P a g e 1 | 23 THE CITY UNIVERSITY OF NEW YORK DRAFT VERSION MARCH 2, 2016 TONGTIN OF CAMBODIA MICROFINANCE:

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DRAFT VERSION MARCH 2, 2016

TONGTIN OF CAMBODIA & MICROFINANCE: COMPLEMENT OR COMPETITOR

This case was written by Michele Costello, an Adjunct Professor at Baruch College, solely as the basis for class discussion and is not intended to serve as an endorsement, source of primary data, or illustration of effective or ineffective handling of a business situation. Names and certain other identifying information have been disguised or purposely omitted to protect confidentiality. Copyright © 2016, Michele Costello – Do not reproduce without written permission of the author .edu.

“I don’t know how much money I earned or spent last week, but I know that my expenses are higher than my income, so I borrow …I am so busy with tongtin activity. For all three groups I am in now it is R100,000 per week. I bid one time per week on each group…it is too much work to play everyday.”

– Thida, from Koh Krabei, Cambodia

It’s a hot day in Koh Krabei, Cambodia. Sitting on a wood bench outside her tin roof home, Thida takes a break from collecting Jasmine to drink some water and contemplate her situation. Her jasmine growing and gathering has produced steady income in the past, but now she is suffering from lost crop due to a pest infestation. In addition, the family has still not recovered financially from the cost of her daughter’s emergency stomach operation in October and she just paid her children’s university fees in November. Gifts from friends and family (a neighbor, a foreign financial sponsor, her daughter who is working in the city, and local political party) have only covered a portion of the family expenses, and she still increased her debt burden to cover those costs. She is now making multiple payments on microfinance loans and informal community savings and loan clubs called “tongtin” each week. She will see the leader of her “tongtin” savings and loan club will tomorrow, but she does not have the funds for her required weekly contribution. As she ponders her options, a representative from a local microfinance institution approaches her home to discuss a new lending program.

BACKGROUND

WHAT IS MICROFINANCE?

Microfinance refers to the provision of a wide range of financial products and services to those who are excluded from the formal finance sector. According to 2011 data from the World Bank, an estimated 2.5 billion working-age adults globally, or more than half of the total adult population, do not have access to formal financial services (Ledgerwood, The New Microfinance Handbook, 2013, p. xvii). Examples of microfinance products and services include loans, savings, insurance, payment transfers, skills/training, and social benefits. Services are provided by microfinance organizations known as Microfinance Institutions (“MFIs”) which are structured in a range of financial and non-financial institutions operating non-profit and for-profit models. The industry’s key goal is to expand financial access to excluded

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segments of society including marginalized populations and those at the bottom of the economic pyramid.

Some industry observers have called microfinance a “movement that envisions a world in which as many

poor and near-poor households as possible have permanent access to an appropriate range of high quality

financial services”1.

While microfinance activity has roots in governmental and non-governmental organization (“NGO”)

economic development activities over many decades, microfinance in the form that it is known today took

root in the 1970’s through pioneering organizations such as ACCION International, Grameen Bank, and

Opportunity International. These organizations sought to recognize the unique challenges of the poor

and redesign the delivery of appropriate financial products and services to this population. While many

organizations initially began with lending programs that targeted specific observed needs in the

communities in which they worked, the MFIs often expanded to provide other services either to break

down barriers to access, protect clients, and/or meet other short and long term client cash flow

management needs. In this way, the industry has evolved from a lending-centric to a diversified financial

services focus. Microfinance gained global prominence in the mid-2000’s with the 2005 UN Year of

Microfinance campaign and the 2006 Nobel Peace Prize award to Mohammed Yunus and Grameen Bank

for their work in microfinance and its impact on economic stability and peace.

Today, there are thousands of known MFIs globally servicing over 100 million borrowers and savers, and

the market has been experiencing a double digit growth rate. A of 2013, the global average loan size per

borrower is roughly $2,000, but loan sizes can range from $20 to $20,000 depending on the geographic

location and sophistication of the client. (Symbiotics, 20132 ; mixmarket.org)

MICROFINANCE IN CAMBODIA

Cambodia is located in South East Asia, and shares its borders with Laos, Vietnam and Thailand. It is

divided into twenty-four provinces and has a population of approximately 14.8 million people, with 80%

of its population living in rural regions (World Bank, n.d.). With a per capita GDP of US$ 944, Cambodia is

one of the poorest countries in the region (World Bank, n.d.) Cambodia is a partially dollarized economy

(Kang, Is Dollarization good for Cambodia?, 2005), due to periods of Vietnamese and United Nations

administration control following the defeat of the Khmer Rouge military regime. As a result, many

individuals and institutions use the Riel (introduced by Vietnam, symbol “R”) and the US dollar (used

during the period of UN administration, symbol “$”) interchangeably. The main sectors of its economy

are agriculture, garments, tourism, and construction (Kang, 2005).

Cambodia’s microfinance industry began in 1990 (Cambodia Microfinance Association, n.d.) to address

poverty and lack of financial access. The country has one of the most developed and competitive

microfinance sectors in the world due to its recent relative political and economic stability coupled with

1 Robert Peck Christen, Richard Rosenberg & Veena Jayadeva. Financial institutions with a double-bottom line:

implications for the future of microfinance. CGAP Occasional Paper, July 2004, pp. 2-3

2 “2013 Symbiotics MIV Survey: Market Data & Peer Group Analysis;” Published by Symbiotics Group; 2013

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the large unmet financial need and the large presence of NGOs and aid organizations operating in the

country following the rule and genocide of the Khmer Rouge regime. In the 1990’s, international donors

and non-governmental organizations began launching non-profit micro-credit projects within rural

development programs which became the microfinance institutions we see today. As of 2012, there are

83 registered financial institutions in Cambodia (International Monetary Fund, 2013). According to

Cambodia Microfinance Association, an industry trade organization, microfinance institutions3 serve 1.9

million people (Cambodian Microfinance Association, n.d.).

