Dhikur (in Thakali), Dhikuti or Dhukuti (in Nepali) - literally a storage box, used for valuables or food grains - The Dhukuti is a financial self-help group which originated from a system of communal food grain storage for the needy. With the onset of the market economy, it expanded quickly and became a sophisticated informal people's bank, providing capital for small businessmen as well as farmers. Its resources are solely derived from internal savings mobilization.
This chapter deals with literature review. It consists of two sections: first, conceptual review and second, review of empirical studies.
Conceptual review
Dhukuti
Dhikur (in Thakali), Dhikuti or Dhukuti (in Nepali) - literally a storage box, used for valuables or food grains - The Dhukuti is a financial self-help group which originated from a system of communal food grain storage for the needy. With the onset of the market economy, it expanded quickly and became a sophisticated informal people's bank, providing capital for small businessmen as well as farmers. Its resources are solely derived from internal savings mobilization.
Thus, the Dhukuti can be defined as a Rotating Saving & Credit Association (RoSCA) in which equal amounts of money are collected from the participants in regular intervals and allocated to one member at a time. Its rotation is mostly determined by secret tender, the fund going to the lowest bidder, except at the first and last rounds of a round. Dhukuti has become a major informal financial institution for small enterprise finance in Nepal, particularly for investments in non-farm and off-farm activities. In many cases, it is the only source of credit.
In many detailed studies made on Dhukutis between 1964 and 1988, the following features were identified:
Rotating Saving & Credit Association (RoSCA)
A Rotating Savings and Credit Association or ROSCA is a group of individuals who agree to meet for a defined period of time in order to save and borrow together. ROSCAs are the poor man's bank, where money is not idle for long but changes hands rapidly, satisfying both consumption and production needs.
Meetings can be regular or tied to seasonal cash flow cycles in rural communities. Each member contributes the same amount at each meeting, and one member takes the whole sum once. As a result, each member is able to access a larger sum of money during the life of the ROSCA, and use it for whatever purpose she or he wishes. This method of saving is a popular alternative to the risks of saving at home, where family and relatives may demand access to savings.
Every transaction is seen by every member during the meetings. Since no money has to be retained inside the group, no records have to be kept. These characteristics make the system a model of transparency and simplicity that is well adapted to communities with low levels of literacy and weak systems for protecting collective property rights.
The system further reduces the risk to members because it is time limited—typically lasting no more than 6 months. This reduces the size of the loss, should someone take funds early and not pay back.
ROSCAs have different names across the world. They are called “chit funds”, “chits” or “committees” in India, in West Africa and the Caribbean, whereas in Nepal they are called “Dhukuti” or “dhikur”. In India, ROSCAs are widespread. Originating in South-India (Bouman, 1995b; 1999; Rakodi and Lloyd-Jones 2000) the ancient Indian ROSCA fund was already in existence before the advent of British Rule. They were originally based on grain contributions, but later on they changed into a monetary ”chitty” (Bouman 1995b). Only migrants who had worked in South India, or who knew colleagues with working experience from there were aware of ROSCAs. Originating in South India, ROSCAs are still today more common in South India than in the North.
The literature distinguishes in general three different types of RoSCAs, depending on how the pot is allocated. The pot may be allocated randomly (random RoSCAs), through a bidding process (bidding RoSCAs) or according to pre-determined order (deterministic RoSCAs).
Chitty or Chit Funds as a ROSCA practice in India
According to Primitive civilizations, a book written by Edith Jemima Simcox, the ‘Malabar Kuri’ system existed from ancient Dravidian times and is somewhat similar to the systems in China. In China it developed to what is popularly known today as the Chinese lottery. Dr NM Nampoothiri in his work 'Legacy of Nila' refers that the Village Banking system known as Kuri has its origins from the ‘Kaavu tattakam’ social group system. ‘Kavu tattakam’ refers to the territorial jurisdiction of a ‘kaavu’ or temple to a specific area. There were many such Thattakams and all ‘Kaavu Tattakams’ were finally linked to Zamorin’s Tirunavaya Mamankam. There are usually four kinds of chits. The 'Simple Kuri', the 'Lelam Kuri or Auction Chit', the 'Sahaya Chit' and the 'Prize Chit or Lottery' where a certain amount of gambling is involved. In Travancore, the usual term used is 'Chitty' from where 'Chit' comes whereas 'Kuri' or 'Panam Payattu' is the name employed in Cochin and Malabar regions. Chit fund become very popular in the 19th century when ruler of erstwhile Cochin state, Raja Rama Varma, gave a loan to a Syrian Christian traders, keeping a certain portion of it to himself for administrative and other expenses. Later, to manage the increasing numbers of those seeking loans, he ordered a cast of lots and gave the accumulated amount to those who drew the lot on the principle of equity. Gradually the practice spread to other parts of the world including Myanmar and Sri Lanka. But the modern operations of chit funds started between 1830 and 1835, when the Chaldean Syrian church in Thrissur started Kuries under its name and issued passbooks to subscribers as evidence of enrolment. Another version of the origin of Chit fund is linked with Portuguese missionaries from China, who visited Muziris (Kodungalloor) for evangelization and established a seminary at Vypeencotta village in 1577. They reportedly encouraged promotion of chit fund in Kodungaloor.
