villagefinance

Saving at home is convenient, private and predator-free.

In a study of 301 households that belonged to village financial institutions (VFIs) in 37 villages in Cambodia, my team from the Canadian Co-operative Association asked what would cause them to deposit more savings? By far the strongest response was: “the managers must show more respect for the rules.” (Towards Safety & Self-Reliance, p. 51.)

The rules to which they referred were not complex: they expected the managers to refrain from lending the whole fund to one or two relatives, to keep the records reasonably consistently, and to return members’ savings when promised. This concern explained why the average member was depositing less than 3% of her total ‘saving at home’ – far too little to help her to save more safely or better.

Yet the NGOs that were incubating these VFIs seemed oblivious to the governance issues. They felt that if their written manuals and training programs were made sufficiently precise and detailed, the villagers in their VFIs would always know what to do, and always do it.

Since most villagers can’t read, this mentality offers a particularly poignant testament to the soundness of Oliver Williamson’s argument (see Financial Market Failure (1) — Governance) that the search for a ‘complete’ contract is futile. And if contracting is unavoidably incomplete – far more so in an oral village than in a literate city — then what really matters is not the contract at all, but whether the governance arrangements consistently ensure fairness and respect for the rules after the contract is signed.