Tontines: The Informal Financial Sector in Cameroon360°ANALYSIS
Tontines in Cameroon are an important part of the informal financial sector that provides individuals who are unable to access money from formal financial sectors with cash. Although this has fostered development and helped individuals overcome extreme poverty, the IFS is yet to address macroeconomic problems.
The Informal Financial Sector (IFS) is a local traditional banking system. The IFS is a practice that is widely known in the majority of francophone Africa as Tontines, which derives from the name of Lorenzo Tonti who vulgarized a similar but not identical practice in France in 1653. In the IFS, individuals with a common social link gather together and pay an amount of money either in tontines (collecting money for one member) or in savings in order to help each other. They can also put goods or services (soap, oil, dishes, food, and labor force) in tontines. The basic element of this practice is trust built through familiarity. Originally popular in West-Cameroon, Tontines (associations) have spread throughout the country. Today 50% of Cameroonians participate in the IFS, including businessmen, individuals with middle and low income revenues, and above all, women.
How it Works
The informal financial system includes diverse forms of tontines depending on the needs and creativity of different groups: financial tontines, tontines of goods and services, credit-savings, emergency-savings, school-banks, and savings for development projects among others.
Members of Tontines collect money or goods that are loaned in rotation. There are two forms of tontines: Tontines without an interest rate and tontines sold by auction in order to balance the profit between earlier and later beneficiaries. The proceeds from these auctions are ultimately distributed to all members. Money collected in credit-savings is given as credit to members in need, at a monthly interest rate of 2 or 3 per cent and for 3, 6 or 12 month terms. The interest generated at the end of a cycle is redistributed to members proportionally to the amount and the duration of their individual savings. The school-bank’s functioning is similar, but it is used exclusively for school purposes like fees, books, uniforms. Emergency-savings help to assist members in case of an emergency like death, illness or ceremonies like birth, marriage, funerals or promotion. The amount spent in one emergency case is split among the participants and returned back to the emergency-savings within a given timeframe. Meanwhile, savings for development projects make it possible to pursue development projects (i.e. building schools, bridges, fountains, roads, installing electricity and supporting health projects) that improve the life conditions of the participants and their families or communities.
There can be tontine failures or abuses, but such cases are rare and self-regulating as they lead to social exclusion. Arrangements are always made to help the member in irregular situation paying the money back and to redistribute individual savings in case of disturbance. The most important shortcomings are the scarce and short term availability of money and the high interest rate of loans. This limits the quality of investment and business that can be undertaken.
The Role of the IFS
Tontines today play an important role in the development of Cameroonian society in social, economical, financial and entrepreneurial domains.They strengthen social relations and trust among their members, and promote cultural identity. They are the primary source of credits for many poor people in Cameroon, especially for women and young people. These groups are typically excluded from the formal financial sectors as they cannot fulfill the credit obligations they require. IFS financing empowers women and young people economically, enabling them to undertake small trading, farming and livestock rearing. These undertakings increase their revenues and enable them to meet the basic needs of their families and the educational needs of their children. Furthermore, Tontines encourage an entrepreneurial mindset, self-reliance and hard-work. They provide simple and rapid access to financial resources without the complex procedures of formal financial institutions; they therefore create a social environment that incites investment. Tontines or credits are at times released based on the binding and shared development objectives between the IFS members.
The IFS has helped many individuals rise out of extreme poverty by empowering them through financial facilities. However, these individual achievements are not reflected at the macro-level of development, as Cameroon is ranked 150th with a low Human Development Index (HDI) of 0,482; the unemployment rate in 2012 is 14% and 76% of the active population is under-employed.
The Need for Innovation
Although the IFS or Tontines have helped reduce poverty, questions regarding the sustainability of this achievement remain. Jobs created with the support of the IFS are mostly in the informal sector and only foster individual subsistence. They have minimal impact when it comes to changing the larger factors that create poverty. Therefore, Tontines need to rethink their development strategies, in order to foster sustainable productive investment and create decent employment and job security. For example, savings for development projects could be used to create cooperative small and medium-size enterprises that better stimulate economic growth. Some Tontines innovate in that sense. They struggle to achieve macroeconomic development projects such as creating production and transformation industries in the agricultural sector or creating private school and housing enterprises among others. However these efforts remain in embryo and face several challenges.
The Cameroon government has tolerated the practice,but Tontines currently operate outside the law. Legal regulation is a necessity for the IFS. The IFS will only be able to influence the global development process if it can enforce transparency and accountability in the enterprises it funds as well as undergo fiscal declaration and contribute to tax revenue.
The lack of sufficient financial resources is the main obstacle to innovation. This obstacle can be overcome through collaboration with formal financial institutions. Banks and microfinance enterprises attribute a high credit risk to poor individuals because of the lack of collateral. A collective group as credit’s seeker would raise confidence due to the liability of group members and their social responsibility. In addition, this would be a sustainable way to put the over liquidities blocked in banks in Cameroon in the service of development.
Finally both banks and the state should create incentives that promote entrepreneurship and innovation. Formal banks should adapt to local realities in order to attract Tontines and to augment investment willingness. The state should improve investment conditions such as infrastructures, energy, adequate education, research and communication, and administrative procedures should be alleviated and corruption intensively fought.
Indeed the IFS in Cameroon has demonstrated its ability to fight against poverty by providing individuals with the financial means to be socially and economically integrated into society. It has also stimulated the entrepreneurial mindset. However challenges to this practice remain. This entrepreneurship needs to be directed towards innovation, large investment, productivity and the creation of jobs in order to address the development of the country at a macroeconomic level in a sustainable way.
The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.