In economies where financial inclusion is low, ROSCAs (Rotating Savings and Credit Associations) are a prevalent mechanism to save money informally. ROSCAs rely on social networks (friends and family) to facilitate credit and financing needs for individuals or even small businesses. They consist of a group of individuals who pool their money into a common fund on a monthly basis. A single member (chosen on the basis of a lottery or financial need) takes a lump sum at the beginning of each cycle. The cycle lasts until each participant has received the pool total.
In Pakistan, the system is usually known as ballot committees or BCs. (Also known as kitty parties among the more affluent). It is the most common means of saving, especially among middle and low income groups as well as housewives, students, professionals and small traders, who swap their limited savings for a lump sum for a variety of purposes, such as buying household goods, raising money for weddings, preparing for unexpected social occasions or their children’s education.
These committees are based on trust, as most members know each other, so there are few chances of default; the social connections acting as a guarantee – although there can be disagreements or even fraud at times. Moreover, for a committee organiser (responsible for keeping track of transactions and payments), record keeping becomes difficult as the group size increases.
Keeping the above in mind, earlier this year, Halima Iqbal and Farwah Tapal launched Oraan (a fintech start-up) with the purpose of helping to streamline committees and ease the record keeping process. The longer term purpose is to eventually bring people into the formal economy by making financial services simple and accessible.
“Oraan’s objectives are to provide members with the right tools and information so that they can make better and more informed financial choices for themselves.”
A former investment banker and a consultant for few Canadian banks on fintech products, Iqbal moved to Pakistan in 2017 and began looking at the financial space.
“I kept on thinking about how people save, and what the mechanisms are for borrowing and why Pakistan’s savings-to-GDP ratio is so low.”
As per the State Bank of Pakistan’s data, Pakistan’s savings-to-GDP ratio stood at 12% in FY 2016-17, 10.4% in FY 2017-18 and 10.8% in FY 2018-19. Furthermore, according to a study by Standard Chartered Bank, an emergent affluent Pakistani saves 14% of his/her monthly income, which is very low compared to most other countries. The reasons why people are not saving include insufficient funds, difficulty setting financial goals, preference for immediate term spending and generally low interest rates.
In Iqbal’s opinion, this data only reflects formal savings made through banks, insurance companies, or mutual funds. Pakistanis do save, she says, but they do it informally, largely through committees, in addition to the age-old practice of keeping cash under the mattress. (According to the 2017 Global Findex Report by the World Bank, only 21% of the population disposes of an account with a financial institution while the corresponding figure for the rest of South Asia is 68%).
According to Iqbal, the main reason why people prefer informal means of savings is a lack of financial inclusion, which she says implies a lack of money management skills, financial alternatives and low literacy levels.
“Eighty-six percent of the population does not have access to financial services and most are reluctant to use them because of issues such as accessibility, trust and simplicity. If people do not understand how to interact with a bank or what saving in a formal economy can do for them, the chances of them opening a bank account are really low.”
Given the lack of data on informal savings, Oraan undertook a research study, based on a sample size of 2,000 people across urban centres (corporates, vocational institutes, hospitals, commercial markets and salons), and discovered that 41% of them regularly took part in committees directly or indirectly. The top three motivators for saving were: long term savings (33%); children’s education (33%) and general emergency (29%).
Tapal, an industrial designer, who joined hands with Iqbal on her return from the US in 2018, points out that “if you look at these motivators, long-term tops the list, followed by short-term and the last is immediate. This proves that despite the fact that we tend to think that people are not interested in saving, they are quite cognisant of budgeting and saving.”
She adds that very often even if people have a bank account, they use it mainly to withdraw salaries and banks are not interested in serving such customers or offering them loans and “hence they are under-banked”.
This is what led Oraan to develop an app aimed at encouraging people to run their committees on a digital platform. At this point, says Tapal, the objective is to encourage adoption. “We are not touching any money; the committees are third parties, we are just asking them to join Oraan.”
The people who organise the committees on the app are called Oraan Commissioners. They are verified by Oraan and the rest of the members are verified by the commissioners. Registration is done by mobile phone. Members can then get in touch with a commissioner who will advise them (based on why and how much money they need to raise) on which committee to join. Once on the platform members can see details of other members.
The value pool of each committee ranges from Rs 0.1 million to 1.7 million rupees, with 10 to 15 members per committee – and which lasts for about 10 to 15 months. There is a Facebook group called Oraan Committees where people can talk about their money issues or express an interest in joining a committee.
According to Iqbal, Oraan is not generating any revenue; “our focus is to build customer trust and social capital, as well as learn how technology as an enabler can solve people’s financial problems.”
Depending on the motivation or goal members want to achieve, Oraan also offers formal investment channels; be they national savings, mutual funds or insurance companies. Oraan’s official mutual fund partner is MCB Arif Habib.
As Tapal says, “if your motivation is to buy a house or a car, you will not be able to buy it from one committee’s payout. So we provide these members with relevant information regarding where they should invest in order to raise the capital they need. It is important to start a savings’ mindset so that people can then explore alternative ways of doing so.”
Oraan eventually hopes to draw people into the formal economy. In this way, formal institutions such as banks, insurance companies and mutual funds are both competitors and partners for Oraan. “You cannot address a national problem on your own. If the institutions have failed to do it for so long, a small financial start-up certainly cannot also do it on its own. There has to be collaboration”, says Iqbal.
According to Iqbal, similar to elsewhere in the world, fintechs are adopted more easily by men. Technology adoption is a challenge among women and Oraan hopes to convince more women to embrace technology and become financially empowered. In terms of the committees, Iqbal adds that “Oraan’s objectives are to provide members with the right tools and information so that they can make better and more informed financial choices for themselves.”