Indian Acts
Chit funds in India are governed by various state or central laws. Organised chit fund schemes are required to register with the Registrar or Firms, Societies and Chits.
While originating in the informal economy, ROSCAs have become a big business in urban settings. In some major cities of India, large ROSCA fund companies run as many as 10,000 auction ROSCAs simultaneously. The steady growth of commercial (auction) ROSCA funds has induced Indian legislators to pass a specific law that regulates this part of the financial sector.
The Government has also set up a Chit Fund Department, to control the activities of the Chit Fund Companies and to publicise registered Chit Fund companies and disqualified chit fund companies.
Customers of commercial ROSCA funds usually don’t interact with other members of the ROSCA group to which they belong (Klonner, 2002). Auction ROSCAs are an exception in this respect. If members do not interact, the organiser or chairman has a bigger responsibility to enforce payments. Yet in commercial ROSCA funds, the company collects the contributions, and pays the winner of a ROSCA. Members are not even aware of defaults or late payments by other participants (Klonner 2002, pp. 2-3).
In Nepal, “Dhukuti” or “committee” is the most common form of Rotating Credit Association. A Dhukuti has the same basic principle as a ROSCA. They are found in different degrees of sophistication. ROSCAs and Dhukutis were originally set up for the poorer members of a community. Yet they have evolved into a largely commercialized and regulated system of small-enterprise finance. At the same time, informal Dhukutis still exist.
Research Gap
Since Dhukuti is being practices unofficially, it seems that there are limited articles, journals & research conducted about ROSCA practice in Nepal. Available research reports are also outdated, focused to some part of the country and not conducted rigorously. Contrary to this, our neighboring country India has made a long stride on this regard. They have established adequate legal & institutional framework for giving a formal way for ROSCA practice as Chit Fund and has conducted very rigorous studies on this instance. Despite the fact that Dhukuti is gaining popularity among Nepalese community, the state has failed to main-streamline Dhukuti. No rigorous study has been made at the very moment. Therefore, at this moment, a rigorous study has become urgent to formalize and institutionalize Dhukuti practice.
Source:
http://nepal-pokhra.blogspot.kr/2013/10/dhukuti-as-new-banking-product.html
Thus, the Dhukuti can be defined as a Rotating Saving & Credit Association (RoSCA) in which equal amounts of money are collected from the participants in regular intervals and allocated to one member at a time. Its rotation is mostly determined by secret tender, the fund going to the lowest bidder, except at the first and last rounds of a round. Dhukuti has become a major informal financial institution for small enterprise finance in Nepal, particularly for investments in non-farm and off-farm activities. In many cases, it is the only source of credit.
In many detailed studies made on Dhukutis between 1964 and 1988, the following features were identified:
- Very common, each with 10-30 or more members
- Access is open to all, both men and women. Individual shares may also be multiple or partial.
- Cycle of rotation is annual in the case of smaller groups and semi-annual in larger groups. The turn is determined by drawing lots/bids, except in the case of the first round and last rounds.
- Books are always kept, with records of all transactions and with all signed and witnessed contracts.
- Cases of defaulting, fraud or embezzlement have remained exceedingly rare at all times.
During the past half century Dhukuti spread as informal financial institutions all over the country and became the small businessman's self-help bank (Seibel & Shrestha 1988). This was mainly due to the extension of the money economy, the increase in business opportunities, an upsurge in the demand for money and, at the same time, the lack of formal financial institutions with convenient savings deposit facilities and broad access to credit. During that process of expansion, the Dhukuti underwent two major changes: the cycle of rotation changed from annual to monthly, and fund allocation by lots was replaced by secret bidding.
