Fluent Essays

P a g e 1 | 23THE CITY UNIVERSITY OF NEW YORKDRAFT VERSION MARCH 2, 2016TONGTIN OF CAMBODIA & MICROFINANCE: COMPLEMENT OR COMPETITORThis case was written by Michele Costello, an Adjunct Professor at Baruch College, solely as the basis for class discussion and is not intended to serve as an endorsement, source of primary data, or illustration of effective or ineffective handling of a business situation. Names and certain other identifying information have been disguised or purposely omitted to protect confidentiality. Copyright © 2016, Michele Costello - Do not reproduce without written permission of the author .edu.I dont know how much money I earned or spent last week, but I know that my expenses are higher than my income, so I borrow ...I am so busy with tongtin activity. For all three groups I am in now it is R100,000 per week. I bid one time per week on each group...it is too much work to play everyday.- Thida, from Koh Krabei, CambodiaIts a hot day in Koh Krabei, Cambodia. Sitting on a wood bench outside her tin roof home, Thida takes a break from collecting Jasmine to drink some water and contemplate her situation. Her jasmine growing and gathering has produced steady income in the past, but now she is suffering from lost crop due to a pest infestation. In addition, the family has still not recovered financially from the cost of her daughters emergency stomach operation in October and she just paid her childrens university fees in November. Gifts from friends and family (a neighbor, a foreign financial sponsor, her daughter who is working in the city, and local political party) have only covered a portion of the family expenses, and she still increased her debt burden to cover those costs. She is now making multiple payments on microfinance loans and informal community savings and loan clubs called tongtin each week. She will see the leader of her tongtin savings and loan club will tomorrow, but she does not have the funds for her required weekly contribution. As she ponders her options, a representative from a local microfinance institution approaches her home to discuss a new lending program.BACKGROUNDWHAT IS MICROFINANCE?Microfinance refers to the provision of a wide range of financial products and services to those who are excluded from the formal finance sector. According to 2011 data from the World Bank, an estimated 2.5 billion working-age adults globally, or more than half of the total adult population, do not have access to formal financial services (Ledgerwood, The New Microfinance Handbook, 2013, p. xvii). Examples of microfinance products and services include loans, savings, insurance, payment transfers, skills/training, and social benefits. Services are provided by microfinance organizations known as Microfinance Institutions (MFIs) which are structured in a range of financial and non-financial institutions operating non-profit and for-profit models. The industrys key goal is to expand financial access to excludedP a g e 2 | 23THE CITY UNIVERSITY OF NEW YORKsegments of society including marginalized populations and those at the bottom of the economic pyramid.Some industry observers have called microfinance a movement that envisions a world in which as manypoor and near-poor households as possible have permanent access to an appropriate range of high qualityfinancial services1.While microfinance activity has roots in governmental and non-governmental organization (NGO)economic development activities over many decades, microfinance in the form that it is known today tookroot in the 1970s through pioneering organizations such as ACCION International, Grameen Bank, andOpportunity International. These organizations sought to recognize the unique challenges of the poorand redesign the delivery of appropriate financial products and services to this population. While manyorganizations initially began with lending programs that targeted specific observed needs in thecommunities in which they worked, the MFIs often expanded to provide other services either to breakdown barriers to access, protect clients, and/or meet other short and long term client cash flowmanagement needs. In this way, the industry has evolved from a lending-centric to a diversified financialservices focus. Microfinance gained global prominence in the mid-2000s with the 2005 UN Year ofMicrofinance campaign and the 2006 Nobel Peace Prize award to Mohammed Yunus and Grameen Bankfor their work in microfinance and its impact on economic stability and peace.Today, there are thousands of known MFIs globally servicing over 100 million borrowers and savers, andthe market has been experiencing a double digit growth rate. A of 2013, the global average loan size perborrower is roughly $2,000, but loan sizes can range from $20 to $20,000 depending on the geographiclocation and sophistication of the client. (Symbiotics, 20132 ; mixmarket.org)MICROFINANCE IN CAMBODIACambodia is located in South East Asia, and shares its borders with Laos, Vietnam and Thailand. It isdivided into twenty-four provinces and has a population of approximately 14.8 million people, with 80\%of its population living in rural regions (World Bank, n.d.). With a per capita GDP of US$ 944, Cambodia isone of the poorest countries in the region (World Bank, n.d.) Cambodia is a partially dollarized economy(Kang, Is Dollarization good for Cambodia?, 2005), due to periods of Vietnamese and United Nationsadministration control following the defeat of the Khmer Rouge military regime. As a result, manyindividuals and institutions use the Riel (introduced by Vietnam, symbol R) and the US dollar (usedduring the period of UN administration, symbol $) interchangeably. The main sectors of its economyare agriculture, garments, tourism, and construction (Kang, 2005).Cambodias microfinance industry began in 1990 (Cambodia Microfinance Association, n.d.) to addresspoverty and lack of financial access. The country has one of the most developed and competitivemicrofinance sectors in the world due to its recent relative political and economic stability coupled with1 Robert Peck Christen, Richard Rosenberg & Veena Jayadeva. Financial institutions with a double-bottom line:implications for the future of microfinance. CGAP Occasional Paper, July 2004, pp. 2-32 2013 Symbiotics MIV Survey: Market Data & Peer Group Analysis; Published by Symbiotics Group; 2013P a g e 3 | 23THE CITY UNIVERSITY OF NEW YORKthe large unmet financial need and the large presence of NGOs and aid organizations operating in thecountry following the rule and genocide of the Khmer Rouge regime. In the 1990s, international donorsand non-governmental organizations began launching non-profit micro-credit projects within ruraldevelopment programs which became the microfinance institutions we see today. As of 2012, there are83 registered financial institutions in Cambodia (International Monetary Fund, 2013). According toCambodia Microfinance Association, an industry trade organization, microfinance institutions3 serve 1.9million people (Cambodian Microfinance Association, n.d.).Microfinance is part of the formal financial sector and is a regulated activity in Cambodia. When thegovernment established the Central Bank Law of 1996, it gave the National Bank of Cambodia,responsibility to regulate and oversee the microfinance sector (Vada, 2010). In 2000, the National Bankof Cambodia issued regulations regarding the