Microfinance is part of the formal financial sector and is a regulated activity in Cambodia. When the

government established the Central Bank Law of 1996, it gave the National Bank of Cambodia,

responsibility to regulate and oversee the microfinance sector (Vada, 2010). In 2000, the National Bank

of Cambodia issued regulations regarding the classifications for Microfinance Institutions (Vada, 2010)

based upon scale and scope. The largest MFIs are required to be licensed by the central bank4, and are

regulated in a similar manner to commercial banks with the exception of a lower capital requirement

(Vada, 2010). Medium-sized MFIs, on the other hand are required to register with the central bank, and

are subjected to less stringent rules – less complicated reports (Vada, 2010). Lastly, the smallest MFIs are

not regulated or supervised because of the high operating costs of such work (Vada, 2010). These licenses

pertain to the ability to issue loans. In order to take deposits, there is an additional set of requirements

testing scale and sustainability to obtain a deposit-taking license.5 The National Bank of Cambodia does

not impose restrictions on interest rates charged by MFIs, and therefore MFI rates are set by market

forces. However, rates charged by MFIs in Cambodia have been documented by researchers as two to

three times lower than the interest rate charged by community loan sharks (Vada, 2010). Therefore, the

launch of the microfinance sector has provided a source of low cost loans to the rural population.

3 A microfinance Institution is defined by the National Bank of Cambodia, as having a loan portfolio outstanding

equal to or greater than $25,000, or have mobilized savings of $250 or more, or having 100 depositors or more.

4 37 of the 83 MFIs are licensed by the central bank (National Bank of Cambodia, n.d.); 7 of the 37 subset of MFI

are licensed to take deposits

5 Institutions need to have held the MFI license, as described in the previous paragraph, for three years, and have a

good and sound financial condition judged by the central bank’s internal rating system for at least two years,

before they can apply for this license. In addition, these MFIs need at least KHR 10,000 million (USD 2.5 million), a

Management Information System, to conform to the chart of accounts, and have a sustainable profitability for two

consecutive years.

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The country also has a high saturation of microfinance institutions (Liv, 20136). Because of the high level

of microfinance activity and competition in Cambodia, the potential for clients to receive multiple loans

from different MFIs is high. In 2011, the Central Bank created the Credit Bureau of Cambodia, which

requires registered MFIs to report lending activity and thereby develop individual credit history profiles

for clients (Credit Bureau Cambodia, n.d.). There are still limitations, as reporting for non-registered MFIs

and informal sources or credit are not disclosed and the Credit Bureau therefore maintains only a limited

picture.

Figure 1: Consolidated Village Data Source

Level of Penetration Levels of

Penetration

Number of

Villages

Percent of Total

Villages

Saturated >100% 914 6%

Very High Penetration 75-100% 1,260 9%

High Penetration 50-75% 2,444 17%

Moderate Penetration 25-50% 3884 28%

Low Penetration <25% 4780 34%

No Service 0% 791 6%

Grand Total N.A. 14,073 100%

Source: Cambodian Institute of Development

TONGTIN OF CAMBODIA – HISTORY AND STRUCTURE

For centuries, people have formed informal groups to pool their money for purchase of goods, savings, or

insurance in the absence of formal financial systems. In the microfinance industry, these informal

associations where a core group of participants make regular contributions to a fund which is distributed

in whole or in part to each contributor in rotation as a “rotating savings and credit association” or

“ROSCA”. The earliest documented forms of saving and loan clubs originated in Italy in the 17th century

under the name “tontine” where members had an opportunity to save or borrow through their

contributions to the group fund. The tradition of community based financial self-help groups continues

today under the names “tontine” in Asia, “susu” in Africa, or “tandas” in parts of South America. While

their characteristics can be quite varied, a typical ROSCA involves a self-selected group where members

agree to contribute a fixed sum at regular intervals (daily, weekly, monthly, etc.) and then distribute the

“pot” at each interval using a pre-agreed system of distribution. The primary methods for distribution of

the “pot” are use of a pre-determined order, member vote at each interval, lottery, or a bidding process

6 Liv, D. (2013). Study on the Drivers of Over-Indebtedness of Microfinance Borrowers in Cambodia: An In-depth

Investigation of Saturated Areas. Phnom Penh, Cambodia: Cambodia Institute of Development Study

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(Rutherford, 19997). The group is organized and managed by a leader who typically receives the “pot”

first and then collects and distributes funds at each group payment interval. Participants could be

recruited through workplace connections, community connections, an affinity group, or through a friends

and family network. The ROSCA will continue for a number of intervals equal to the number of

participants so that each member has an opportunity to win the “pot”. Each member has an opportunity

to receive the “pot” based on the pre-agreed system, and members can win the “pot” only once during

the cycle. (Ledgerwood, 19998) Variations exist where members elect not to receive the “pot” during

the cycle, and instead receive the “pot” at the end of the cycle because they intend to use the group only

as a mechanisms for savings. In a simple non-bidding ROSCA, members will only receive an amount equal

to the sum of the agreed group contribution, and effectively receive zero or negative interest considering

the time value of money. In a bidding ROSCA, the potential pay-in per week and pay-out of the pot varies

and the members have an opportunity to earn interest or borrow at variable rates based on bidding. All

ROSCAs are trust based groups that rely on peer pressure to enforce ongoing participation in the system.

If members drop out, future payments to players who have not received the pot are jeopardized. In

addition, there are other transaction costs associated with ROSCAs such as member transportation or

opportunity cost to attend the regular meetings or the leader’s costs for refreshments or other

organizational aspects of hosting the meeting. In most cases, there is also a social significance assigned

to belonging and participating in the group.

The “tongtin” of Cambodia is derived from the term “tontine” and typically follows the model of a

“bidding” or “auction” ROSCA. Under this system, the leader recruits a group of participants to start the

fund, establishes a periodic contribution amount, and sets a regular meeting interval for future collection

and auction of the pot (for example weekly). The leader receives the “pot” first, and usually circles the

fund because he or she has an urgent cash need (purchase of a loom, children’s school fees, a large health

expense). In the subsequent weeks, members will continue to make contributions which are variable

based on a sealed bid auction process run by the leader. Members submit their bid to the leader on a slip

of rolled or folded paper, and the leader selects the best bid to win the pot. The best bid will be conveyed

7 Rutherford, S. (1999). The Poor and Their Money: An essay about financial services for poor people.

Manchester,UK: University of Manchester.

