Committees: formal financial system may have ignored it, but that's not the way forward

Over the past week, a story about a woman who ran hundreds of committees has made headlines. She claimed that she was unable to make payments to members participating in her committees, and amassed a debt of Rs420 million.

The story has led to many criticising committees as a tool for saving and borrowing money, calling out the inefficiency and instability of the mechanism. But the question remains, why are committees so deeply entrenched in the socio-economic fabric of our society? And what demand and supply gaps exist in the formal markets that lead to committees being so widely used by Pakistanis across gender, age, occupation and class.

We need to delve deeper into why regulation and formal institutions have failed to solve this problem. They are the very tools that can bring those on the fringes of the financial system into the formal economy.

ROSCAs are an age-old method of saving in numerous communities in South America, Africa, South East Asia and even the US, where each community has inscribed its own name to the method.

In Pakistan we call them ‘committees’; committees have remained an informal space where individuals come together in communities to solve money problems.

A Karandaaz study in 2019 revealed that 36% of the people in Pakistan save money, but only 4% of those save money with a formal financial institution, 33% save through committees. 60% of the household financial needs in Pakistan are catered through informal social channels and billions of rupees are circulated via committees in the economy.

While men play the role of the primary breadwinner in the majority of households across Pakistan, women are the budget ministers; managing household expenses and saving for familial needs such as education, children, weddings and large ticket size household expenses through committees.

However, their ostracisation and exclusion from the formal financial system in the country has led to a reliance on informal mechanisms to raise capital, save and borrow.

While at their best, committees leverage social capital to ensure financial security and recurring payments by members in a pool, at their worst, committees can lead to ponzi schemes, predatory scams and even bankruptcy.

Committees remain deeply entrenched in the socio-economic fabric of our society, therefore, while they receive criticism for being inefficient, we also need to understand how well they overcome the gaps in the financial market.

The scam around an informal committee that made rounds in Pakistan over the previous weekend did not happen in isolation. It was a failure of formal financial systems in the country to provide responsible access to capital and address the lack of financial literacy across the board.

There exists a vast gap between the demand for capital and the vehicles available to fulfill that demand. We have seen some powerful stories flooding the internet building a case for committees and how they have helped individuals achieve their financial needs.

The problem with traditional committees is that they are purely unregulated and individuals running them have archaic procedures in place for logging payments.

There is no way of keeping track of payments. Word of mouth is the only mode of communication leaving people helpless in the event that someone defaults. There is a need for the process to be digitised and regulated so that each individual participating in a committee has access to a larger pool of people, not just people in smaller communities, there needs to be an engine in place that logs payments, records financial transactions and holds people accountable.

There is a need to bridge this gap. Efforts need to be made to formalise this practice and provide an avenue to women to help ease their financial pressure.

Women need to be introduced to the world of credit scores and financial literacy while allowing them to access money simply in the way they already know best, but without the hassle and the fear of the unknown.

There need to be checks in place deterring fraud and ensuring each transaction has a paper trail.

The article does not necessarily reflect the opinion of Business Recorder or its owners

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