classifications for Microfinance Institutions (Vada, 2010)based upon scale and scope. The largest MFIs are required to be licensed by the central bank4, and areregulated in a similar manner to commercial banks with the exception of a lower capital requirement(Vada, 2010). Medium-sized MFIs, on the other hand are required to register with the central bank, andare subjected to less stringent rules - less complicated reports (Vada, 2010). Lastly, the smallest MFIs arenot regulated or supervised because of the high operating costs of such work (Vada, 2010). These licensespertain to the ability to issue loans. In order to take deposits, there is an additional set of requirementstesting scale and sustainability to obtain a deposit-taking license.5 The National Bank of Cambodia doesnot impose restrictions on interest rates charged by MFIs, and therefore MFI rates are set by marketforces. However, rates charged by MFIs in Cambodia have been documented by researchers as two tothree times lower than the interest rate charged by community loan sharks (Vada, 2010). Therefore, thelaunch of the microfinance sector has provided a source of low cost loans to the rural population.3 A microfinance Institution is defined by the National Bank of Cambodia, as having a loan portfolio outstandingequal to or greater than $25,000, or have mobilized savings of $250 or more, or having 100 depositors or more.4 37 of the 83 MFIs are licensed by the central bank (National Bank of Cambodia, n.d.); 7 of the 37 subset of MFIare licensed to take deposits5 Institutions need to have held the MFI license, as described in the previous paragraph, for three years, and have agood and sound financial condition judged by the central banks internal rating system for at least two years,before they can apply for this license. In addition, these MFIs need at least KHR 10,000 million (USD 2.5 million), aManagement Information System, to conform to the chart of accounts, and have a sustainable profitability for twoconsecutive years.P a g e 4 | 23THE CITY UNIVERSITY OF NEW YORKThe country also has a high saturation of microfinance institutions (Liv, 20136). Because of the high levelof microfinance activity and competition in Cambodia, the potential for clients to receive multiple loansfrom different MFIs is high. In 2011, the Central Bank created the Credit Bureau of Cambodia, whichrequires registered MFIs to report lending activity and thereby develop individual credit history profilesfor clients (Credit Bureau Cambodia, n.d.). There are still limitations, as reporting for non-registered MFIsand informal sources or credit are not disclosed and the Credit Bureau therefore maintains only a limitedpicture.Figure 1: Consolidated Village Data SourceLevel of Penetration Levels ofPenetrationNumber ofVillagesPercent of TotalVillagesSaturated >100\% 914 6\%Very High Penetration 75-100\% 1,260 9\%High Penetration 50-75\% 2,444 17\%Moderate Penetration 25-50\% 3884 28\%Low Penetration <25\% 4780 34\%No Service 0\% 791 6\%Grand Total N.A. 14,073 100\%Source: Cambodian Institute of DevelopmentTONGTIN OF CAMBODIA - HISTORY AND STRUCTUREFor centuries, people have formed informal groups to pool their money for purchase of goods, savings, orinsurance in the absence of formal financial systems. In the microfinance industry, these informalassociations where a core group of participants make regular contributions to a fund which is distributedin whole or in part to each contributor in rotation as a rotating savings and credit association orROSCA. The earliest documented forms of saving and loan clubs originated in Italy in the 17th centuryunder the name tontine where members had an opportunity to save or borrow through theircontributions to the group fund. The tradition of community based financial self-help groups continuestoday under the names tontine in Asia, susu in Africa, or tandas in parts of South America. Whiletheir characteristics can be quite varied, a typical ROSCA involves a self-selected group where membersagree to contribute a fixed sum at regular intervals (daily, weekly, monthly, etc.) and then distribute thepot at each interval using a pre-agreed system of distribution. The primary methods for distribution ofthe pot are use of a pre-determined order, member vote at each interval, lottery, or a bidding process6 Liv, D. (2013). Study on the Drivers of Over-Indebtedness of Microfinance Borrowers in Cambodia: An In-depthInvestigation of Saturated Areas. Phnom Penh, Cambodia: Cambodia Institute of Development StudyP a g e 5 | 23THE CITY UNIVERSITY OF NEW YORK(Rutherford, 19997). The group is organized and managed by a leader who typically receives the potfirst and then collects and distributes funds at each group payment interval. Participants could berecruited through workplace connections, community connections, an affinity group, or through a friendsand family network. The ROSCA will continue for a number of intervals equal to the number ofparticipants so that each member has an opportunity to win the pot. Each member has an opportunityto receive the pot based on the pre-agreed system, and members can win the pot only once duringthe cycle. (Ledgerwood, 19998) Variations exist where members elect not to receive the pot duringthe cycle, and instead receive the pot at the end of the cycle because they intend to use the group onlyas a mechanisms for savings. In a simple non-bidding ROSCA, members will only receive an amount equalto the sum of the agreed group contribution, and effectively receive zero or negative interest consideringthe time value of money. In a bidding ROSCA, the potential pay-in per week and pay-out of the pot variesand the members have an opportunity to earn interest or borrow at variable rates based on bidding. AllROSCAs are trust based groups that rely on peer pressure to enforce ongoing participation in the system.If members drop out, future payments to players who have not received the pot are jeopardized. Inaddition, there are other transaction costs associated with ROSCAs such as member transportation oropportunity cost to attend the regular meetings or the leaders costs for refreshments or otherorganizational aspects of hosting the meeting. In most cases, there is also a social significance assignedto belonging and participating in the group.The tongtin of Cambodia is derived from the term tontine and typically follows the model of abidding or auction ROSCA. Under this system, the leader recruits a group of participants to start thefund, establishes a periodic contribution amount, and sets a regular meeting interval for future collectionand auction of the pot (for example weekly). The leader receives the pot first, and usually circles thefund because he or she has an urgent cash need (purchase of a loom, childrens school fees, a large healthexpense). In the subsequent weeks, members will continue to make contributions which are variablebased on a sealed bid auction process run by the leader. Members submit their bid to the leader on a slipof rolled or folded paper, and the leader selects the best bid to win the pot. The best bid will be conveyed7 Rutherford, S. (1999). The Poor and Their Money: An essay about financial services for poor people.Manchester,UK: University of Manchester.8 Ledgerwood, J. (1999). Microfinance Handbook. Danvers, Massachusetts: World Bank.Participant Cash Flow: ROSCA with lottery allocationWeek 1 2 3 4 5 