8 Ledgerwood, J. (1999). Microfinance Handbook. Danvers, Massachusetts: World Bank.

Participant Cash Flow: ROSCA with lottery allocation

Week 1 2 3 4 5 6 7 8 9 10 TOTAL

Payment to Leader $100 $100 $100 $100 $100 $100 $0 $100 $100 $100 $900

Payout to Participant $900 $900

Payout minus contributions: $0

Assumptions: 10 member ROSCA, $100 weekly contribution, player wins the pot in a lottery week 7

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as an interest figure, which is actually the discount the member is willing to receive that week off the face

value of the typical contribution amount. For example, in a tongtin with a weekly payment of $100, a

winning bid of $15 means that the members contribute $85 per person that week instead of $100 per

person to the winning bidder. In the case of a tie, the members must bid again until a winning bid

emerges. Once a bidder has won the discounted pot, he or she must contribute the full face value of the

$100 weekly payment regardless of future winning bidder figures. Members can bid every week until they

win, but are not required to bid at any time. In this way, members who do not win the pot earn interest

(in the form of reduced weekly contributions but a full payout at the end) which varies per period based

upon the value of the winning bid. The winner’s interest rate (or the discounted pot sum) is also variable

based upon the competing bidders in any given week. Not all members are required to bid, and there are

net savers and net borrowers in the tongtin system. Due to bidding it is impossible for participants to

know their weekly contributions, savings interest rate, or borrowing cost ex-ante , or if they will ever be

successful in winning the “pot.” It is also the case that tongtin groups can be quite large, with over 100

participants. While conducting field interviews in Cambodia for this case, a few participants mentioned

that their groups were so large (over 200 members) they could not keep track of where they were in the

cycle or when these tongtin groups were ending. Many members do not record the payments they make

or the specific amounts and rely on trust that the system is working. For long-running groups, leaders

have been known to conduct annual book reconciliations or audits to maintain the integrity of the tongtin

finances. The risk of defecting members is also real, and in field interviews for this case study, participants

told us that they had experiences where members and leaders of tongtin had run away with the money

and ceased participation part way through the cycle. Despite these negative experiences, most

interviewed participants said they continue to play tongtin and take greater care to select “good” leaders.

All of the factors mentioned introduce uncertainty and risk into the tongtin process. Regardless,

participation in tongtin spans all walks of life in Cambodia and is deeply embedded in the culture.

According to a university research paper by Man Hau Liev, Cambodians believe tongtin is an easier

alternative to save or borrow money, as compared to the hassle of complex processes in banks.

“Participants in Cambodian tontines believe that the returns from tontines are higher than those available

from other saving methods,” wrote Hau Liev. “To them, a tontine is a familiar financial instrument within

their ethnic communities.” (Phnom Pehn post) In addition, during field interviews for this case study,

participants reported that it was important for them to participate in tongtin to support their friends and

neighbors and in this way help their community.

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The tongtin groups observed in Koh Krabei during primary interviews for this case study follow the auction

process described above, and had some additional significant characteristics: semi-formal organization,

multi-player members , and leader as underwriter.

First, Koh Krabei and neighboring villages generally inform the village chief and sometimes the commune

chief when forming a tongtin group. Next, the leader creates a document with the tongtin rules and

members sign using finger prints to acknowledge membership. The village chief will also sign the list of

members as a form of registration for the group. This process did not have a legal significance as far as

we know, but did appear to enhance the accountability and social pressure to perform in the tongtin

group. One participant mentioned that she could have approached the village chief as a advocate to help

her collect tongtin funds.

Second, tongtin members can participate as multiple players. This could mean double or triple

contributions and payouts if one was participating as two or three players. A net saver could enhance

their interest earned, and a net borrower could achieve a large lump sum payment by bidding and winning

twice or three times. However, neither can know the ex-ante costs or rewards of these decisions and the

volatility of their cash flow into and out of the tongtin is increased by participating as a multi-player

Participant Cash Flow: ROSCA with bidding allocation, participant as borrower

Week 1 2 3 4 5 6 7 8 9 10 TOTAL

Payment to Leader $100 $90 $95 $75 $85 $85 $0 $100 $100 $100 $830

Winning Bid N/A $10 $5 $25 $15 $15 $20 $15 $10 $5

Payout to Participant $740 $740

Payout minus contributions: -$90

Assumptions: 10 member ROSCA, $100 weekly face value contribution, bid represents discount from face value of contribution,

player wins bid in a lottery week 7, winner receives face ($100) minus bid value ($20), or $80, from each member except the leader who

contributes face ($100), winners must contribute face ($100) in all periods after winning,

Participant Cash Flow: ROSCA with bidding allocation, participant as saver

Week 1 2 3 4 5 6 7 8 9 10 TOTAL

Payment to Leader $100 $90 $95 $75 $85 $85 $80 $85 $90 $95 $880

Winning Bid N/A $10 $5 $25 $15 $15 $20 $15 $10 $5

Payout to Participant $900

Payout minus contributions: $20

Assumptions: 10 member ROSCA, $100 weekly face value contribution, bid represents discount from face value of contribution,

player never bids to win the pot

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member. The ability of one person to participate as multiple players also introduces a customer

concentration into the risk pool for the tongtin leader.

Third, most members told us that the leader also acts as a partial underwriter. If a member fails to make

the weekly payment, the tongtin leader will make the contribution for them (and presumably pursue that

person for back payment outside the group). There is a practical limit financially to how many defectors

a leader can cover, so this is not an unlimited guarantee by the leader. However, most participants when

asked if they were concerned about defectors and losses, indicated that they were confident that the

leader was sound, had selected good members, and would cover the payments of defectors. Members

also reported that leaders can go to the home of tongtin defectors and take items of value in lieu of cash

payment (e.g. cows, motorcycles). Again the limit to this strategy is in fact the limited assets of the

participants in this geographic area.

THIDA’S HOUSEHOLD CASH FLOW PROFILE: JUNE – NOVEMBER 2013

Thida, approximately 50 years old, lives in Koh Krabei village with her husband, two sons and three

daughters. She and her husband, assisted by their oldest son, are farmers who maintain the jasmine

growing and harvesting activity which is the primary source of income for the family. Her oldest daughter

is a physical therapist who works in the city and sends money back home, and the other three members

of the family are still studying. Her husband sporadically works as a tractor broker who connects farmers

in need to tractor owners/lessors. In addition to his family farming activities, the oldest son works as a

part time cook in a village café.

Cash flow from the jasmine growing generates on average $71 per week, with spikes at times of religious

ceremony and celebrations which require jasmine flower ornamentation. There is a wide variance in

weekly income over the course of the last six months, including some zero income weeks.

