Bank Insured RoSCA for Microfinance: Experimental Evidence in Poor Egyptian Villages

This paper compares rates of take-up and repayment in standard interest-based microlending with an alternative model that builds on indigenous rotating savings and credit associations (RoSCAs).

The continued growth of MFIs in terms of client numbers and portfolio sizes has enabled greater access to credit in many of the worlds less developed nations. Recent studies have shown, however, that very many of the poor, especially Muslims, remain unbanked and many who have access to banks remain credit constrained. This problem is worsened in many Middle Eastern countries, where the poor reject available microfinance on religious grounds.

The study conducts laboratory experiments in the field, using poor subjects in rural Egypt who are eligible for microloans. It compares take-up and repayment rates of randomly assigned subjects under the RoSCA model and the standard, Grameen model. Study findings indicate that the RoSCA model:

• Solves a coordination problem that may otherwise prevent the spontaneous development of informal RoSCAs in practice;
• Generated significantly higher take-up and repayment rates than the standard model;
• Can be a useful alternative for Islamic countries where many of the poor have rejected conventional modes of microfinance.