6 7 8 9 10 TOTALPayment to Leader $100 $100 $100 $100 $100 $100 $0 $100 $100 $100 $900Payout to Participant $900 $900Payout minus contributions: $0Assumptions: 10 member ROSCA, $100 weekly contribution, player wins the pot in a lottery week 7P a g e 6 | 23THE CITY UNIVERSITY OF NEW YORKas an interest figure, which is actually the discount the member is willing to receive that week off the facevalue of the typical contribution amount. For example, in a tongtin with a weekly payment of $100, awinning bid of $15 means that the members contribute $85 per person that week instead of $100 perperson to the winning bidder. In the case of a tie, the members must bid again until a winning bidemerges. Once a bidder has won the discounted pot, he or she must contribute the full face value of the$100 weekly payment regardless of future winning bidder figures. Members can bid every week until theywin, but are not required to bid at any time. In this way, members who do not win the pot earn interest(in the form of reduced weekly contributions but a full payout at the end) which varies per period basedupon the value of the winning bid. The winners interest rate (or the discounted pot sum) is also variablebased upon the competing bidders in any given week. Not all members are required to bid, and there arenet savers and net borrowers in the tongtin system. Due to bidding it is impossible for participants toknow their weekly contributions, savings interest rate, or borrowing cost ex-ante , or if they will ever besuccessful in winning the pot. It is also the case that tongtin groups can be quite large, with over 100participants. While conducting field interviews in Cambodia for this case, a few participants mentionedthat their groups were so large (over 200 members) they could not keep track of where they were in thecycle or when these tongtin groups were ending. Many members do not record the payments they makeor the specific amounts and rely on trust that the system is working. For long-running groups, leadershave been known to conduct annual book reconciliations or audits to maintain the integrity of the tongtinfinances. The risk of defecting members is also real, and in field interviews for this case study, participantstold us that they had experiences where members and leaders of tongtin had run away with the moneyand ceased participation part way through the cycle. Despite these negative experiences, mostinterviewed participants said they continue to play tongtin and take greater care to select good leaders.All of the factors mentioned introduce uncertainty and risk into the tongtin process. Regardless,participation in tongtin spans all walks of life in Cambodia and is deeply embedded in the culture.According to a university research paper by Man Hau Liev, Cambodians believe tongtin is an easieralternative to save or borrow money, as compared to the hassle of complex processes in banks.Participants in Cambodian tontines believe that the returns from tontines are higher than those availablefrom other saving methods, wrote Hau Liev. To them, a tontine is a familiar financial instrument withintheir ethnic communities. (Phnom Pehn post) In addition, during field interviews for this case study,participants reported that it was important for them to participate in tongtin to support their friends andneighbors and in this way help their community.P a g e 7 | 23THE CITY UNIVERSITY OF NEW YORKThe tongtin groups observed in Koh Krabei during primary interviews for this case study follow the auctionprocess described above, and had some additional significant characteristics: semi-formal organization,multi-player members , and leader as underwriter.First, Koh Krabei and neighboring villages generally inform the village chief and sometimes the communechief when forming a tongtin group. Next, the leader creates a document with the tongtin rules andmembers sign using finger prints to acknowledge membership. The village chief will also sign the list ofmembers as a form of registration for the group. This process did not have a legal significance as far aswe know, but did appear to enhance the accountability and social pressure to perform in the tongtingroup. One participant mentioned that she could have approached the village chief as a advocate to helpher collect tongtin funds.Second, tongtin members can participate as multiple players. This could mean double or triplecontributions and payouts if one was participating as two or three players. A net saver could enhancetheir interest earned, and a net borrower could achieve a large lump sum payment by bidding and winningtwice or three times. However, neither can know the ex-ante costs or rewards of these decisions and thevolatility of their cash flow into and out of the tongtin is increased by participating as a multi-playerParticipant Cash Flow: ROSCA with bidding allocation, participant as borrowerWeek 1 2 3 4 5 6 7 8 9 10 TOTALPayment to Leader $100 $90 $95 $75 $85 $85 $0 $100 $100 $100 $830Winning Bid N/A $10 $5 $25 $15 $15 $20 $15 $10 $5Payout to Participant $740 $740Payout minus contributions: -$90Assumptions: 10 member ROSCA, $100 weekly face value contribution, bid represents discount from face value of contribution,player wins bid in a lottery week 7, winner receives face ($100) minus bid value ($20), or $80, from each member except the leader whocontributes face ($100), winners must contribute face ($100) in all periods after winning,Participant Cash Flow: ROSCA with bidding allocation, participant as saverWeek 1 2 3 4 5 6 7 8 9 10 TOTALPayment to Leader $100 $90 $95 $75 $85 $85 $80 $85 $90 $95 $880Winning Bid N/A $10 $5 $25 $15 $15 $20 $15 $10 $5Payout to Participant $900Payout minus contributions: $20Assumptions: 10 member ROSCA, $100 weekly face value contribution, bid represents discount from face value of contribution,player never bids to win the potP a g e 8 | 23THE CITY UNIVERSITY OF NEW YORKmember. The ability of one person to participate as multiple players also introduces a customerconcentration into the risk pool for the tongtin leader.Third, most members told us that the leader also acts as a partial underwriter. If a member fails to makethe weekly payment, the tongtin leader will make the contribution for them (and presumably pursue thatperson for back payment outside the group). There is a practical limit financially to how many defectorsa leader can cover, so this is not an unlimited guarantee by the leader. However, most participants whenasked if they were concerned about defectors and losses, indicated that they were confident that theleader was sound, had selected good members, and would cover the payments of defectors. Membersalso reported that leaders can go to the home of tongtin defectors and take items of value in lieu of cashpayment (e.g. cows, motorcycles). Again the limit to this strategy is in fact the limited assets of theparticipants in this geographic area.THIDAS HOUSEHOLD CASH FLOW PROFILE: JUNE - NOVEMBER 2013Thida, approximately 50 years old, lives in Koh Krabei village with her husband, two sons and threedaughters. She and her husband, assisted by their oldest son, are farmers who maintain the jasminegrowing and harvesting activity which is the primary source of income for the family. Her oldest daughteris a physical therapist who works in the city and sends money back home, and the other three membersof the family are still studying. Her husband sporadically works as a tractor broker who connects farmersin need to tractor owners/lessors. In addition to his family farming activities, the oldest son works as apart time cook in a village café.Cash flow from the jasmine growing generates on average $71 per week, with spikes at times of religiousceremony and celebrations which require jasmine flower ornamentation. There is a wide variance inweekly income over the course of the last six months, including some zero income weeks.6moTotal(US $)Median(US $)Std. Dev.