D+C Development and Cooperation (No. 1, January/February 2001,
p. 21-22)

Local tontines in Cameroon, small, informal savings and loan associations, are proving to be still the main grassroots financing system. The people handle about 90 per cent of their financial transactions through them. By comparison, the formal and semi-formal finance sector, meaning commercial and savings and loan banks, achieves a volume of only about 10 per cent of national loan business. But the tontines are of limited use for long-term investments and probably have a negative impact on durable economic growth. Jean-Marc Sika and Balz Strasser describe a new system being tested by a village cooperative in Bansoa which is aimed at closing this gap.

Cameroon has a population of 14 million, of which 7.5 million are economically active. To date, about 700,000 bank accounts have been opened, divided into 250,000 business and 450,000 private accounts. A total of 800 savings and loan cooperatives with 250,000 members operates in the semi-formal finance sector. Only about 10 per cent of the economically active population is reached via the channels of these two groups of finance institutions. The majority of the people obtain their loans in the informal finance sector. This sector consists of private moneylenders, informal traders and the tontines. What are tontines and what significance do they have for the country's economy?

Difficult definition

Due to their hybrid nature - a mixture of social and financial functions - the tontines are difficult to define. Typically, people who get together in these savings and loan associations feel bound to each other in some way. There are family and neighbourhood tontines, and others among craftspeople and farmers. Common relationships or interests are in the foreground. That strengthens social control and ensures that the tontines work.

The tontines in Cameroon can be classified as two types, both of which have variants. Despite the already marked differences among them, new variants arise all the time. Their ability to adjust to constantly changing social conditions and the inexhaustible imagination of their promoters bring about ever new forms of tontines.

The first tontine type is a rotating savings system. The members of these tontines meet at fixed intervals, usually weekly or monthly, and pay in a certain sum of money agreed at the beginning of the round. The total amount collected is loaned to a different member each month. From that moment on there are two common variants. In the first, the sequence of the members who receive the money is determined in advance by consensus. The number of the members produces the number of the loan periods and defines the length of a loan cycle. An equal amount of money is distributed each month, free of interest.

Loan auctions

In another variant of this type of tontine, the money collected is auctioned and all members of the current round who have not yet received a loan may bid for it. The money goes to the highest bidder. The 'profit' made in this main money market is then divided into small amounts which also are auctioned. The money from this secondary market is treated as short-term loans which must be repaid, together with interest, within a few weeks. If the amount of money from the secondary market is large enough it is transferred to the main market and offered in the subsequent tontine round. This means that every member wins a 'free' round. The tontine ends as soon as all members have been paid once. The loans of the secondary money market are collected in the last round and distributed equally to all members, and a new round can begin. Both variants of this tontine type are oriented on savings.

The second tontine type is loan-oriented. Pay-ins are not fixed in advance, but depend basically on what the members can afford. The money collected is similar to a joint fund, which is available to individual members as a loan stock. At every tontine round repayments and new contributions are divided into packets of money whose amount depends on the number of members taking part and the level of loans they seek. An arbitration body is often essential to satisfy all members. In this case the loans have a shorter term, usually one month, and interest is set at 5-10 per cent per month. The tontine cycle ends when the term set by this round matures. This can be in August, when the aim is to fund the costs of children starting school, or in December, to cover the extra expenses of celebrations to mark the end of the year. At such fixed times the tontine pays out the members' savings, plus interest earned, which depends on the amount saved and the term of the loan. Since both types of tontines have complementary roles (the building up of investment loans or savings), both often can be found in interplay within one group.

Strengths and weaknesses
of tontines

For the majority of the people, who have no access to the formal banking system, the tontines' savings and loan functions are a necessary alternative. They provide a large section of the population with financial services, and their members can better manage their own cash flows over a year or more. Also, because the tontines are self-administered they can be adjusted at any time to the changing needs of individual members. Against a background of great economic and social insecurity, this flexibility is very important and certainly one of the tontines' success factors. Another positive feature of the tontines is their high repayment rate. This is the result of a system based entirely on the mutual trust of the members and doing without collateral which would exclude many people. The network of social relationships in which the actors live is structured in such a way that they depend on the help and solidarity of each other. So it is in every member's interest to pay in the fixed sums regularly and repay loans on time. If they do not, they risk exclusion not only from their own tontine but from the whole system. And no-one can afford that.

But the tontines also have some weak spots which preclude using them as a means of financing the investment needed for Cameroon's economic development. One of their first weaknesses is that they cannot convert their short-term savings stocks into long-term loans, which, incidentally, is also a still-unresolved problem in the country's formal bank sector. One obstacle is the shortness of the tontine cycle. A second problem linked with that is the low level of the loan sums, and finally the high interest rates are not an incentive to use tontine loans to finance long-term projects.