The Rotating Savings and Credit Association (RoSCA) plays an important role as a financial intermediary in many parts of developing countries. They flourish in both urban and rural settings, especially where formal financial institutions seem to fail to meet the needs of a large fraction of the population. Bouman (1979), for example, estimates that, in central African countries, about 20% of household savings are accumulated in informal RoSCAs. In the South- Indian state of Tamil Nadu with a population of 62 million, the turnover in formal RoSCAs has been estimated at 100 billion Rupees, about 2.5 billion US dollars, in 2001 (Rao,2001).
In each part of the world, RoSCAs come under different names, all of them share, however, some common features. More specifically, Calomiris and Rajaraman (1998) define a RoSCA as ‘a voluntary grouping of individuals who agree to contribute financially at each of a set of uniformly-spaced dates towards the creation of a fund, which will then be allotted in accordance with some prearranged principle to each member of the group in turn’. Once a member has received a fund she/he is excluded from the allotment of future chits until the RoSCA ends.
Many empirical studies report that the funds obtained from a RoSCA are often used to purchase a lumpy good whose cost cannot be covered by a member’s current income. In this connection, a random RoSCA has the merit of allocating the full amount of the chit to one of the members each time the group meets.
Informal financial institutions (IFIs), among them the ubiquitous rotating savings and credit associations, are of ancient origin. Owned and self-managed by local people, poor and non-poor, they are self-help organizations which mobilize their own resources, cover their costs and finance their growth from their profits. With the expansion of the money economy, they have spread into new areas and grown in numbers, size and diversity; but ultimately, most have remained restricted in size, outreach and duration. There are over 20,000 informal community based organisations, such as self-help groups and rotating savings and credit associations (ROSCAs), moneylenders, traders, friends and relatives. Friends and families are the main providers of informal loans in both urban and rural areas; they provide 84.4% and 60.5% of total informal loans respectively. (Citation: MICROFINANCE INDUSTRY REPORT, Nepal, 2009 page 19) Are they best left alone, or should they be helped to upgrade their operations and integrate into the wider financial market with a modification or without a modification? This question is yet to be answered.
Statement of the Problem
"When the change outside is greater than the change inside, the end is near" - Peter Drucker. New products are crucial because the market is changing. The old trend might become new again but it never stay still. Only constant is change. Therefore, any business house in the market has to develop new market products for its survival in the market. This is possible only by modifying existing market product or by introducing a new conceptual product.
More than two decades after Nepal liberalized the banking sector and witnessed its tremendous quantitative expansion. The banking sector has contributed immensely to the Nepali economy and the Nepali people since the liberalization, as is demonstrated by the tremendous growth in deposits and lending. Not only has the access of the common people to banking grown during this intervening period, but their habit of channeling money into savings has also increased significantly. But banking seems to have become a victim of its own success, and things have now reached a tipping point. Unless there is serious reform and restructuring in the sector with new product developments, there are indications we may be headed for serious trouble in the future. Therefore, similar condition also applies to the banking sector. With the mushrooming pattern of banking sector, they do need new product concept for the market. Irrespective of the growing size of banking sector, the market is lacking of newer market products.
On the other hand, banking sector is also suffering from liquidity crisis. The year to year repeating cyclic nature of liquidity crisis has become one of the major challenge. The amount of C/D (Credit/Deposit) ratio is above the tolerable level and increasing. Such liquidity problems with Nepal's banking sector is caused by the opaqueness of most transactions, VAT evasion, under-invoicing, and the fact that many Nepalis are not in the tax net. One of the money circulations which does not come under the tax net of the state is the widely exercised unofficial practice of RoSCA in the form of Dhukuti. If this cash circulation could be diverted into the banking sector, there would be more cash available in the banking sector.
In addition, the Dhukuti schemes are being practiced unofficially because of which, on the one hand, a huge amount of money is out of the state tax bracket and on the other hand, people are unable to take legal actions against default and fraud in the absence of legal agreement. Despite the fact that it involves a higher risk of default in the absence of legal agreement, a huge amount of money is still being circulated via this sector. If the money could be diverted into the banking sector, this would have a dual effect of addressing liquidity crisis on one hand and meeting the people's aspirations and expectations on the other hand.