(US $)Mean(US $)\% ZeroWeek1650.65 50.75 62.58 71.77 9\%Jasmine farming is common to Thidas village (see Exhibit 3 for cash flow results of neighboring farmers).She does not maintain any significant inventory as jasmine is a perishable good that can only be kept forabout one week before spoiling. Loose jasmine and decorative jasmine ornament sales occur daily at thenearby market or pagodas (religious temple where jasmine is used in ceremonies). There is also someseasonality in the business. During the rainy season from May to October, the jasmine bushes produceless flower buds, thereby limiting supply and driving up prices. Major festivals also drive up demand andprices. She also periodically receives remittances from a daughter who works in the city ($500 over thepast 6 months.)P a g e 9 | 23THE CITY UNIVERSITY OF NEW YORKThe household is not able to meet its weekly expenses, with income covering food and miscellaneouscosts on average four out of the seven days per week. The household often turns to family members suchas Thidas sister for help and maintains no savings. Assets are limited, and primarily consist of materialsto maintain and harvest the jasmine, a basic motorcycle (moto) which is used by the family members toget to and from work, school or the market, and the family home. The land her home and farm are locatedon has already been pledged against a loan to a microfinance organization.Household Cash Flow ChartSource: Adapted from field research study (Sze, 2013)In order to meet the cash flow shortfalls, Thidas household has obtained a number of loans, both formaland informal, and relied on gifts of stores of rice and other creative measures to get by.MFIs have frequently visited her village, and held meetings for the village to learn more about theirproducts. On other occasions, MFI staff have come to her home to tell her about products and services.In a few cases, she took out a loan with the representative making a home visit.She currently has three outstanding MFI loans:• R400,000 loan ($100 equivalent), 25 week term, 20 weeks remaining, pays R22,000 per week($5.50 equivalent), no collateral, used for general family cash needs• $300 loan, 1 year term, 11 months remaining, pays $30 per month, no collateral, used to partiallypay daughter surgery expenses• $3,000 loan, 3 year term, 2.25 years remaining, pays $120 per month payment, collateral in theform of land title, used to partially pay daughters school fees(6,000,000)(4,000,000)(2,000,000)-2,000,0004,000,0006,000,0008,000,0001-Jun 1-Jul 1-Aug 1-Sep 1-Oct 1-NovThidas Household Cash FlowTOTAL INFLOWS TOTAL OUTFLOWS Net Cash FlowP a g e 10 | 23THE CITY UNIVERSITY OF NEW YORKIn addition, Thida believes it is important to participate in tongtin to support her friends and neighborswho have financial needs. When a neighbor who was starting a tongtin group to raise money for her sonsschool fees, she recruited Thida who was happy to join to support her neighbor and earn some intereston her money. The members of this group are doing better than her financially, giving Thida confidencethat the group will remain liquid. The tongtin groups she participates in today were organized by a middleaged woman her relative introduced her to from a neighboring village, a middle aged farmer in her village,and a young jasmine seller in a neighboring village. In general, Thida believes she has earned good returnson tongtin funds contributed compared to the hassle and low rates associated with depositing moneywith the bank. These days, she does not have extra money left over to save and is glad to be in two tongtingroups where she has not yet won the pot so that she can bid and receive the money to help her withemergencies. She has already won the pot in the tongtin with the leader based in her village and it wasexpensive. Still, it was a very quick process and she did not have to wait for the MFI representatives tocome to the village to get help. The is using the young womans tongtin for savings, but unfortunately 10people have already run away from that group. She bid and lost the tongtin managed by the middle agedwoman a few times, but would have used the funds to make payment for daughter study, repay an MFIloan, and buy parts for a water pump to improve jasmine production.Her current tongtin groups are as follows:• 90 members, $5 weekly contribution, has not received the pot yet, 35 weeks remaining• 60 members, $7.50 weekly contribution, has received the pot, 10 weeks remaining• 60 members, $12.50 weekly contribution, has not received the pot yet, 18 week remainingOver the past year, she also obtained a $50 loan from a loan shark (related to the daughters surgery), andanother $150 loan from her aunt. She has paid off the emergency $50 loan shark obligation with adonation from her daughters overseas financial sponsor. Terms of repayment for the loan from the auntare not defined and there is no explicit agreed interest payment.Today, she is feeling the weight of the significant burden of loan interest and tongtin payments which nowcomprise about 70\% of her average household inflows.DECISION TIMEThida is not confident in her crop harvest potential due to the crop infestation, and her family is not ableto fill the gap. She does not want to disappoint her group and face future exclusion from tongtin clubs.The loan shark and her tongtin will both be expensive in terms of interest cost relative to a microfinancebank loan. Faced with defaulting on her payment for a Tongtin group, Thida takes out a new $80uncollateralized 25-week loan with $4.50 weekly payments with the visiting MFI that has come to herhome in the village.P a g e 11 | 23THE CITY UNIVERSITY OF NEW YORKQUESTIONS FOR DISCUSSION1. Did Thida make the right decision?2. Is the microfinance loan a complement or substitute for the informal Tongtin financing club?3. What risks does the Tongtin participation pose to the client, and what can she do to reducethose risks? Why do you think Thida continues to participate in the tongtin despite the risks?4. What risks does the Tongtin participation pose to providers of microfinance services, and whatcan microfinance providers do to reduce those risks?5. What financial products in the formal sector is tongtin most similar to?6. What are some of the reasons clients like Thida would use tongtin for savings or loans?7. What financial products in the formal sector would be most appropriate to address Thidasvarious cash needs and why?8. Are there other products, services, or actions that could have prevented Thidas cash crisis?9. How does the availability of multiple sources of capital impact client decision making?10. How can Thida break the cycle of paying off existing loans with new indebtedness?P a g e 12 | 23THE CITY UNIVERSITY OF NEW YORKEXHIBIT 1Map of CambodiaP a g e 13 | 23THE CITY UNIVERSITY OF NEW YORKEXHIBIT 2Koh Krabei Village of CambodiaKoh