6moTotal

(US $)

Median

(US $)

Std. Dev.

(US $)

Mean

(US $)

% Zero

Week

1650.65 50.75 62.58 71.77 9%

Jasmine farming is common to Thida’s village (see Exhibit 3 for cash flow results of neighboring farmers).

She does not maintain any significant inventory as jasmine is a perishable good that can only be kept for

about one week before spoiling. Loose jasmine and decorative jasmine ornament sales occur daily at the

nearby market or pagodas (religious temple where jasmine is used in ceremonies). There is also some

seasonality in the business. During the rainy season from May to October, the jasmine bushes produce

less flower buds, thereby limiting supply and driving up prices. Major festivals also drive up demand and

prices. She also periodically receives remittances from a daughter who works in the city ($500 over the

past 6 months.)

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The household is not able to meet its weekly expenses, with income covering food and miscellaneous

costs on average four out of the seven days per week. The household often turns to family members such

as Thida’s sister for help and maintains no savings. Assets are limited, and primarily consist of materials

to maintain and harvest the jasmine, a basic motorcycle (“moto”) which is used by the family members to

get to and from work, school or the market, and the family home. The land her home and farm are located

on has already been pledged against a loan to a microfinance organization.

Household Cash Flow Chart

Source: Adapted from field research study (Sze, 2013)

In order to meet the cash flow shortfalls, Thida’s household has obtained a number of loans, both formal

and informal, and relied on gifts of stores of rice and other creative measures to get by.

MFIs have frequently visited her village, and held meetings for the village to learn more about their

products. On other occasions, MFI staff have come to her home to tell her about products and services.

In a few cases, she took out a loan with the representative making a home visit.

She currently has three outstanding MFI loans:

• R400,000 loan ($100 equivalent), 25 week term, 20 weeks remaining, pays R22,000 per week

($5.50 equivalent), no collateral, used for general family cash needs

• $300 loan, 1 year term, 11 months remaining, pays $30 per month, no collateral, used to partially

pay daughter surgery expenses

• $3,000 loan, 3 year term, 2.25 years remaining, pays $120 per month payment, collateral in the

form of land title, used to partially pay daughter’s school fees

(6,000,000)

(4,000,000)

(2,000,000)

2,000,000

4,000,000

6,000,000

8,000,000

1-Jun 1-Jul 1-Aug 1-Sep 1-Oct 1-Nov

Thida’s Household Cash Flow

TOTAL INFLOWS TOTAL OUTFLOWS Net Cash Flow

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In addition, Thida believes it is important to participate in tongtin to support her friends and neighbors

who have financial needs. When a neighbor who was starting a tongtin group to raise money for her son’s

school fees, she recruited Thida who was happy to join to support her neighbor and earn some interest

on her money. The members of this group are doing better than her financially, giving Thida confidence

that the group will remain liquid. The tongtin groups she participates in today were organized by a middle

aged woman her relative introduced her to from a neighboring village, a middle aged farmer in her village,

and a young jasmine seller in a neighboring village. In general, Thida believes she has earned good returns

on tongtin funds contributed compared to the hassle and low rates associated with depositing money

with the bank. These days, she does not have extra money left over to save and is glad to be in two tongtin

groups where she has not yet won the “pot” so that she can bid and receive the money to help her with

emergencies. She has already won the pot in the tongtin with the leader based in her village and it was

expensive. Still, it was a very quick process and she did not have to wait for the MFI representatives to

come to the village to get help. The is using the young woman’s tongtin for savings, but unfortunately 10

people have already run away from that group. She bid and lost the tongtin managed by the middle aged

woman a few times, but would have used the funds to make payment for daughter study, repay an MFI

loan, and buy parts for a water pump to improve jasmine production.

Her current tongtin groups are as follows:

• 90 members, $5 weekly contribution, has not received the “pot” yet, 35 weeks remaining

• 60 members, $7.50 weekly contribution, has received the “pot”, 10 weeks remaining

• 60 members, $12.50 weekly contribution, has not received the “pot” yet, 18 week remaining

Over the past year, she also obtained a $50 loan from a loan shark (related to the daughter’s surgery), and

another $150 loan from her aunt. She has paid off the emergency $50 loan shark obligation with a

donation from her daughter’s overseas financial sponsor. Terms of repayment for the loan from the aunt

are not defined and there is no explicit agreed interest payment.

Today, she is feeling the weight of the significant burden of loan interest and tongtin payments which now

comprise about 70% of her average household inflows.

DECISION TIME

Thida is not confident in her crop harvest potential due to the crop infestation, and her family is not able

to fill the gap. She does not want to disappoint her group and face future exclusion from tongtin clubs.

The loan shark and her tongtin will both be expensive in terms of interest cost relative to a microfinance

bank loan. Faced with defaulting on her payment for a Tongtin group, Thida takes out a new $80

uncollateralized 25-week loan with $4.50 weekly payments with the visiting MFI that has come to her

home in the village.

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QUESTIONS FOR DISCUSSION

1. Did Thida make the right decision?

2. Is the microfinance loan a complement or substitute for the informal Tongtin financing club?

3. What risks does the Tongtin participation pose to the client, and what can she do to reduce

those risks? Why do you think Thida continues to participate in the tongtin despite the risks?

4. What risks does the Tongtin participation pose to providers of microfinance services, and what

can microfinance providers do to reduce those risks?

5. What financial products in the formal sector is tongtin most similar to?

6. What are some of the reasons clients like Thida would use tongtin for savings or loans?

7. What financial products in the formal sector would be most appropriate to address Thida’s

various cash needs and why?

8. Are there other products, services, or actions that could have prevented Thida’s cash crisis?

9. How does the availability of multiple sources of capital impact client decision making?

10. How can Thida break the cycle of paying off existing loans with new indebtedness?

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EXHIBIT 1

Map of Cambodia

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EXHIBIT 2

Koh Krabei Village of Cambodia

Koh Krabei is situated in the southeast of Phnom Penh across the river from the city. Phom Koh Krabei

belongs to Prek Thmei Commune, Mean Chey District of Phnom Penh.

These village has daily gross domestic product of $2.58, which is favorable compared to half of

Cambodians living on lss than $2/day. During field research interviews in 2013, the team observed

political stability and good infrastructure, such as viable road and high access to electricity.

The villagers grows mostly jasmine, which supplies Phnom Penh’s ceremonial and religious needs.