Beside, most of the banking products are taken as investment alternative as well. The returns of banking products are quite certain & predictable. But, the range of this investment-type banking products are in limited number. Adding new investment like banking product not only will attract new customers rather it will help to address liquidity crisis of the bank as well.
- Can RoSCA be introduced in the form of Dhukuti in banking sector?
- Will this new product be able to address liquidity crisis of bank effectively?
- How much liquidity will it inject in the banking sector?
- Can Dhukuti be an investment alternative?
- Can each participants of Dhukuti be satisfied?
This chapter deals with literature review. It consists of two sections: first, conceptual review and second, review of empirical studies.
Conceptual review
Dhukuti
Dhikur (in Thakali), Dhikuti or Dhukuti (in Nepali) - literally a storage box, used for valuables or food grains - The Dhukuti is a financial self-help group which originated from a system of communal food grain storage for the needy. With the onset of the market economy, it expanded quickly and became a sophisticated informal people's bank, providing capital for small businessmen as well as farmers. Its resources are solely derived from internal savings mobilization.
Thus, the Dhukuti can be defined as a Rotating Saving & Credit Association (RoSCA) in which equal amounts of money are collected from the participants in regular intervals and allocated to one member at a time. Its rotation is mostly determined by secret tender, the fund going to the lowest bidder, except at the first and last rounds of a round. Dhukuti has become a major informal financial institution for small enterprise finance in Nepal, particularly for investments in non-farm and off-farm activities. In many cases, it is the only source of credit.
In many detailed studies made on Dhukutis between 1964 and 1988, the following features were identified:
- Very common, each with 10-30 or more members
- Access is open to all, both men and women. Individual shares may also be multiple or partial.
- Cycle of rotation is annual in the case of smaller groups and semi-annual in larger groups. The turn is determined by drawing lots/bids, except in the case of the first round and last rounds.
- Books are always kept, with records of all transactions and with all signed and witnessed contracts.
- Cases of defaulting, fraud or embezzlement have remained exceedingly rare at all times.
Rotating Saving & Credit Association (RoSCA)
A Rotating Savings and Credit Association or ROSCA is a group of individuals who agree to meet for a defined period of time in order to save and borrow together. ROSCAs are the poor man's bank, where money is not idle for long but changes hands rapidly, satisfying both consumption and production needs.
Meetings can be regular or tied to seasonal cash flow cycles in rural communities. Each member contributes the same amount at each meeting, and one member takes the whole sum once. As a result, each member is able to access a larger sum of money during the life of the ROSCA, and use it for whatever purpose she or he wishes. This method of saving is a popular alternative to the risks of saving at home, where family and relatives may demand access to savings.
Every transaction is seen by every member during the meetings. Since no money has to be retained inside the group, no records have to be kept. These characteristics make the system a model of transparency and simplicity that is well adapted to communities with low levels of literacy and weak systems for protecting collective property rights.
The system further reduces the risk to members because it is time limited—typically lasting no more than 6 months. This reduces the size of the loss, should someone take funds early and not pay back.
ROSCAs have different names across the world. They are called “chit funds”, “chits” or “committees” in India, in West Africa and the Caribbean, whereas in Nepal they are called “Dhukuti” or “dhikur”. In India, ROSCAs are widespread. Originating in South-India (Bouman, 1995b; 1999; Rakodi and Lloyd-Jones 2000) the ancient Indian ROSCA fund was already in existence before the advent of British Rule. They were originally based on grain contributions, but later on they changed into a monetary ”chitty” (Bouman 1995b). Only migrants who had worked in South India, or who knew colleagues with working experience from there were aware of ROSCAs. Originating in South India, ROSCAs are still today more common in South India than in the North.
The literature distinguishes in general three different types of RoSCAs, depending on how the pot is allocated. The pot may be allocated randomly (random RoSCAs), through a bidding process (bidding RoSCAs) or according to pre-determined order (deterministic RoSCAs).
