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/

Muhammad Yunus: Empowering Women in Developing Countries

By Adrian Requena
Dear World

“Portrait of Muhammad Yunus”

In 2006, Muhammad Yunus was awarded the Nobel Peace Prize for innovating the credit market. He established the first microcredit institution, Grameen Bank, for the purpose of empowering the poor and giving them an opportunity to become independent entrepreneurs. Yunus had another equally as important goal when he envisioned the revolutionary microcredit service; gender equality.

At the HUB Chamber of Commerce in Santo Domingo, Dominican Republic, Yunus addressed multiple microcredit institution and delivered the conference “Eradicating world poverty, one loan at a time”. Here, he urged the present party to note and continue integrating his principles that make microcredit such a successful venture.

Yunus seems to have noticed that lending money to women is more beneficial to the household. He argues that women are more cautious and therefor spend differently than men. We will discuss this later on in this blog. First, it is crucial to understand the inequality women face in most, if not all, developing countries.


 The Reality of Women in Developing Countries


In Julie Shaffner’s “Development Economics: Theory, Empirical Research, and Policy Analysis”, she notes that the lives of women and girls in developing countries are much harder than that of men and boys. Within households, women and girls frequently consume less, work longer hours, and have generally fewer rights compared to men and boys. Shaffner continues to describe what it is like being a girl in South Asia and China, where they receive lower quality of food, are less likely to receive health care when they are sick, and have a higher mortality rate. Women work longer hours than men taking care of all the household chores and jobs needed to keep the family afloat.

This being said, they have more restrictions on their freedom and fewer rights to own property. In many developing areas women have little to no decision-making power when it comes to the finances of the household. Yunus recalls a conversation he had with a woman in India about to receive a loan. She told him, “I have not touched money in my life… how am I going to use this money if I do not know how to handle it?” There is clearly something wrong with this picture, good thing Yunus recognized the problem and decided to do something about it.

Yunus continues to address exactly what his approach towards gender equality was. Under normal circumstances, bank loans should aim at women participation levels of about 50%, likewise for men. Grameen Bank aimed at making 90% of the loans go to poor women. This goal and change of focus by a bank really made an impact and truly empowered women who previously did not have many opportunities. Looking at empirical data around the developing world, this makes a lot of sense. Women are more likely to be self-employed than men. Shaffner reports that in urban Vietnam, “more than 40% of men and more than 60% of women are self employed”. It wasn’t until later that empirical research began to show what the real outcomes of lending to women were.


Impact of Women Decision-Makers


Katherine Esty, Ph.D in social psychology and founder of Ibis Consulting Group, spoke with Yunus in 1994 and was enlightened by the notion that lending to women almost always leads to better spending in ways that help their families over time. Yunus told Esty that women are less likely to use the borrowed money to buy unnecessary goods and luxuries like men, instead, they do what is best for the family and spend money on food and health as well as goods like cows, chickens, or seeds that could be sold and profited off of in the future.

This hypothesis can also by backed up by evidence presented by Shaffner from empirical research in Brazil. Thomas (1990) found that non-labor income in the hands of women had a bigger positive impact on family health and child survival rate than said income in the hands of men. Shaffner continues to point out a study by Duflo (2003) in South Africa. They found that pension income in the hands of women had a positive impact on girls nourishment in the household, while the same could not be said for pension income in the hands of men.

Much like Yunus before, Shaffner comes to the conclusion that “channeling development program benefits to women rather than men can increase program impact on household nutrition and other investments in the human capital of children”.


Prior to Yunus’ Grameen Bank, the participation of women in financial decisions in the household were close to none, Esty points out that 98% of borrowers at commercial banks in Bangladesh were men. Apart from being unjust and wrong, this is extremely inefficient and unproductive. Looking at this from an economic stand point, having 50% of the population that work the hardest and know what is best for the household not able to access capital was completely inefficient.

In order to alleviate poverty in the developing world, Yunus realized, women must be given equal rights when it comes to borrowing and making the tough decisions in the household. Hopefully Yunus’ believes and standards remain at the core of all microcredit institutions around the world.




Pascual, Kelvin. “Yunus: prestarle a mujeres es más beneficioso para familias.” Hoy digital. N.p., 17 Mar. 2017. Web. <http://hoy.com.do/yunus-prestarle-a-mujeres-es-mas-beneficioso-para-familias/&gt;.

Esty, Katherine. “5 Reasons Why Muhammad Yunus Focuses on Lending to Women.” Web log post. Impatient Optimist . Bill & Melinda Gates Foundation, 10 Jan. 2014. Web. <http://www.impatientoptimists.org/Posts/2014/01/5-Reasons-Why-Muhammad-Yunus-Focuses-on-Lending-to-Women#.WPaLqGTyub8&gt;.