According to an article by Phnom Penh Post (2009), Koh Krabei is famous for having many jasmine farms.

Most farms will sell their produce to wholesalers who go to the markets in Phnom Penh to sell them to

tea makers. However, each week most households would send a family member to sell jasmine wreaths

and ornaments in the markets or Pagodas. Jasmine is a crop that will provide fresh flower buds almost

daily, and it is closely tied to the culture of Cambodians.

Other crops include, papayas, bananas, longans, and oranges. During important events like weddings,

festivals, Khmer New Year, and Pchum Ben, where demand would exceed supply of jasmine flowers,

villagers can reap a very high profit.

Figure 2: Google Map of Phnom Penh

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Source: Field Research –

Description Koh Krabei

Population (2010) 5,191

No. of Chamkar farmer families

(2010)9

785

Main Occupation

(Commune level, 2010)

Long-term crops

Access to electricity

(Commune level, 2010) 97.11%

Small-scale food shop

businesses (Commune level,

2010)

31

Rice production per capita

(Commune level, 2010) 2kg/person

9 Chamkar land is land that is used to grow a variety of crops.

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EXHIBIT 3

MFI SECTOR IN CAMBODIA

Major MFIs in Cambodia Sorted by Loan Book Size:

Source: Mixmarket.org

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Lending methodologies

There are three main types of credit that is provided by MFIs in Cambodia – individual loans, solidarity

group loans, and community bank loans (Vada, 2010) (Kredit Microfinance, n.d.). The individual loan the

largest form of credit provided by the MFIs, but it typically requires collateral and guarantor to reduce the

default risk. They are first evaluated by a MFI credit officer, who interviews the client, his or her neighbor,

and village chief.

The second type of credit is the solidarity group loan, where the borrowers form groups to borrow money

together. If one person in the group defaults, the entire group is deemed as in default as well. The group

loan reduces the problem of adverse selection—where the MFI does not know if the client is creditworthy

and the problem of moral hazard—where the MFI cannot observe if the loans are put to good use or

carelessly frittered away (Ledgerwood, 1999). As a result, groups will now look for people they trust to

take the loan together, and also look out for each other to ensure that the loans are put to good use. Once

a group is formed, the credit officer will evaluate them and then conduct weekly visits to collect the

repayment.

The third type of credit is the community bank, which is usually formed in villages that are difficult for the

MFI to access (Ledgerwood, 1999). This product is very similar to the solidarity group loan, however the

loans are monitored by an association of village members and guided by a credit officer (Kredit

Microfinance, n.d.). The MFI would lend seed capital to the community bank, and all members would sign

a loan agreement to guarantee each other (Ledgerwood, 1999). Members will form small groups between

4 and 6 people and can form up to a maximum of 20 such groups (Kredit Microfinance, n.d.). The loan

cycle is 12 months and the loan amount increases with each successful completion of the cycle (Kredit

Microfinance, n.d.).

Competition and Over-indebtedness

The microfinance industry in Cambodia is very competitive given the number of institutions in the country

alone. Competition and limited reach of the Credit Bureau can give rise to clients with multiple loans.

Moreover, because of the competitive nature of the industry, the problem of over-indebtedness could

become a reality if there are no ways to keep track of everyone’s credit history. The Credit Bureau was

created in 2011 but not all loans are required to be reported as only registered MFIs need to report, so

effectiveness is still limited. In an interview with a microfinance practitioner, the list of credit history is

updated once a month and if the client is in need of a large sum, he/she could go to two or more MFIs at

the same time to obtain the loan and the MFIs would not know.

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The Cambodian Institute of Development Study looked at this question and gathered data regarding the

level of penetration and over-indebtedness, through eight microfinance institutions that represent 77%

of the borrowers in the microfinance industry, and 88% of outstanding gross loans (Liv, 2013).

Figure 3: Consolidated Village Data Source

Level of Penetration Levels of

Penetration

Number of

Villages

Percent of Total

Villages

Saturated >100% 914 6%

Very High Penetration 75-100% 1,260 9%

High Penetration 50-75% 2,444 17%

Moderate Penetration 25-50% 3884 28%

Low Penetration <25% 4780 34%

No Service 0% 791 6%

Grand Total N.A. 14,073 100%

The study selected 44 villages that had overlapping coverage from the 8 partner MFIs. From these villages

a random sample of 1,500 clients was selected from the total of 10,266 clients. In these villages, the report

measures over-indebtedness by taking the monthly installments on all business and household debt over

the monthly net income, which includes the revenue from business and household minus expenses from

business and households excluding debt expenses (Liv, 2013). They found that a majority (56%) of

borrowers were solvent, where their monthly debt repayments were 75% of less than their new monthly

income. 12% of the sample was considered “at risk” while 22% was considered “insolvent”. Another 10%

was not classified because they did not have their income data. The study confirmed that about a fifth of

MFI clients have obtained more loans than they can pay back.

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EXHIBIT 4

Aggregated Income June – November 2013 for Three Typical Jasmine Farmers in Koh Krabei

Below is based on field research carried was out by Jeremy Sze and supervised by Michele Costello

between June 2013 – March 2014 using the financial diaries methodology and in-depth household surveys.

Typical and referral sampling were applied to gather our respondents (Palys, n.d.). Observing typical

households will allow us to understand cash flows that could be representative of Cambodia’s rural

villages. Referral sampling enables us to reach households that are similar to each other.

Occupation Household Total

(US $)

Median

(US $)

Std. Dev.

(US $)

Mean

(US $)

% Zero

Week

Farmer Thida 1650.65 50.75 62.58 71.77 9%

Farmer Chenda 2514.85 102.50 79.26 109.34 9%

Farmer Ary 1364.83 38.38 53.44 59.34 13%

Source: Working paper “Financial Diaries in Cambodia”, Jeremy Sze, May 2014

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EXHIBIT 5

Range of Financial Service Providers

Source: New Microfinance Handbook Ledgerwood 2013

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EXHIBIT 6

Financial Service Needs for Different Livelihood Segments

Source: New Microfinance Handbook Ledgerwood 2013

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EXHIBIT 7

Additional Cash Flow Information for Thida’s Household

Below is adapted from field research carried was out by Jeremy Sze and supervised by Michele Costello

between June 2013 – March 2014 using the financial diaries methodology and in-depth household surveys.