Krabei is situated in the southeast of Phnom Penh across the river from the city. Phom Koh Krabeibelongs to Prek Thmei Commune, Mean Chey District of Phnom Penh.These village has daily gross domestic product of $2.58, which is favorable compared to half ofCambodians living on lss than $2/day. During field research interviews in 2013, the team observedpolitical stability and good infrastructure, such as viable road and high access to electricity.The villagers grows mostly jasmine, which supplies Phnom Penhs ceremonial and religious needs.According to an article by Phnom Penh Post (2009), Koh Krabei is famous for having many jasmine farms.Most farms will sell their produce to wholesalers who go to the markets in Phnom Penh to sell them totea makers. However, each week most households would send a family member to sell jasmine wreathsand ornaments in the markets or Pagodas. Jasmine is a crop that will provide fresh flower buds almostdaily, and it is closely tied to the culture of Cambodians.Other crops include, papayas, bananas, longans, and oranges. During important events like weddings,festivals, Khmer New Year, and Pchum Ben, where demand would exceed supply of jasmine flowers,villagers can reap a very high profit.Figure 2: Google Map of Phnom PenhP a g e 14 | 23THE CITY UNIVERSITY OF NEW YORKSource: Field Research -Description Koh KrabeiPopulation (2010) 5,191No. of Chamkar farmer families(2010)9785Main Occupation(Commune level, 2010)Long-term cropsAccess to electricity(Commune level, 2010) 97.11\%Small-scale food shopbusinesses (Commune level,2010)31Rice production per capita(Commune level, 2010) 2kg/person9 Chamkar land is land that is used to grow a variety of crops.P a g e 15 | 23THE CITY UNIVERSITY OF NEW YORKEXHIBIT 3MFI SECTOR IN CAMBODIAMajor MFIs in Cambodia Sorted by Loan Book Size:Source: Mixmarket.orgP a g e 16 | 23THE CITY UNIVERSITY OF NEW YORKLending methodologiesThere are three main types of credit that is provided by MFIs in Cambodia - individual loans, solidaritygroup loans, and community bank loans (Vada, 2010) (Kredit Microfinance, n.d.). The individual loan thelargest form of credit provided by the MFIs, but it typically requires collateral and guarantor to reduce thedefault risk. They are first evaluated by a MFI credit officer, who interviews the client, his or her neighbor,and village chief.The second type of credit is the solidarity group loan, where the borrowers form groups to borrow moneytogether. If one person in the group defaults, the entire group is deemed as in default as well. The grouploan reduces the problem of adverse selection—where the MFI does not know if the client is creditworthyand the problem of moral hazard—where the MFI cannot observe if the loans are put to good use orcarelessly frittered away (Ledgerwood, 1999). As a result, groups will now look for people they trust totake the loan together, and also look out for each other to ensure that the loans are put to good use. Oncea group is formed, the credit officer will evaluate them and then conduct weekly visits to collect therepayment.The third type of credit is the community bank, which is usually formed in villages that are difficult for theMFI to access (Ledgerwood, 1999). This product is very similar to the solidarity group loan, however theloans are monitored by an association of village members and guided by a credit officer (KreditMicrofinance, n.d.). The MFI would lend seed capital to the community bank, and all members would signa loan agreement to guarantee each other (Ledgerwood, 1999). Members will form small groups between4 and 6 people and can form up to a maximum of 20 such groups (Kredit Microfinance, n.d.). The loancycle is 12 months and the loan amount increases with each successful completion of the cycle (KreditMicrofinance, n.d.).Competition and Over-indebtednessThe microfinance industry in Cambodia is very competitive given the number of institutions in the countryalone. Competition and limited reach of the Credit Bureau can give rise to clients with multiple loans.Moreover, because of the competitive nature of the industry, the problem of over-indebtedness couldbecome a reality if there are no ways to keep track of everyones credit history. The Credit Bureau wascreated in 2011 but not all loans are required to be reported as only registered MFIs need to report, soeffectiveness is still limited. In an interview with a microfinance practitioner, the list of credit history isupdated once a month and if the client is in need of a large sum, he/she could go to two or more MFIs atthe same time to obtain the loan and the MFIs would not know.P a g e 17 | 23THE CITY UNIVERSITY OF NEW YORKThe Cambodian Institute of Development Study looked at this question and gathered data regarding thelevel of penetration and over-indebtedness, through eight microfinance institutions that represent 77\%of the borrowers in the microfinance industry, and 88\% of outstanding gross loans (Liv, 2013).Figure 3: Consolidated Village Data SourceLevel of Penetration Levels ofPenetrationNumber ofVillagesPercent of TotalVillagesSaturated >100\% 914 6\%Very High Penetration 75-100\% 1,260 9\%High Penetration 50-75\% 2,444 17\%Moderate Penetration 25-50\% 3884 28\%Low Penetration <25\% 4780 34\%No Service 0\% 791 6\%Grand Total N.A. 14,073 100\%The study selected 44 villages that had overlapping coverage from the 8 partner MFIs. From these villagesa random sample of 1,500 clients was selected from the total of 10,266 clients. In these villages, the reportmeasures over-indebtedness by taking the monthly installments on all business and household debt overthe monthly net income, which includes the revenue from business and household minus expenses frombusiness and households excluding debt expenses (Liv, 2013). They found that a majority (56\%) ofborrowers were solvent, where their monthly debt repayments were 75\% of less than their new monthlyincome. 12\% of the sample was considered at risk while 22\% was considered insolvent. Another 10\%was not classified because they did not have their income data. The study confirmed that about a fifth ofMFI clients have obtained more loans than they can pay back.P a g e 18 | 23THE CITY UNIVERSITY OF NEW YORKEXHIBIT 4Aggregated Income June - November 2013 for Three Typical Jasmine Farmers in Koh KrabeiBelow is based on field research carried was out by Jeremy Sze and supervised by Michele Costellobetween June 2013 - March 2014 using the financial diaries methodology and in-depth household surveys.Typical and referral sampling were applied to gather our respondents (Palys, n.d.). Observing typicalhouseholds will allow us to understand cash flows that could be representative of Cambodias ruralvillages. Referral sampling enables us to reach households that are similar to each other.Occupation Household Total(US $)Median(US $)Std. Dev.