On April 30th, 2017, AfricaNews published an article about the recent resurgence of an old type of loan, the tontine, entitled “Traditional micro-credit scheme helps Senegalese women do business.” The article explains that women’s access to credit has long been severely restricted in Africa. Prohibitively high interest rates, low literacy rates, and cultural barriers all contribute to Senegalese women’s lack of willingness to sign formal loan contracts. Tontines are being explored as an alternative option to formal loans from banks.
In the Médina area of Grand-Mbao, a neighborhood within Senegal’s capital, Dakar, women use the tontine to great benefit. There are 250 women in the tontine. They each contribute about three euros to the calabash daily, either in cash or via mobile banking transfers. Every day, following a specific predetermined order, one woman gets the lottery payout of nearly 760 euros. The members of the tontine describe it as having a family atmosphere in which the members support one another. In order to ensure members continually pay each day, a Sanctions Regime is created to enforce the rules, promote transparency, and instill confidence in the process. There are late fees for missed payments – which are less than a euro. If a member is continuously late, their place in line for the payout will be pushed back. If they continue to miss payments, they may be unable to collect their lottery payout until their late payments have been rectified with the Sanctions Regime.
Additionally, women must use the money productively. If they are found to have squandered the payout on food or some other consumable item, they will lose face in their community. In Médina, social standing within the village is paramount. One woman goes so far as to say that not only will the individual have to pay it back, but even their grandchildren will likely be affected by those actions. The women are supposed to use the payout for investments that they could not otherwise afford, such as construction, the purchase of durables, or investments in business. One specific woman, Mame Ngone Cisse, stated that the tontine enabled her to purchase chicks to save her poultry farming business.
This article proposes a type of loan similar to the group lending model we have discussed in class. We can compare this informal loan to a more formal loan through some of the theories covered in class, including Moral Hazards, Adverse Selection, and Time Preferences. The tontine has both advantages and disadvantages as compared to a formal bank loan that we will discuss in this post.
Regarding Ex-Post Moral Hazard, the tontines use both monetary and social fines to incentivize members of the group to keep up their part of the contract. Hypothetically, a woman who collects her payout could stop paying into the tontine if she no longer wants to participate. The monetary fine of one euro each time a payment is late and the social fine of a loss of social standing within the local community strongly incentivize the members to continue to make their payments. The fact that these women’s families generally live in the same town for years adds to the social incentive because, as mentioned in the article, an individual’s actions can affect their family’s social standing for generations. As compared to banks, the only enforcement against Ex-Post Moral Hazard would be a loss of credit and seizure of collateral – if collateral was part of the contract. As we have seen in class, areas with improved access to credit tend to also increase the community members’ access to informal credit regardless of if those seeking informal loans have access for formal loans or not. Thus, locals frequently have workarounds to loss of credit, but in the case of tontines, there is no workaround as you would be stealing from your neighbors. The community atmosphere of the tontine also naturally protects against Ex-Ante Moral Hazard, as the women can easily tell what the winner uses the payout for. If the woman uses the payout for consumables, she will lose face in the community.
The Sanctions Regime has better information than a bank has; therefore, they are less susceptible to adverse selection. Due to the fact that tontines consist only of members within the community, the Sanctions Regime has nearly perfect information regarding an individual’s past credit record and their character. The members of the community are able to select individuals to take part in the tontine only if they are in good standing within the community, are considered financially responsible, and are believed to be trustworthy. Access to this sort of intimate information would be highly unlikely for the banks, so they are at a real disadvantage as compared to the tontines.
The expectation of time inconsistent preferences makes the tontine an interesting loaning format. Generally speaking, we know that people tend to have a classic hyperbolic discount rate – meaning that they are more patient with payouts in the future rather than in the present. An individual adhering to time inconsistent preferences would be less willing to wait a month now for extra money as opposed to waiting an additional month atop an already six-month waiting period for extra money. Due to the fact that, in a tontine with 250 people, each member gets paid roughly every eight months, there is an extended waiting period imposed upon them. My main concern is that the relatively minimal monetary fine on late payments wouldn’t be enough to incentivize payments to always be on time. One could only surmise that the social standing loss must be significantly severe to the point that the members would do all they can to avoid missing payments. Aside from the social loss, the additional punishment of pushing the date of collection back would be a poor deterrent based on time inconsistent preferences. An average person would likely think “I already have to wait eight months for this payout – what’s another few days?” Though, I would say the punishment of restricting a member’s ability to collect the payout when they miss many payments is a strong refutation of that line of thinking.
In summary, the use of tontines in the Médina area of Senegal are a unique approach to solving the credit access issue many women in Africa face today. By circumventing the high interest rates, large initial down payments, and cultural barriers, these women have employed an intelligent solution to their financial woes. As we know, many people in developing nations are frequently unable to save significant sums of money to purchase durables for their entrepreneurial aspirations due to budget constraints. These Senegalese women have created a way to provide themselves with a large sum of money at least once a year at relatively minor costs to their daily income. We saw how the theories of Moral Hazard, Adverse Selection, and Time Inconsistent Preferences are affected under the system of tontines. Overall, tontines are an interesting temporary solution employed by the people of Médina who face credit access problems.