A Fresh Look at the Tontine Loan Scheme

Women in the West Senegal region of Medine are exploring the use of Tontines to replace traditional loans



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.


  1. http://www.africanews.com/2017/04/30/traditional-micro-credit-scheme-helps-senegalese-women-do-business/

“Urban Productivity in the Developing World”

Julian Leal

A look at the potential effects of urbanization on developing countries and policy implications.

Glaeser and Xiong, members of Harvard’s Economics Department, in March 2017, released a working paper entitled “Urban Productivity in the Developing World”. Quoting the introduction, the paper seeks to see if “Cities help turn poor countries into rich countries”. The paper looks at several factors to determine this: productivity, density, human capital, and local entrepreneurship.

First the paper looks at the disparity in production between cities. All countries have a production disparity between urban and rural areas. More people are more densely located in cities. Industry and technological improvement is more likely to be in cities. However, the gap between urban and rural areas is more pronounced in developing countries. By understanding why parts of poor countries have become richer, we can improve the whole country. The part examines the correlation between urban density, population relative to area, and productivity in Brazil, China, and India. They use earnings, which in a classical model is equal to the value of a laborer’s production and total firm productivity. The urban-rural wage gap is established in earlier papers (urban areas earning 45%, 122%, and 176% more than rural areas in China, India, and Brazil, respectively). Data from China shows that earnings dispersion is matched with labor productivity dispersion closely (Figure 1). They show differences in labor productivity (by industry) between prefectures (small provincial areas) in China, showing that the productivity gap between the 1st and 2nd most productive is large (60%), and then lessens.


Then they look at the differences across industries in agglomeration (the extent firms locate near firms in the same industry (Silicon Valley, Wall street) and what extent firms locate in densely populated prefectures). 2000-2007 sees a rise in agglomeration in Chinese prefectures. Some industries agglomerate more than others (artificial fibers, electronic music equipment), and more traditional industries (silk-dyeing) have negative agglomeration. Agglomeration is attributed to the ability to share ideas and inputs and access a larger labor and customer pool. Looking at the industry-prefecture’s average labor productivity and the prefecture’s share of total employment in that industry, they conclude that the relationship isn’t linear. Any area with more than 2% of an industry’s employment has good productivity. The relationship between industry employment share and population density of the prefecture correlates positively, though not as much, since manufacturing isn’t urban in most cases (Figure 3).1

Lastly, the correlation between population density and labor productivity is positive, being even slightly higher than that of the U.S. While this could be a misleading effect, most likely these agglomeration economies are legitimate because large cities tend to be more connected to the rest of the world, allowing technology to enter and dramatically boost productivity. Glaeser and Xiang run several correlations and regression between several variables already discussed as well as other variables that would alter them like college degrees and export percentage. The main takeaways from these charts are that industries and firms with higher percentages of employees with college degrees tend to be more agglomerated Information sharing is valuable with knowledge-based fields, so they urbanize to facilitate it. It also provides easier access to the rest of the world. Industries based on exporting tend to be urbanized as they need access to a larger customer base and to special economic zones like ports. While these are the main interpretations, the data shows that the tendency to and returns to urbanization and agglomeration are very industry based.

Next human capital (knowledge and skills) externalities (the benefits of being around smart and skilled people) is discussed. Areas are defined by skill level, so human capital increases will increase earnings. In India, Brazil, and China, these effects are more pronounced than in the U.S. Human capital is important in developing countries because high human capital enables spread of knowledge and skills, where there is a large gap in developing countries. The more urbanized developing countries become, the more pronounced these effects become. Denser populations are in closer proximity to people with higher human capital. Glaeser and Xiang say that developing countries shouldn’t use policy to impose artificial barriers on growth, such as housing limits, to maximize this phenomenon.

Next, they address entrepreneurship’s effects on development. Previous papers looking at entrepreneurship’s affects shows that it makes urban areas resilient to declines and increases employment and establishment size. It doesn’t increase income growth, potentially from the elastic labor supply or the ability of entrepreneurs suppress keep labor costs. Modern ideas conclude that entrepreneurship is a type of human capital, so it behaves as such.

Specifically, in developing countries in Africa, entrepreneurship is low because human capital is low. Economists originally thought that foreign direct investment (FDI) would increase local entrepreneurship potential and allow exporting businesses to flourish. It appears that neither FDI or local entrepreneurship have any effect unless a certain threshold of human capital, not present in many African countries, exists. They lack the knowledge and ability to produce for global markets. What about immigrant entrepreneurs? Several immigrant entrepreneurs are noted: Sergey Brin (Google) and Fernando Duarte (Nando’s), and others from India, Europe, and the Middle East. However, Africa has difficulties attracting entrepreneurs due to its unattractive locales and pushback from local politics and regulations. Making Africa more attractive and easier to access is crucial in policy decisions. Other policy considerations include investing in education to improve human capital and make areas more attractive to entrepreneurs who can better utilize skilled and knowledgeable people. This however doesn’t encourage native entrepreneurship, so potential strategies (little evidence of their effects exists) are entrepreneurial training, providing spaces for clustering entrepreneurs to facilitate learning from each other, and deregulating and removing restrictions that deter entrepreneurs. A combination of these strategies can increase local entrepreneurship and lift businesses to global markets.

Should policy encourage the increase of city size? Benefits and costs exist. Spatially biased policies are dangerous as they favor more politically powerful regions and subsidies may be misplaced. Barriers to urban growth need to be reduced through urban life quality improvement. Cities appear to be beneficial to the economy, so their growth shouldn’t be hindered. Downsides of density in urban areas are disease, congestion, crime, etc. Decreasing these makes cities more attractive to immigrants, as well as encourages productivity. Points to improve urban areas include infrastructure, which can reduce water-borne illnesses, traffic congestion, etc. Infrastructure is expensive and in several instances costs outweigh benefits. Different types of infrastructure providers are discussed, each having strengths and weaknesses. The For-Profit Independent and the Public Integrated are determined to have the most potential, given the presence of strong independent leaders or a non-corrupt government, respectively. Property rights are less clear and aren’t well protected in the developing world. This reduces incentives to invest in property and its improvement. Labor supply decreases because people spend more time protecting property. Property rights make transactions easier when properties are defined and documented, as well as reducing crime.

In summary, this paper promotes the benefits of urbanization of developing countries. Urbanized areas are more productive and attract more educated people and local and immigrant entrepreneurs. Investing in these people and human capital overall is crucial to development. Therefore policy-makers must enact policies that decrease the negative effects of urbanization and not restrict city growth to promote these skilled people.

Original Paper: http://www.nber.org/papers/w23279