(US $)Mean(US $)\% ZeroWeekFarmer Thida 1650.65 50.75 62.58 71.77 9\%Farmer Chenda 2514.85 102.50 79.26 109.34 9\%Farmer Ary 1364.83 38.38 53.44 59.34 13\%Source: Working paper Financial Diaries in Cambodia, Jeremy Sze, May 2014P a g e 19 | 23THE CITY UNIVERSITY OF NEW YORKEXHIBIT 5Range of Financial Service ProvidersSource: New Microfinance Handbook Ledgerwood 2013P a g e 20 | 23THE CITY UNIVERSITY OF NEW YORKEXHIBIT 6Financial Service Needs for Different Livelihood SegmentsSource: New Microfinance Handbook Ledgerwood 2013P a g e 21 | 23THE CITY UNIVERSITY OF NEW YORKEXHIBIT 7Additional Cash Flow Information for Thidas HouseholdBelow is adapted from field research carried was out by Jeremy Sze and supervised by Michele Costellobetween June 2013 - March 2014 using the financial diaries methodology and in-depth household surveys.Typical and referral sampling were applied to gather our respondents (Palys, n.d.). Observing typicalhouseholds will allow us to understand cash flows that could be representative of Cambodias ruralvillages. Referral sampling enables us to reach households that are similar to each other.Source: Adapted from field research (Sze, 2013)Thidas Household2013, in Riel (R4000:$1) June July August September October NovemberInflowsagriculture 388,000 304,500 1,235,300 540,000 1,091,800 859,000other work/remittances 280,000 530,000 560,000 560,000 400,000 465,000gifts 10,000 30,000 145,000 - 70,000 -tongtin - - - - - -loans 220,000 900,000 - - 1,400,000 -TOTAL INFLOWS 898,000 1,764,500 1,940,300 1,100,000 2,961,800 1,324,000OutflowsFood 315,000 329,900 455,500 322,800 242,700 559,400farming inputs - - 5,000 20,000 5,000 -utilities 22,500 87,500 66,500 67,500 24,600 22,500bicycle/moto - 148,000 - - - 12,000other sundry 24,000 98,000 53,500 18,500 67,000 133,300gifts 58,000 74,500 41,000 28,000 . 105,000education 108,000 55,000 50,000 - - 3,875,000health - 38,000 30,400 25,000 2,000,000 8,000tongtin 266,000 335,500 318,000 364,000 320,000 278,000loans principal & interest 480,000 517,000 657,000 507,000 712,000 622,000TOTAL OUTFLOWS 1,273,500 1,683,400 1,676,900 1,352,800 3,371,300 5,615,200Net Cash Flow (375,500) 81,100 263,400 (252,800) (409,500) (4,291,200)Stored food and rice used 63,000 55,000 110,050 25,000 96,200 122,000P a g e 22 | 23THE CITY UNIVERSITY OF NEW YORKEXHIBIT 8Characteristics of Cambodian ROSCAs called tongtin observed in small villages outside Phnom PenhThe below information is based on field research carried was out by Jeremy Sze and supervised byMichele Costello between June 2013 - March 2014 using the financial diaries methodology and in-depthhousehold surveys.Definition of ROSCA: an association formed upon a core of participants who make regular contributionsto a fund, which is given, in whole or in part, to each contributor in rotation (Ardner, 1964)High Level Types of ROSCAs:ROSCAs are defined by the manner in which they distribute funds to members. The four main types ofROSCAs are as follows (Rutherford, 1999):1. Prior agreement2. Agreement at each round3. Lottery4. Bidding for the lump sumThe Cambodian tongtin observed in the study meets the definition of a bidding ROSCA.Primary ROSCA characteristics observed for Cambodian Tongtin in villages outstide Phnom PehnOrganizational Operational Risk ManagementFormal/Semi-Formal/InformalHowformed?MembershiprestrictionsSize of pot Process toaward potMeetingfrequencyUnderwriter? Screeningmembers?Semi-formal.registered withvillage chief inmost cases;leader is notcompensated butdocuments thegroup members(and sometimesalso the rules ofthe group) on apaper signed bymembers usingthumb printSelfnominatedleaderrecruitsand/orapprovesthe playersYes,membersmust beapproved byleader;memberscan play asmore thanone player inany gamewithpermissionof leaderSymmetrical(based onconsistentcontributionper memberper week)Finite, timebound,sealedauctionbidding,chaired bythe leader(with nothird partyauditfunction ormethod)Preagreedregularmeetingsweekly,bi-weeklyormonthlyLeader acts asunderwriterYes,membersmust beapprovedby leader;usuallyreferred byanotherplayer toleader;sometimesmust be ina salariedjob ormarriedDescription of important characteristics:• Time bound? Yes, term is based on number of participants and the pot is distributed at a regularinterval (weekly, bi-weekly, or monthly until all participants have received funds). The regularP a g e 23 | 23THE CITY UNIVERSITY OF NEW YORKpayment and conclusion of the ROSCA acts as an informal audit during the life and at the conclusion of the game• Symmetrical? Yes, all members have a chance to bid for a consistent pot at a regular interval.• Reciprocal? Yes, all members are either savers or lenders based upon redistribution of funds in the pot (contrary to pooling of funds where only a few members receive payment due to a specific event occurring and others receive nothing)• Graduated payments? No, members pay the same amount weekly for the life of the game• Leverage? Yes, members can participate as more than one player in the tongtin group• Credit Screening of members? Informal. Certain tongtin groups require members to have a salaried job or be married; respondents indicated this was because it showed participants were able to pay into the group with regularity during the life of the game. More commonly, affinity groups such as groups such as neighbors, artisans or teachers played together.• Pre-agreed Risk sharing? No, most members indicated the leader assumes the credit risk as an informal underwriter for all members.• Leader compensated? No, however leader receives first round funding.• Use of funds by members? Varies. School fees, business investment, household expenditure, purchase of equipment such as moto or water pump, health emergency funding, etc.P a g e 1 | 23THE CITY UNIVERSITY OF NEW YORKDRAFT VERSION MARCH 2, 2016TONGTIN OF CAMBODIA & MICROFINANCE: COMPLEMENT OR COMPETITORThis case was written by Michele Costello, an Adjunct Professor at Baruch College, solely as the basis for class discussion and is not intended to serve as an endorsement, source of primary data, or illustration of effective or ineffective handling of a business situation. Names and certain other identifying information have been disguised or purposely omitted to protect confidentiality. Copyright © 2016, Michele Costello - Do not reproduce without written permission of the author .edu.I dont know how much money I earned or spent last week, but I know that my expenses are higher than my income, so I borrow ...I am so busy with tongtin activity. For all three groups I am in now it is R100,000 per week. I bid one time per week on each group...it is too much work to play everyday.- Thida, from Koh Krabei, CambodiaIts a hot day in Koh Krabei, Cambodia. Sitting on a wood bench outside her tin roof home, Thida takes a break from collecting Jasmine to drink some water and contemplate her situation. Her jasmine growing and gathering has produced steady income in the past, but now she is suffering from lost crop due to a pest infestation. In addition, the family has still not recovered financially from the cost of her daughters emergency stomach operation in October and she just paid her childrens university fees in November. Gifts from friends and family (a neighbor, a foreign financial sponsor, her daughter who is working in the city, and local political party) have only covered a portion of the family expenses, and she still increased her debt burden to cover those costs. She is now making multiple payments on microfinance loans and informal community savings and loan clubs called tongtin each week. She will see the leader of her tongtin savings and loan club will tomorrow, but she does not have the funds for her required weekly contribution. As she ponders her options, a representative from a local microfinance institution approaches her home to discuss a new lending program.BACKGROUNDWHAT IS MICROFINANCE?Microfinance refers to the provision of a wide range of