What "associations" mean for the Egyptian economy

Many Egyptians take part in "collective" or "participatory saving". (Photo by Adobe).

Financial "associations", sometimes known as Rotating Savings and Credit Associations (ROSCAs), are common in Egyptian society so that households can meet their household expenses. Some analysts see them as harmful to the national economy. Ahmad Abdel-Rahman explains.

Many Egyptians are suffering from a cost-of-living crisis and cannot save. This difficult task is solved by what the Egyptians call "collective" or "participatory saving". The idea is that a sum is collected monthly from several people, one of whom will receive the sum of what was collected in the month, according to agreed terms and conditions. The main advantage for the members of these associations is that the money is without interest or profits. People may also use these associations for many months, depending on need.

These financial associations may be used by those who are preparing a house for marriage, by those who are looking to pay the private university fees for their children, or for covering travel expenses to a resort. These associations are considered a safe way to achieve otherwise unobtainable goals.

Associations explained

Many countries have ​​participatory saving schemes, especially in the Arab region, but the percentage who participate in them in Egypt is very high. According to a 2018 study by the American University in Cairo, 43 per cent of the Egyptian population, with savings, participates in associations.

Usually, the organiser of the association is the one who is eligible for the full amount in the first month. It is also customary that those who want to participate with two shares (two names) receive money in the first month and another at the end of the distribution period. There are also some participants who are not in a hurry to get the "money", because their participation is for the purpose of long-term savings or to satisfy an non-urgent need.

Many consider associations a social and economic necessity for large segments of society. They vary in terms of the total number of participants and the specific amount to be raised.

Why associations have risen in importance

These associations gained additional importance because of the financial crisis caused by the burdens of Corona and the subsequent crisis of the Russian-Ukrainian war. These crises caused a number of industries and commercial establishments to operate at a loss, and have led to mass unemployment, which has doubled the burden of the family in meeting its basic needs.

Associations are not limited to the middle and poor classes. Some traders join "merchant associations" with their colleagues to buy goods and provide for their trade needs. However, these associations differ from the other associations, as the monthly amount raised can be as much as EGP 250,000 (USD 13,300).

The informal economy exceeds 50 per cent of the Egyptian national product, according to television statements by Yasser Taymour, advisor to the Minister of Finance for the development of the tax authority. The Egyptian government is working on several programmes to accommodate these businesses within the official banking and tax framework.

The "association", despite the solutions it gives to the individual by being able to obtain a large sum of money, on a monthly basis, is tainted by some risks. Among these are the method of payment and the regularity of members to pay their obligations, the fact that some withdrew, along with disputes over of who will receive the money each month.

The most important risk is the lack of guarantees of repayment and its reliance on personal trust. In this respect, economics professor Karim El-Omda points out that informal financial transactions "may lead to fraud and the appropriation of others' money and perpetuate the suspicion of irregularity".

Do associations harm the economy?

El-Omda has also said that the association's system is an "informal savings method that provides cash liquidity in a timely manner to the contributor to the association," and stressed "the necessity of providing investment funds away from bank savings certificates". Many doubt these are forbidden by Sharia, despite all the state's efforts to refute those ideas. He added that these funds "can attract citizens' savings, away from associations that do not provide cash interest and have no economic impact other than recycling cash and using it to purchase products".

Economist Ahmed Maati believes that associations "harm the state's economy, because these sums do not enter the banking sector, which directs them to implement projects that provide job opportunities and increase the domestic product". Maati added that the large size of the informal economy and the presence of many groups that do not have a bank account and do not want to open one because their profits and financial transactions are not disclosed, "is what increases the association's activity, especially among traders". Maati called on the banking sector to remove some obstacles so that people can enter the official economic framework.

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Saturday, 04 February 2023