Typical and referral sampling were applied to gather our respondents (Palys, n.d.). Observing typical

households will allow us to understand cash flows that could be representative of Cambodia’s rural

villages. Referral sampling enables us to reach households that are similar to each other.

Source: Adapted from field research (Sze, 2013)

Thida’s Household

2013, in Riel (R4000:$1) June July August September October November

Inflows

agriculture 388,000 304,500 1,235,300 540,000 1,091,800 859,000

other work/remittances 280,000 530,000 560,000 560,000 400,000 465,000

gifts 10,000 30,000 145,000 – 70,000 –

tongtin – – – – – –

loans 220,000 900,000 – – 1,400,000 –

TOTAL INFLOWS 898,000 1,764,500 1,940,300 1,100,000 2,961,800 1,324,000

Outflows

Food 315,000 329,900 455,500 322,800 242,700 559,400

farming inputs – – 5,000 20,000 5,000 –

utilities 22,500 87,500 66,500 67,500 24,600 22,500

bicycle/moto – 148,000 – – – 12,000

other sundry 24,000 98,000 53,500 18,500 67,000 133,300

gifts 58,000 74,500 41,000 28,000 . 105,000

education 108,000 55,000 50,000 – – 3,875,000

health – 38,000 30,400 25,000 2,000,000 8,000

tongtin 266,000 335,500 318,000 364,000 320,000 278,000

loans principal & interest 480,000 517,000 657,000 507,000 712,000 622,000

TOTAL OUTFLOWS 1,273,500 1,683,400 1,676,900 1,352,800 3,371,300 5,615,200

Net Cash Flow (375,500) 81,100 263,400 (252,800) (409,500) (4,291,200)

Stored food and rice used 63,000 55,000 110,050 25,000 96,200 122,000

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EXHIBIT 8

Characteristics of Cambodian ROSCAs called “tongtin” observed in small villages outside Phnom Penh

The below information is based on field research carried was out by Jeremy Sze and supervised by

Michele Costello between June 2013 – March 2014 using the financial diaries methodology and in-depth

household surveys.

Definition of ROSCA: “an association formed upon a core of participants who make regular contributions

to a fund, which is given, in whole or in part, to each contributor in rotation” (Ardner, 1964)

High Level Types of ROSCAs:

ROSCAs are defined by the manner in which they distribute funds to members. The four main types of

ROSCAs are as follows (Rutherford, 1999):

1. Prior agreement

2. Agreement at each round

3. Lottery

4. Bidding for the lump sum

The Cambodian tongtin observed in the study meets the definition of a “bidding” ROSCA.

Primary ROSCA characteristics observed for Cambodian Tongtin in villages outstide Phnom Pehn

Organizational Operational Risk Management

Formal/Semi-

Formal/Informal

How

formed?

Membership

restrictions

Size of pot Process to

award pot

Meeting

frequency

Underwriter? Screening

members?

Semi-formal.

registered with

village chief in

most cases;

leader is not

compensated but

documents the

group members

(and sometimes

also the rules of

the group) on a

paper signed by

members using

thumb print

Selfnominated

leader

recruits

and/or

approves

the players

Yes,

members

must be

approved by

leader;

members

can play as

more than

one player in

any game

with

permission

of leader

Symmetrical

(based on

consistent

contribution

per member

per week)

Finite, time

bound,

sealed

auction

bidding,

chaired by

the leader

(with no

third party

audit

function or

method)

Preagreed

regular

meetings

weekly,

bi-weekly

or

monthly

Leader acts as

underwriter

Yes,

members

must be

approved

by leader;

usually

referred by

another

player to

leader;

sometimes

must be in

a salaried

job or

married

Description of important characteristics:

• Time bound? Yes, term is based on number of participants and the pot is distributed at a regular

interval (weekly, bi-weekly, or monthly until all participants have received funds). The regular

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payment and conclusion of the ROSCA acts as an informal audit during the life and at the conclusion of the game

• Symmetrical? Yes, all members have a chance to bid for a consistent pot at a regular interval.

• Reciprocal? Yes, all members are either savers or lenders based upon redistribution of funds in the pot (contrary to pooling of funds where only a few members receive payment due to a specific event occurring and others receive nothing)

• Graduated payments? No, members pay the same amount weekly for the life of the game

• Leverage? Yes, members can participate as more than one player in the tongtin group

• Credit Screening of members? Informal. Certain tongtin groups require members to have a salaried job or be married; respondents indicated this was because it showed participants were able to pay into the group with regularity during the life of the game. More commonly, affinity groups such as groups such as neighbors, artisans or teachers played together.

• Pre-agreed Risk sharing? No, most members indicated the leader assumes the credit risk as an informal underwriter for all members.

• Leader compensated? No, however leader receives first round funding.

• Use of funds by members? Varies. School fees, business investment, household expenditure, purchase of equipment such as moto or water pump, health emergency funding, etc.P a g e 1 | 23

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DRAFT VERSION MARCH 2, 2016

TONGTIN OF CAMBODIA & MICROFINANCE: COMPLEMENT OR COMPETITOR

This case was written by Michele Costello, an Adjunct Professor at Baruch College, solely as the basis for class discussion and is not intended to serve as an endorsement, source of primary data, or illustration of effective or ineffective handling of a business situation. Names and certain other identifying information have been disguised or purposely omitted to protect confidentiality. Copyright © 2016, Michele Costello – Do not reproduce without written permission of the author .edu.

“I don’t know how much money I earned or spent last week, but I know that my expenses are higher than my income, so I borrow …I am so busy with tongtin activity. For all three groups I am in now it is R100,000 per week. I bid one time per week on each group…it is too much work to play everyday.”

– Thida, from Koh Krabei, Cambodia

It’s a hot day in Koh Krabei, Cambodia. Sitting on a wood bench outside her tin roof home, Thida takes a break from collecting Jasmine to drink some water and contemplate her situation. Her jasmine growing and gathering has produced steady income in the past, but now she is suffering from lost crop due to a pest infestation. In addition, the family has still not recovered financially from the cost of her daughter’s emergency stomach operation in October and she just paid her children’s university fees in November. Gifts from friends and family (a neighbor, a foreign financial sponsor, her daughter who is working in the city, and local political party) have only covered a portion of the family expenses, and she still increased her debt burden to cover those costs. She is now making multiple payments on microfinance loans and informal community savings and loan clubs called “tongtin” each week. She will see the leader of her “tongtin” savings and loan club will tomorrow, but she does not have the funds for her required weekly contribution. As she ponders her options, a representative from a local microfinance institution approaches her home to discuss a new lending program.

