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. Confounding this problem in many Muslim countries is the poor's propensity to reject microfinance, when available, on religious grounds. In this paper we develop an alternative microfinance model which aims to establish credit unions for the poor in which the bank plays the role of a guarantor in the familiar rotating savings and credit association (RoSCA). We test the performance of this model against a stylized 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 bank-insured RoSCA model generated significantly higher takeup and repayment rates than the Grameen model. This suggests that this model, by overcoming the religious barriers to credit, can be a useful alternative to Grameen-style microfinance.