Bank-insured RoSCA for microfinance: Experimental evidence in poor Egyptian villagesby Mahmoud El-Gamal, Mohamed El-Komi, Dean Karlan, Adam Osman

Journal of Economic Behavior & Organization


Economics and Econometrics / Organizational Behavior and Human Resource Management


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ARTICLE IN PRESSG ModelJEBO-3316; No. of Pages 18

Journal of Economic Behavior & Organization xxx (2014) xxx–xxx

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Bank-insured RoSCA for microfinance: Experimental eviden

Mahmou a Rice Universi b American Un c Yale Universi d Innovations f a r t i c l

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E-mail add http://dx.doi.o 0167-2681/© e this article in press as: El-Gamal, M., et al., Bank-insured RoSCA for microfinance: Experimental evidence in tian villages. J. Econ. Behav. Organ. (2014), ce in poor Egyptian villages d El-Gamala, Mohamed El-Komib, Dean Karlanc,d, Adam Osmanc,∗ ty and James A. Baker III Institute for Public Policy, United States iversity in Cairo, Egypt ty, United States or Poverty Action, United States e i n f o arch 2013 vised form 2013 ebruary 2014 e xxx a b s t r a c t

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. © 2014 Elsevier B.V. All rights reserved. ction advances made by microfinance institutions in giving the poor access to credit, recent studies have estimated lion adults in the developing world remain unbanked, cf. CGAP (2009). Even among those who have access to banking services, there is evidence of significant credit constraints, cf. Banerjee and Duflo (2004). Confounding m in the Middle East are religious and social injunctions, especially in the modern era for Muslims, against ed borrowing, grounded in the ancient prohibition of usury. egard, the Muslim poor, in particular, have shown significant rates of rejection of traditional microloans. This ith large, and in some cases increasing, incidences of poverty and financial exclusion among Muslim popularchers from the Islamic Development Bank estimated that in the six countries with largest Muslim populations

India, Pakistan, Bangladesh, Egypt and Nigeria) the number of people living on less than $2 per day far exceeds ateful to The Women and Human Rights Program at the Baker Institute at Rice University for generous funding. ding author at: Department of Economics, Yale University, New Haven, CT 06511, United States. Tel.: +1 203 432 3644. resses:, (A. Osman). rg/10.1016/j.jebo.2014.02.025 2014 Elsevier B.V. All rights reserved.

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ARTICLE IN PRESSG ModelJEBO-3316; No. of Pages 18 2 M. El-Gamal et al. / Journal of Economic Behavior & Organization xxx (2014) xxx–xxx half a billion (their estimate is 628 million), cf. Obaidullah and Khan (2008). 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 and Khan, 2008, p. 64). Finally, for Muslims with access to microloans, surveys have suggested that up to 40% reject such loans on religious grounds, cf. CGAP (2008, 2009).

Despite the fast growth of “Islamic finance,”1 its ability to engage the Muslim poor, who comprise half of all the Muslims in the world, has been meager. As of 2008, “Islamic microfinance” was estimated to reach only 380,000 customers, only one half of one percent of total microfinance outreach, cf. CGAP (2008). A few recent papers (cf. Ahmed, 2002; Dhumale and

Sapcanin, 1998; Abdul and Rahim, 2007) have attempted to explain the current progress or lack thereof, but it is safe to say that the religious-legal-arbitrage methods used in “Islamic Finance” (cf. El-Gamal, 2006), which have met some success among the middle and upper classes, have not been sufficiently appealing to the poor.

The impact of microfinance on poverty alleviation is not as significant or well established as one might think,2 and the objective of this study does not extend to measuring the impact of microfinance availability. Our objective is introduce a new model of microlending that is Islamically permissible and test it against the standard model of interest-based sequential group microlending (as practiced earlier, for instance, by the Grameen Bank of Bangladesh). We compare the rates of takeup and repayment of the standard model and our alternative model which is built upon the indigenous rotating savings and credit association (RoSCA), known in Egypt as the gam(iya. This institution is used extensively and was approbated by both classical and contemporary Islamic jurists, including the most conservative.3