Chitty or Chit Funds as a ROSCA practice in India
According to Primitive civilizations, a book written by Edith Jemima Simcox, the ‘Malabar Kuri’ system existed from ancient Dravidian times and is somewhat similar to the systems in China. In China it developed to what is popularly known today as the Chinese lottery. Dr NM Nampoothiri in his work 'Legacy of Nila' refers that the Village Banking system known as Kuri has its origins from the ‘Kaavu tattakam’ social group system. ‘Kavu tattakam’ refers to the territorial jurisdiction of a ‘kaavu’ or temple to a specific area. There were many such Thattakams and all ‘Kaavu Tattakams’ were finally linked to Zamorin’s Tirunavaya Mamankam. There are usually four kinds of chits. The 'Simple Kuri', the 'Lelam Kuri or Auction Chit', the 'Sahaya Chit' and the 'Prize Chit or Lottery' where a certain amount of gambling is involved. In Travancore, the usual term used is 'Chitty' from where 'Chit' comes whereas 'Kuri' or 'Panam Payattu' is the name employed in Cochin and Malabar regions. Chit fund become very popular in the 19th century when ruler of erstwhile Cochin state, Raja Rama Varma, gave a loan to a Syrian Christian traders, keeping a certain portion of it to himself for administrative and other expenses. Later, to manage the increasing numbers of those seeking loans, he ordered a cast of lots and gave the accumulated amount to those who drew the lot on the principle of equity. Gradually the practice spread to other parts of the world including Myanmar and Sri Lanka. But the modern operations of chit funds started between 1830 and 1835, when the Chaldean Syrian church in Thrissur started Kuries under its name and issued passbooks to subscribers as evidence of enrolment. Another version of the origin of Chit fund is linked with Portuguese missionaries from China, who visited Muziris (Kodungalloor) for evangelization and established a seminary at Vypeencotta village in 1577. They reportedly encouraged promotion of chit fund in Kodungaloor.
Indian Acts
Chit funds in India are governed by various state or central laws. Organised chit fund schemes are required to register with the Registrar or Firms, Societies and Chits.
- Union Government - Chit Funds Act 1982 (Except the State of Jammu and Kashmir)
- Kerala - Kerala Chitties Act 1975
- Tamil Nadu - Tamil Nadu Chit Funds Act, 1961
- Karnataka: The Chit Funds (Karnataka) Rules, 1983
- Andhra Pradesh - The Andhra Pradesh Chit Funds Act, 1971
- New Delhi- The Chit Funds Act,1982 and Delhi Chit Funds Rules, 2007
- Maharashtra - Maharashtra Chit Fund Act 1975
While originating in the informal economy, ROSCAs have become a big business in urban settings. In some major cities of India, large ROSCA fund companies run as many as 10,000 auction ROSCAs simultaneously. The steady growth of commercial (auction) ROSCA funds has induced Indian legislators to pass a specific law that regulates this part of the financial sector.
The Government has also set up a Chit Fund Department, to control the activities of the Chit Fund Companies and to publicise registered Chit Fund companies and disqualified chit fund companies.
Customers of commercial ROSCA funds usually don’t interact with other members of the ROSCA group to which they belong (Klonner, 2002). Auction ROSCAs are an exception in this respect. If members do not interact, the organiser or chairman has a bigger responsibility to enforce payments. Yet in commercial ROSCA funds, the company collects the contributions, and pays the winner of a ROSCA. Members are not even aware of defaults or late payments by other participants (Klonner 2002, pp. 2-3).
In Nepal, “Dhukuti” or “committee” is the most common form of Rotating Credit Association. A Dhukuti has the same basic principle as a ROSCA. They are found in different degrees of sophistication. ROSCAs and Dhukutis were originally set up for the poorer members of a community. Yet they have evolved into a largely commercialized and regulated system of small-enterprise finance. At the same time, informal Dhukutis still exist.
Research Gap
Since Dhukuti is being practices unofficially, it seems that there are limited articles, journals & research conducted about ROSCA practice in Nepal. Available research reports are also outdated, focused to some part of the country and not conducted rigorously. Contrary to this, our neighboring country India has made a long stride on this regard. They have established adequate legal & institutional framework for giving a formal way for ROSCA practice as Chit Fund and has conducted very rigorous studies on this instance. Despite the fact that Dhukuti is gaining popularity among Nepalese community, the state has failed to main-streamline Dhukuti. No rigorous study has been made at the very moment. Therefore, at this moment, a rigorous study has become urgent to formalize and institutionalize Dhukuti practice.
Source:
http://nepal-pokhra.blogspot.kr/2013/10/dhukuti-as-new-banking-product.html
No comments:
Post a Comment