Only short-term loans

The limit on saving is due mainly to the duration of a tontine's cycle, which is determined by the number of its members. The tontines' institutionalised life of a maximum of 12 months means they cannot finance longer-term projects. That is especially so since all their accounts must be balanced out to zero at the end of every round. Savings plus interest are paid out to the members, and borrowers must acquit their loans by that deadline. Only then can the next round begin.

If one wished to make greater investments it would in theory be possible to accumulate the savings of various tontines until the required amount was available. One could also think of carrying forward repaid sums into the next round. But the time-gap between the end of one round and the beginning of the next is the main problem here. During this 'downtime' the people have the cash in their pockets, with all the well-known consequences. In the social context of Cameroon, it is often impossible to keep the money intact until the next round begins.

The terms of the tontine loans present a similar problem. The repayment period of one to a maximum of two months allows only investments which also pay off in a short time. This means the loans are attractive mainly for financing short-term and mostly speculative activities and not for long-term productive projects. Another weakness of the tontine as a loan instrument is the high cost of its credits at 5-10 per cent per month. One reason for that is that it has always been done that way, and another is that there is still a certain risk in being a member of a tontine.

Assuming that development of Cameroon's rural regions is not possible without the existence of local and long-term loan funds on affordable terms, the money available by means of the tontines is insufficient. That limits markedly the production capacity of the poorer people, and particularly that of the women.

An approach to a solution:
build bridges and use synergies

The Caisse Populaire de Banéghang, a savings and loan cooperative in Bansoa, a village in West Cameroon, has been testing a new approach since 1999. It is developing a new type of loan system that links the traditional tontine with the classic loan structure of a semi-formal finance institution. The idea is to combine the advantages of the proven tontine system - flexibility, solidarity, self-responsibility and group drive - with the attractive terms of the loan cooperative, above all in longer and more favorable loans.

Members of a cooperative who wish to take out a loan must provide collateral. This can be a parcel of land, or a well-known person can act as guarantor. But this system is disadvantageous for women in particular because for cultural reasons they hardly own any land, especially in rural regions. To remedy this shortcoming, the Caisse is developing a loan system for the village women's groups that are organised in tontines. The basic idea is that the tontine as a group will be an active member of the cooperative and thus have the usual rights and duties of membership. The first obligation is regularly to make a savings deposit into the tontine account at the Caisse. This account will accumulate during the tontine round by means of the regular deposits of its various members. The tontine group will then be able to apply for a loan from the cooperative. Before then, the Caisse's management will help every tontine member to draw up their own investment plan within the framework of their personal opportunities for development. Every member will be able to decide for themselves in which sector the money is to be invested. The total sum of the planned investments will then be compiled in a portfolio. The tontine will now apply for a loan matching the value of the portfolio, and the money allocated will be distributed among the group according to the agreed investment plans. The repayment period is usually 23-36 months because Cameroon has no institutions that bear the risk of longer-term loans. At every tontine meeting all members pay in the redemption instalments on their loans, and the total sum is paid to the Caisse.

The uniqueness of this system is that it is not the individual members that are indebted to the cooperative, but the tontine as an institution. The members incur personal debt to the tontine, as before. The social pressure and marked solidarity within the tontine encourages every member to pay his or her instalments on time. That means there is no need for the sureties usually required for a loan from the cooperative. There is trust in a traditional system that is anchored strongly among the local people and has over decades guaranteed high repayment rates. But the real advantage of a link with the cooperative is both the level and term of the loans and their favorable price. The interest rate is 20 per cent per year (1.8 per cent per month), of which 18 per cent is repaid to the Caisse and 2 per cent is set aside for the long-term building up of a guarantee fund. Every member can now invest in projects which could not be financed with the meagre funds from a traditional source such as the tontine.

The following example should explain these advantages. A woman farmer who wants to buy organic fertiliser for her maize field has to pay F CFA 18,000 for it. Her maize crop takes three months before it can be harvested and a further three months until it has dried and can be sold. If she borrows the money from a tontine she has two problems. First, the interest rate of at least 5 per cent per month is too high for her, and second she must repay the loan within two months, before her maize can be harvested. That means that in order to be able to repay the first loan she must take out another, which usually costs even more. This is not an ideal solution. But backed by the guarantee of her tontine she can borrow what she needs from the cooperative and has six months in which to repay the loan in instalments. Every month she pays F CFA 3,000 (18,000:6) plus 1.8 per cent interest into the tontine. Even with this solution she must begin to repay the loan before she earns the profit from her maize crop, but since the monthly instalments are low she can cover them out of other income.

Every tontine group should, however, continue with their traditional activities, for although tontine loans are not suitable for long-term investments that does not mean they should no longer be considered for other purposes. On the contrary, depending upon the sector involved it can make sense to take out a short-term expensive loan to finance some speculative business. And against a background of a lack of liquidity and high transaction costs it is also useful to be able to cover important, short notice expenditure.

Jean-Marc Sika is a financing specialist and head of the Productive Credit and Women in Development Programme (PCWID) of the Netherlands Volunteers Foundation (SNV) in Bamenda, Cameroon.