main reason for this shortcoming is that the majority of Muslim populations reject microfinance on religious grounds, stating that microfinance products and services are generally not in accordance with the prohibition against charging interest. As a result, the authors thus argue that poor Muslims are more vulnerable to financial exclusion than are poor non-Muslims.

The authors report on their work in Egypt to compare the rates of take-up and repayment of (1) standard interest-based loans, as offered by conventional models of microfinance such as the Grameen Bank of Bangladesh, with (2) an alternative model that builds on credit unions such as rotating savings and credit associations (RoSCAs). RoSCAs, which are known as “gam’iyas” in Egypt, are a form of informal financial intermediation wherein approximately 15 to 30 people form a self-managed group to which each contributes an agreed amount at regular meetings. The entire fund is then distributed to each member on a rotating basis, until everyone in the group has contributed and received the same amount. The RoSCA model proposed by the authors is combined with bank insurance that is used as an intervention in case a member defaults.

A series of randomized controlled trials indicates that the bank-insured RoSCA model experienced higher take-up and repayment rates than the Grameen model. The authors conclude by advocating for further investigation of the viability and desirability of village-level credit unions as a bridge to connect poor people with the mainstream financial sector in majority-Muslim countries.

By Jacqueline Foelster, Research Associate

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