In Pakistan, Savings Circles Beat Banks

Ballot committees force citizens to save, but pay no interest

In Pakistan, Savings Circles Beat Banks
Tahira Bibi and child with her new microwave oven
Photograph by Asim Hafeez for Bloomberg Businessweek

Ali has been selling wall clocks and wristwatches in a crowded Karachi market for 15 years. He’s been participating in savings circles with fellow shopkeepers for just as long, and has used the proceeds to buy a car and acquire a new store.

Now he’s a few months away from getting 400,000 rupees ($4,100) from a savings group of 16 shopkeepers into which he’s been paying 1,000 rupees a day for almost a year. He plans to put a down payment on an apartment. “This system is flawless,” says Ali, 35, who goes by one name. “You can never save this way without this binding commitment of making payments every day or every month. At banks there are hassles and procedures that waste time. This is simple. The organizer comes to collect the money himself, and because of the trust element, it’s a given that we’ll get the money.”

Millions of Pakistanis save billions of rupees in informal, interest-free savings circles called ballot committees—popularly known as BCs—run by housewives, students, office workers, shopkeepers, even high-society ladies. Each member of a group of trusted friends or relatives contributes the same sum daily or monthly to a pool for a predetermined length of time, usually one year. Through a ballot, each participant is allotted a number indicating his or her turn. Every month, one participant gets the pool total. Everyone on the committee keeps contributing until each member gets a pot of cash.

The organizer, who doesn’t charge a fee and collects contributions from each participant, often takes the first installment. Nafisa Arif, a Karachi housewife, has run BCs for 12 years. She’s handling four BCs involving 110 people, all of them relatives. “I only run committees in the family,” she says. “Otherwise there’s the danger someone can run away with the money. That’s no fun.”

No one knows the origins of savings circles, but they’re found in Africa and Latin America as well as Asia. “This system has existed in South Asia as long as I’ve known, and it was started by low-income women who were financially insecure,” says Ashfaque Hasan Khan, dean at the business school of the National University of Sciences & Technology in Islamabad. “The purpose was to hedge against a problem or to pay for a son or daughter’s wedding.” In India a similar savings plan, called a chit fund, flourishes. The big difference is that India’s savings circles, after years of operating on their own, are now regulated by the government.

No estimates exist of the total amount of the funds collected by the committees. In Karachi alone, the All Karachi Traders Alliance Association estimates 10 million rupees pour into ballot committees on a daily basis. “The size and volume of the circles is on the rise because inflationary pressures mean people need more cash now to do the same things,” says Dean Khan of National University. Inflation in Pakistan is close to 8 percent. While the official savings rate is 10.7 percent of gross domestic product, it is probably higher thanks to the committees.

Another reason the ballot committees are flourishing is the low level of financial literacy in Pakistan and the reluctance of ordinary Pakistanis to take part in cumbersome banking procedures. “Coverage by bank branches is fairly limited, especially in rural areas,” says Sakib Sherani, chief executive officer at Macro Economic Insights, a research firm in Islamabad. “The ballot committees offer greater flexibility and avoid the hassle of traveling to a bank, keeping documentation, and paying service charges.”

Only 14 percent of Pakistanis use a financial product from a formal financial institution, according to a 2009 World Bank report. That compares with 48 percent for India. But when informal financial networks such as the BCs are taken into account, 50.5 percent of Pakistanis have access to finance, according to the report. “Committees function in a very efficient way. We’ve yet to hear of a default, and they’re simply based on trust,” says Khan. “There’s also a psychological impact because it’s a forced saving: You pay and forget about that payment and then wait your turn. Then you get money in bulk with which you can do many things.”

Nadeem, a laundry man in Karachi, started paying 3,000 rupees a month into a committee where each member eventually gets 160,000 rupees. Nadeem is looking forward to his payout so he can put a new roof on his house. “These days expenses are endless, so there’s no other way to save,” he says. “Money just gets finished. This is the only means we have.”

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