BACKGROUND

WHAT IS MICROFINANCE?

Microfinance refers to the provision of a wide range of financial products and services to those who are excluded from the formal finance sector. According to 2011 data from the World Bank, an estimated 2.5 billion working-age adults globally, or more than half of the total adult population, do not have access to formal financial services (Ledgerwood, The New Microfinance Handbook, 2013, p. xvii). Examples of microfinance products and services include loans, savings, insurance, payment transfers, skills/training, and social benefits. Services are provided by microfinance organizations known as Microfinance Institutions (“MFIs”) which are structured in a range of financial and non-financial institutions operating non-profit and for-profit models. The industry’s key goal is to expand financial access to excluded

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segments of society including marginalized populations and those at the bottom of the economic pyramid.

Some industry observers have called microfinance a “movement that envisions a world in which as many

poor and near-poor households as possible have permanent access to an appropriate range of high quality

financial services”1.

While microfinance activity has roots in governmental and non-governmental organization (“NGO”)

economic development activities over many decades, microfinance in the form that it is known today took

root in the 1970’s through pioneering organizations such as ACCION International, Grameen Bank, and

Opportunity International. These organizations sought to recognize the unique challenges of the poor

and redesign the delivery of appropriate financial products and services to this population. While many

organizations initially began with lending programs that targeted specific observed needs in the

communities in which they worked, the MFIs often expanded to provide other services either to break

down barriers to access, protect clients, and/or meet other short and long term client cash flow

management needs. In this way, the industry has evolved from a lending-centric to a diversified financial

services focus. Microfinance gained global prominence in the mid-2000’s with the 2005 UN Year of

Microfinance campaign and the 2006 Nobel Peace Prize award to Mohammed Yunus and Grameen Bank

for their work in microfinance and its impact on economic stability and peace.

Today, there are thousands of known MFIs globally servicing over 100 million borrowers and savers, and

the market has been experiencing a double digit growth rate. A of 2013, the global average loan size per

borrower is roughly $2,000, but loan sizes can range from $20 to $20,000 depending on the geographic

location and sophistication of the client. (Symbiotics, 20132 ; mixmarket.org)

MICROFINANCE IN CAMBODIA

Cambodia is located in South East Asia, and shares its borders with Laos, Vietnam and Thailand. It is

divided into twenty-four provinces and has a population of approximately 14.8 million people, with 80%

of its population living in rural regions (World Bank, n.d.). With a per capita GDP of US$ 944, Cambodia is

one of the poorest countries in the region (World Bank, n.d.) Cambodia is a partially dollarized economy

(Kang, Is Dollarization good for Cambodia?, 2005), due to periods of Vietnamese and United Nations

administration control following the defeat of the Khmer Rouge military regime. As a result, many

individuals and institutions use the Riel (introduced by Vietnam, symbol “R”) and the US dollar (used

during the period of UN administration, symbol “$”) interchangeably. The main sectors of its economy

are agriculture, garments, tourism, and construction (Kang, 2005).

Cambodia’s microfinance industry began in 1990 (Cambodia Microfinance Association, n.d.) to address

poverty and lack of financial access. The country has one of the most developed and competitive

microfinance sectors in the world due to its recent relative political and economic stability coupled with

1 Robert Peck Christen, Richard Rosenberg & Veena Jayadeva. Financial institutions with a double-bottom line:

implications for the future of microfinance. CGAP Occasional Paper, July 2004, pp. 2-3

2 “2013 Symbiotics MIV Survey: Market Data & Peer Group Analysis;” Published by Symbiotics Group; 2013

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the large unmet financial need and the large presence of NGOs and aid organizations operating in the

country following the rule and genocide of the Khmer Rouge regime. In the 1990’s, international donors

and non-governmental organizations began launching non-profit micro-credit projects within rural

development programs which became the microfinance institutions we see today. As of 2012, there are

83 registered financial institutions in Cambodia (International Monetary Fund, 2013). According to

Cambodia Microfinance Association, an industry trade organization, microfinance institutions3 serve 1.9

million people (Cambodian Microfinance Association, n.d.).

Microfinance is part of the formal financial sector and is a regulated activity in Cambodia. When the

government established the Central Bank Law of 1996, it gave the National Bank of Cambodia,

responsibility to regulate and oversee the microfinance sector (Vada, 2010). In 2000, the National Bank

of Cambodia issued regulations regarding the classifications for Microfinance Institutions (Vada, 2010)

based upon scale and scope. The largest MFIs are required to be licensed by the central bank4, and are

regulated in a similar manner to commercial banks with the exception of a lower capital requirement

(Vada, 2010). Medium-sized MFIs, on the other hand are required to register with the central bank, and

are subjected to less stringent rules – less complicated reports (Vada, 2010). Lastly, the smallest MFIs are

not regulated or supervised because of the high operating costs of such work (Vada, 2010). These licenses

pertain to the ability to issue loans. In order to take deposits, there is an additional set of requirements

testing scale and sustainability to obtain a deposit-taking license.5 The National Bank of Cambodia does

not impose restrictions on interest rates charged by MFIs, and therefore MFI rates are set by market

forces. However, rates charged by MFIs in Cambodia have been documented by researchers as two to

three times lower than the interest rate charged by community loan sharks (Vada, 2010). Therefore, the

launch of the microfinance sector has provided a source of low cost loans to the rural population.

3 A microfinance Institution is defined by the National Bank of Cambodia, as having a loan portfolio outstanding

equal to or greater than $25,000, or have mobilized savings of $250 or more, or having 100 depositors or more.

4 37 of the 83 MFIs are licensed by the central bank (National Bank of Cambodia, n.d.); 7 of the 37 subset of MFI

are licensed to take deposits

5 Institutions need to have held the MFI license, as described in the previous paragraph, for three years, and have a

good and sound financial condition judged by the central bank’s internal rating system for at least two years,

before they can apply for this license. In addition, these MFIs need at least KHR 10,000 million (USD 2.5 million), a

Management Information System, to conform to the chart of accounts, and have a sustainable profitability for two

consecutive years.