financial products and services to those who are excluded from the formal finance sector. According to 2011 data from the World Bank, an estimated 2.5 billion working-age adults globally, or more than half of the total adult population, do not have access to formal financial services (Ledgerwood, The New Microfinance Handbook, 2013, p. xvii). Examples of microfinance products and services include loans, savings, insurance, payment transfers, skills/training, and social benefits. Services are provided by microfinance organizations known as Microfinance Institutions (MFIs) which are structured in a range of financial and non-financial institutions operating non-profit and for-profit models. The industrys key goal is to expand financial access to excludedP a g e 2 | 23THE CITY UNIVERSITY OF NEW YORKsegments of society including marginalized populations and those at the bottom of the economic pyramid.Some industry observers have called microfinance a movement that envisions a world in which as manypoor and near-poor households as possible have permanent access to an appropriate range of high qualityfinancial services1.While microfinance activity has roots in governmental and non-governmental organization (NGO)economic development activities over many decades, microfinance in the form that it is known today tookroot in the 1970s through pioneering organizations such as ACCION International, Grameen Bank, andOpportunity International. These organizations sought to recognize the unique challenges of the poorand redesign the delivery of appropriate financial products and services to this population. While manyorganizations initially began with lending programs that targeted specific observed needs in thecommunities in which they worked, the MFIs often expanded to provide other services either to breakdown barriers to access, protect clients, and/or meet other short and long term client cash flowmanagement needs. In this way, the industry has evolved from a lending-centric to a diversified financialservices focus. Microfinance gained global prominence in the mid-2000s with the 2005 UN Year ofMicrofinance campaign and the 2006 Nobel Peace Prize award to Mohammed Yunus and Grameen Bankfor their work in microfinance and its impact on economic stability and peace.Today, there are thousands of known MFIs globally servicing over 100 million borrowers and savers, andthe market has been experiencing a double digit growth rate. A of 2013, the global average loan size perborrower is roughly $2,000, but loan sizes can range from $20 to $20,000 depending on the geographiclocation and sophistication of the client. (Symbiotics, 20132 ; mixmarket.org)MICROFINANCE IN CAMBODIACambodia is located in South East Asia, and shares its borders with Laos, Vietnam and Thailand. It isdivided into twenty-four provinces and has a population of approximately 14.8 million people, with 80\%of its population living in rural regions (World Bank, n.d.). With a per capita GDP of US$ 944, Cambodia isone of the poorest countries in the region (World Bank, n.d.) Cambodia is a partially dollarized economy(Kang, Is Dollarization good for Cambodia?, 2005), due to periods of Vietnamese and United Nationsadministration control following the defeat of the Khmer Rouge military regime. As a result, manyindividuals and institutions use the Riel (introduced by Vietnam, symbol R) and the US dollar (usedduring the period of UN administration, symbol $) interchangeably. The main sectors of its economyare agriculture, garments, tourism, and construction (Kang, 2005).Cambodias microfinance industry began in 1990 (Cambodia Microfinance Association, n.d.) to addresspoverty and lack of financial access. The country has one of the most developed and competitivemicrofinance sectors in the world due to its recent relative political and economic stability coupled with1 Robert Peck Christen, Richard Rosenberg & Veena Jayadeva. Financial institutions with a double-bottom line:implications for the future of microfinance. CGAP Occasional Paper, July 2004, pp. 2-32 2013 Symbiotics MIV Survey: Market Data & Peer Group Analysis; Published by Symbiotics Group; 2013P a g e 3 | 23THE CITY UNIVERSITY OF NEW YORKthe large unmet financial need and the large presence of NGOs and aid organizations operating in thecountry following the rule and genocide of the Khmer Rouge regime. In the 1990s, international donorsand non-governmental organizations began launching non-profit micro-credit projects within ruraldevelopment programs which became the microfinance institutions we see today. As of 2012, there are83 registered financial institutions in Cambodia (International Monetary Fund, 2013). According toCambodia Microfinance Association, an industry trade organization, microfinance institutions3 serve 1.9million people (Cambodian Microfinance Association, n.d.).Microfinance is part of the formal financial sector and is a regulated activity in Cambodia. When thegovernment established the Central Bank Law of 1996, it gave the National Bank of Cambodia,responsibility to regulate and oversee the microfinance sector (Vada, 2010). In 2000, the National Bankof Cambodia issued regulations regarding the classifications for Microfinance Institutions (Vada, 2010)based upon scale and scope. The largest MFIs are required to be licensed by the central bank4, and areregulated in a similar manner to commercial banks with the exception of a lower capital requirement(Vada, 2010). Medium-sized MFIs, on the other hand are required to register with the central bank, andare subjected to less stringent rules - less complicated reports (Vada, 2010). Lastly, the smallest MFIs arenot regulated or supervised because of the high operating costs of such work (Vada, 2010). These licensespertain to the ability to issue loans. In order to take deposits, there is an additional set of requirementstesting scale and sustainability to obtain a deposit-taking license.5 The National Bank of Cambodia doesnot impose restrictions on interest rates charged by MFIs, and therefore MFI rates are set by marketforces. However, rates charged by MFIs in Cambodia have been documented by researchers as two tothree times lower than the interest rate charged by community loan sharks (Vada, 2010). Therefore, thelaunch of the microfinance sector has provided a source of low cost loans to the rural population.3 A microfinance Institution is defined by the National Bank of Cambodia, as having a loan portfolio outstandingequal to or greater than $25,000, or have mobilized savings of $250 or more, or having 100 depositors or more.4 37 of the 83 MFIs are licensed by the central bank (National Bank of Cambodia, n.d.); 7 of the 37 subset of MFIare licensed to take deposits5 Institutions need to have held the MFI license, as described in the previous paragraph, for three years, and have agood and sound financial condition judged by the central banks internal rating system for at least two years,before they can apply for this license. In addition, these MFIs need at least KHR 10,000 million (USD 2.5 million), aManagement Information System, to conform to the chart of accounts, and have a sustainable profitability for twoconsecutive years.P a g e 4 | 23THE CITY UNIVERSITY OF NEW YORKThe country also has a high saturation of microfinance institutions (Liv, 20136). Because of the high levelof microfinance activity and competition in Cambodia, the potential for