Pakistan is primarily a consumption-driven economy where the savings rate is just 4.5 per cent of the gross domestic product. This number puts us well behind the South Asian average of 28pc or the low-income group’s 23pc.

However, these statistics often miss the massive informal economy that most people in the country turn towards due to the dismal reach of existing financial institutions.

Rotating savings and credit association (Rosca), or committee as they are better known, is a group of individuals who agree to meet for a defined period to save and borrow together, a form of combined peer-to-peer banking and peer-to-peer lending.

According to research by Oraan, around 41pc Pakistanis saved via committees (or Rosca), whereas Karandaaz puts that figure at 34pc. Assuming the informal economy accounts for roughly 30pc, as suggested by research from the Pakistan Institute of Developing Economics, it translates into annual committees of Rs4 trillion at base prices, using conservative inputs.

While this back-of-the-envelope calculation is far from scientific, it helps contextualise how big the informal savings market really is. Everyone from a widow looking to save up for her children’s education to young adults trying to save up for their marriage, committees are what they turn to.

Back-of-the-envelope calculations suggest that the value of annual committees is Rs4 trillion at base prices, using conservative inputs

This phenomenon is not exclusive to Pakistan. According to a note by Middle East Venture Partners (one of the investors in Bykea), “the global market is largely untapped and ripe for disruption with 2.4 billion people using money circles through traditional channels.”

They recently participated in the Egyptian digital committees’ startup MoneyFellows’ $31m Series B.

Apart from the traditional financial institutions’ general apathy towards the customer, committees appeal to an average Pakistani for several reasons: they are a community-based instrument with some level of flexibility and there is no interest involved.

Most importantly, it helps them manage cash flow better due to habitual change. For women, the product enjoys particular popularity since the former financial services are largely inaccessible.

However, since committees are primarily cash-based with virtually no money trail involved, it poses massive risks, as we saw recently when a girl, Sidra Humaid, who ran a network of committees through social media, defaulted on Rs420m of payments.

The extent of fraud involved probably even puts Anuradha from Lakshmi Chit Fund to shame. Hundreds of families lost their hard-earned money and, with that, the ability to pay for the university admission fee or a long-due home renovation. Due to the informal nature, courts may not be a viable option either.

Even beyond this, committees have flaws by design, only amplified by Pakistan’s macros. For instance, the person receiving the first lump sum amount will always be at an advantage since their instalments in the subsequent months would be worth less due to both inflation and rupee depreciation. The recipient of the last payment would see the amount’s purchasing power eroded substantially by the time they get it.

Moreover, due to the community-based nature of the product, the risk of network defaulting is higher as people of usually similar risk profiles would be pooling in their money.

For example, if employees from an organisation have running office committees, delayed salaries or layoffs within the organisation would lead to a bad equilibrium, creating losses for the rest of the group, often resulting in default.

However, there are ways to address some of those challenges. First of all, to (partially) protect your lump sum from depreciation or devaluation, you can enter a committee with a duration of up to 10 months. Given Pakistan’s macros of late, you’d still lose money in real terms but to be fair, that’d most likely be the case in any other instrument as well, including the risk-free government papers.

In fact, contrary to popular perception, there are certain ways to further alleviate the inflation problem. Digital committees have an option of gamifying the experience by rewarding good payment behaviour through loyalty programs and/or brand partnerships to provide discounts on utilities-based services and products.

Secondly, digital committees help create a trail of money which, coupled with a centralised authority (the platform itself), brings in accountability and recourse in the event of a default. The receipt and/or ledger helps with basic accounting in committees creating transparency for people within the group.

The third benefit of digital committees is the security factor. The participant has to go through a know-your-customer and credit check process to make sure there is no fraudulent behaviour that could negatively impact the group, along with the participant’s ability and willingness to pay to create an overall environment for responsible finance.

It’s not uncommon to see finance professionals dunk on committees with a typical sniff of arrogance, and from a purely mathematical viewpoint, the arguments are not without merits. But the reason an average Joe turns towards committees instead of equities or funds is due to the incompetence of those very same finance professionals.

If they had spent a little more time on making financial services accessible and less on leaching off government bonds, then maybe people wouldn’t have turned to the likes of Sidra Humaid.

Mutaher Khan is the co-founder of Data Darbar and Halima Iqbal is the CEO of Oraan

Published in Dawn, The Business and Finance Weekly, December 12th, 2022

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