Informal financial institutions important contributors to trust and economic capability

January 25, 2016

Informal financial institutions in Rwanda help to build trust among people and strengthen economic capabilities. This is the conclusion of a new PhD thesis from the University of Gothenburg.

A number of informal financial institutions exist in Rwanda, all of which are based on the premise that members of the group have trust in each other.

"This is one reason why informal financial institutions are regarded as being more trustworthy than formal banking systems and NGO-driven micro-financing systems," says Janviere Ntamazeze, who has studied two kinds of informal financial systems in her PhD thesis: ROSCAs and ASCRAs.

Rotating Savings and Credit Associations (ROSCAs) are typically smaller groups of people who make regular contributions to a fund, which is given to each contributor in rotation. In contrast, Accumulating Savings and Credit Associations (ASCRAs) can comprise hundreds of members and function more like a bank, where contributions can be given as loans to members in need, with interest tied to the repayment.

The process of taking on new members in an informal financial institution (IFI) group relies on personal relationships, whereby one or more members can recommend a new person who wants to join. Ntamazeze found that when taking on new members, issues of sex, age, occupation and marital status were more important than ethnicity. In fact, most of the groups were ethnically mixed.

Contrary to other studies, Ntamazeze also found that family ties decreased trust.

"This is because of a fear that conflicts that might exist in a family could affect the group," she explains.

To counter this, informal financial institution groups can set rules that prohibit a wife and a husband from joining the same group, for example.

In rural areas, not belonging to an IFI group can be seen as selfish and as demonstrating an unwillingness to contribute to the community's development. Therefore most people join one or more groups, even if they earn a good salary and do not have an economic need to participate.

"Especially in rural areas, joining an IFI group is more important socially and culturally than economically."

However, the economic benefits of IFIs are also important - not least from a national perspective. IFIs give poor people an opportunity to start investing in education, a small business, etc. At the same time, they have a de facto role as contributing social security systems. And for the banking system, IFIs mean more money to lend.

"ASCRAs might use a bank account to handle the group's money. But since it can only be used for savings and not as a means of taking a bank loan, the money accumulated will be a source for the bank."

Ntamazeze's study is based on an analysis of formal and informal documents concerning IFI, as well as observations and over 120 interviews with IFI members. Although the field work was conducted within groups in Rwanda, similar groups exist in poor communities all over the world and Ntamazeze's results might also be applicable to the phenomenon outside Rwanda.

"I know for instance that these kinds of informal financial institutions are used within some immigrant groups in Sweden."
More information

Thesis title: Trust and capabilities. Experiences from Rwanda's informal financial institutions.

More information about the thesis can be found in the University of Gothenburg's Publications Electronic Archive:

University of Gothenburg

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