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The country also has a high saturation of microfinance institutions (Liv, 20136). Because of the high level

of microfinance activity and competition in Cambodia, the potential for clients to receive multiple loans

from different MFIs is high. In 2011, the Central Bank created the Credit Bureau of Cambodia, which

requires registered MFIs to report lending activity and thereby develop individual credit history profiles

for clients (Credit Bureau Cambodia, n.d.). There are still limitations, as reporting for non-registered MFIs

and informal sources or credit are not disclosed and the Credit Bureau therefore maintains only a limited

picture.

Figure 1: Consolidated Village Data Source

Level of Penetration Levels of

Penetration

Number of

Villages

Percent of Total

Villages

Saturated >100% 914 6%

Very High Penetration 75-100% 1,260 9%

High Penetration 50-75% 2,444 17%

Moderate Penetration 25-50% 3884 28%

Low Penetration <25% 4780 34%

No Service 0% 791 6%

Grand Total N.A. 14,073 100%

Source: Cambodian Institute of Development

TONGTIN OF CAMBODIA – HISTORY AND STRUCTURE

For centuries, people have formed informal groups to pool their money for purchase of goods, savings, or

insurance in the absence of formal financial systems. In the microfinance industry, these informal

associations where a core group of participants make regular contributions to a fund which is distributed

in whole or in part to each contributor in rotation as a “rotating savings and credit association” or

“ROSCA”. The earliest documented forms of saving and loan clubs originated in Italy in the 17th century

under the name “tontine” where members had an opportunity to save or borrow through their

contributions to the group fund. The tradition of community based financial self-help groups continues

today under the names “tontine” in Asia, “susu” in Africa, or “tandas” in parts of South America. While

their characteristics can be quite varied, a typical ROSCA involves a self-selected group where members

agree to contribute a fixed sum at regular intervals (daily, weekly, monthly, etc.) and then distribute the

“pot” at each interval using a pre-agreed system of distribution. The primary methods for distribution of

the “pot” are use of a pre-determined order, member vote at each interval, lottery, or a bidding process

6 Liv, D. (2013). Study on the Drivers of Over-Indebtedness of Microfinance Borrowers in Cambodia: An In-depth

Investigation of Saturated Areas. Phnom Penh, Cambodia: Cambodia Institute of Development Study

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(Rutherford, 19997). The group is organized and managed by a leader who typically receives the “pot”

first and then collects and distributes funds at each group payment interval. Participants could be

recruited through workplace connections, community connections, an affinity group, or through a friends

and family network. The ROSCA will continue for a number of intervals equal to the number of

participants so that each member has an opportunity to win the “pot”. Each member has an opportunity

to receive the “pot” based on the pre-agreed system, and members can win the “pot” only once during

the cycle. (Ledgerwood, 19998) Variations exist where members elect not to receive the “pot” during

the cycle, and instead receive the “pot” at the end of the cycle because they intend to use the group only

as a mechanisms for savings. In a simple non-bidding ROSCA, members will only receive an amount equal

to the sum of the agreed group contribution, and effectively receive zero or negative interest considering

the time value of money. In a bidding ROSCA, the potential pay-in per week and pay-out of the pot varies

and the members have an opportunity to earn interest or borrow at variable rates based on bidding. All

ROSCAs are trust based groups that rely on peer pressure to enforce ongoing participation in the system.

If members drop out, future payments to players who have not received the pot are jeopardized. In

addition, there are other transaction costs associated with ROSCAs such as member transportation or

opportunity cost to attend the regular meetings or the leader’s costs for refreshments or other

organizational aspects of hosting the meeting. In most cases, there is also a social significance assigned

to belonging and participating in the group.

The “tongtin” of Cambodia is derived from the term “tontine” and typically follows the model of a

“bidding” or “auction” ROSCA. Under this system, the leader recruits a group of participants to start the

fund, establishes a periodic contribution amount, and sets a regular meeting interval for future collection

and auction of the pot (for example weekly). The leader receives the “pot” first, and usually circles the

fund because he or she has an urgent cash need (purchase of a loom, children’s school fees, a large health

expense). In the subsequent weeks, members will continue to make contributions which are variable

based on a sealed bid auction process run by the leader. Members submit their bid to the leader on a slip

of rolled or folded paper, and the leader selects the best bid to win the pot. The best bid will be conveyed

7 Rutherford, S. (1999). The Poor and Their Money: An essay about financial services for poor people.

Manchester,UK: University of Manchester.

8 Ledgerwood, J. (1999). Microfinance Handbook. Danvers, Massachusetts: World Bank.

Participant Cash Flow: ROSCA with lottery allocation

Week 1 2 3 4 5 6 7 8 9 10 TOTAL

Payment to Leader $100 $100 $100 $100 $100 $100 $0 $100 $100 $100 $900

Payout to Participant $900 $900

Payout minus contributions: $0

Assumptions: 10 member ROSCA, $100 weekly contribution, player wins the pot in a lottery week 7

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as an interest figure, which is actually the discount the member is willing to receive that week off the face

value of the typical contribution amount. For example, in a tongtin with a weekly payment of $100, a

winning bid of $15 means that the members contribute $85 per person that week instead of $100 per

person to the winning bidder. In the case of a tie, the members must bid again until a winning bid

emerges. Once a bidder has won the discounted pot, he or she must contribute the full face value of the

$100 weekly payment regardless of future winning bidder figures. Members can bid every week until they

win, but are not required to bid at any time. In this way, members who do not win the pot earn interest

(in the form of reduced weekly contributions but a full payout at the end) which varies per period based

upon the value of the winning bid. The winner’s interest rate (or the discounted pot sum) is also variable

based upon the competing bidders in any given week. Not all members are required to bid, and there are

net savers and net borrowers in the tongtin system. Due to bidding it is impossible for participants to

know their weekly contributions, savings interest rate, or borrowing cost ex-ante , or if they will ever be

successful in winning the “pot.” It is also the case that tongtin groups can be quite large, with over 100

participants. While conducting field interviews in Cambodia for this case, a few participants mentioned

that their groups were so large (over 200 members) they could not keep track of where they were in the

cycle or when these tongtin groups were ending. Many members do not record the payments they make

or the specific amounts and rely on trust that the system is working. For long-running groups, leaders

have been known to conduct annual book reconciliations or audits to maintain the integrity of the tongtin

finances. The risk of defecting members is also real, and in field interviews for this case study, participants

to







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