I well remember the experience of my late father-in-law who during the chaotic post-Soviet 90s in Lithuania relied extensively on informal relationships with other small business owners to manage finances. I don't know the specific types of structures they relied on, but I do know that lending was a big part of it. The trouble is that the sums were quite substantial (10s or even 100s of thousands USD), and the guarantees were problematic. Inevitably, local criminal gangs came to play a role in "encouraging" repayments...
The point is that these businesses were themselves perfectly legitimate (small manufacturing, services, etc.) and not even focused on lending or investing. They did so out of necessity, since there was no reliable formal sector to turn to -- either for savings or for loans. Once the banking sector became more reliable, these informal financial links started decreasing, even though they coexisted for quite s ome time.
To me, informal groups have a basic limitation in how they're able to manage risk. The basic ROSCA is fairly low risk, even for large amounts, since no one is responsible for safeguarding assets and repaying loans. And even the ROSCA is limited in terms of timing -- have any of you heard of a 5-year ROSCA, let alone 10 or more? And once fund management comes into play (i.e. ASCAs and other more complex groups), the risks are magnified. Small amounts may be ok, but as the sums and number of members grow, problems with governance can become tricky. At some point, an informal financial cooperative needs oversight and supervision -- i.e. become a financial institution.
Clearly, both informal and formal services are important, and my problem is that for small savings at least, the responses have consistently been -- groups! But I haven't heard a cogent answer for how financial institutions might be ab le to serve small & frequent savers in a way that is even mildly profitable (other than through cross-selling loans). I don't think groups alone can be the answer.
Daniel
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