clients to receive multiple loansfrom different MFIs is high. In 2011, the Central Bank created the Credit Bureau of Cambodia, whichrequires registered MFIs to report lending activity and thereby develop individual credit history profilesfor clients (Credit Bureau Cambodia, n.d.). There are still limitations, as reporting for non-registered MFIsand informal sources or credit are not disclosed and the Credit Bureau therefore maintains only a limitedpicture.Figure 1: Consolidated Village Data SourceLevel of Penetration Levels ofPenetrationNumber ofVillagesPercent of TotalVillagesSaturated >100\% 914 6\%Very High Penetration 75-100\% 1,260 9\%High Penetration 50-75\% 2,444 17\%Moderate Penetration 25-50\% 3884 28\%Low Penetration <25\% 4780 34\%No Service 0\% 791 6\%Grand Total N.A. 14,073 100\%Source: Cambodian Institute of DevelopmentTONGTIN OF CAMBODIA - HISTORY AND STRUCTUREFor centuries, people have formed informal groups to pool their money for purchase of goods, savings, orinsurance in the absence of formal financial systems. In the microfinance industry, these informalassociations where a core group of participants make regular contributions to a fund which is distributedin whole or in part to each contributor in rotation as a rotating savings and credit association orROSCA. The earliest documented forms of saving and loan clubs originated in Italy in the 17th centuryunder the name tontine where members had an opportunity to save or borrow through theircontributions to the group fund. The tradition of community based financial self-help groups continuestoday under the names tontine in Asia, susu in Africa, or tandas in parts of South America. Whiletheir characteristics can be quite varied, a typical ROSCA involves a self-selected group where membersagree to contribute a fixed sum at regular intervals (daily, weekly, monthly, etc.) and then distribute thepot at each interval using a pre-agreed system of distribution. The primary methods for distribution ofthe pot are use of a pre-determined order, member vote at each interval, lottery, or a bidding process6 Liv, D. (2013). Study on the Drivers of Over-Indebtedness of Microfinance Borrowers in Cambodia: An In-depthInvestigation of Saturated Areas. Phnom Penh, Cambodia: Cambodia Institute of Development StudyP a g e 5 | 23THE CITY UNIVERSITY OF NEW YORK(Rutherford, 19997). The group is organized and managed by a leader who typically receives the potfirst and then collects and distributes funds at each group payment interval. Participants could berecruited through workplace connections, community connections, an affinity group, or through a friendsand family network. The ROSCA will continue for a number of intervals equal to the number ofparticipants so that each member has an opportunity to win the pot. Each member has an opportunityto receive the pot based on the pre-agreed system, and members can win the pot only once duringthe cycle. (Ledgerwood, 19998) Variations exist where members elect not to receive the pot duringthe cycle, and instead receive the pot at the end of the cycle because they intend to use the group onlyas a mechanisms for savings. In a simple non-bidding ROSCA, members will only receive an amount equalto the sum of the agreed group contribution, and effectively receive zero or negative interest consideringthe time value of money. In a bidding ROSCA, the potential pay-in per week and pay-out of the pot variesand the members have an opportunity to earn interest or borrow at variable rates based on bidding. AllROSCAs are trust based groups that rely on peer pressure to enforce ongoing participation in the system.If members drop out, future payments to players who have not received the pot are jeopardized. Inaddition, there are other transaction costs associated with ROSCAs such as member transportation oropportunity cost to attend the regular meetings or the leaders costs for refreshments or otherorganizational aspects of hosting the meeting. In most cases, there is also a social significance assignedto belonging and participating in the group.The tongtin of Cambodia is derived from the term tontine and typically follows the model of abidding or auction ROSCA. Under this system, the leader recruits a group of participants to start thefund, establishes a periodic contribution amount, and sets a regular meeting interval for future collectionand auction of the pot (for example weekly). The leader receives the pot first, and usually circles thefund because he or she has an urgent cash need (purchase of a loom, childrens school fees, a large healthexpense). In the subsequent weeks, members will continue to make contributions which are variablebased on a sealed bid auction process run by the leader. Members submit their bid to the leader on a slipof rolled or folded paper, and the leader selects the best bid to win the pot. The best bid will be conveyed7 Rutherford, S. (1999). The Poor and Their Money: An essay about financial services for poor people.Manchester,UK: University of Manchester.8 Ledgerwood, J. (1999). Microfinance Handbook. Danvers, Massachusetts: World Bank.Participant Cash Flow: ROSCA with lottery allocationWeek 1 2 3 4 5 6 7 8 9 10 TOTALPayment to Leader $100 $100 $100 $100 $100 $100 $0 $100 $100 $100 $900Payout to Participant $900 $900Payout minus contributions: $0Assumptions: 10 member ROSCA, $100 weekly contribution, player wins the pot in a lottery week 7P a g e 6 | 23THE CITY UNIVERSITY OF NEW YORKas an interest figure, which is actually the discount the member is willing to receive that week off the facevalue of the typical contribution amount. For example, in a tongtin with a weekly payment of $100, awinning bid of $15 means that the members contribute $85 per person that week instead of $100 perperson to the winning bidder. In the case of a tie, the members must bid again until a winning bidemerges. Once a bidder has won the discounted pot, he or she must contribute the full face value of the$100 weekly payment regardless of future winning bidder figures. Members can bid every week until theywin, but are not required to bid at any time. In this way, members who do not win the pot earn interest(in the form of reduced weekly contributions but a full payout at the end) which varies per period basedupon the value of the winning bid. The winners interest rate (or the discounted pot sum) is also variablebased upon the competing bidders in any given week. Not all members are required to bid, and there arenet savers and net borrowers in the tongtin system. Due to bidding it is impossible for participants toknow their weekly contributions, savings interest rate, or borrowing cost ex-ante , or if they will ever besuccessful in winning the pot. It is also the case that tongtin groups can be quite large, with over 100participants. While conducting field interviews in Cambodia for this case, a few participants mentionedthat their groups were so large (over 200 members) they could not keep track of where they were in thecycle or when these tongtin groups were ending. Many members do not record the payments they makeor the specific amounts and rely on trust that the system is working. For long-running groups, leadershave been known to conduct annual book reconciliations or audits to maintain the integrity of the tongtinfinances. The risk of defecting members is also real, and in field interviews for this case study, participantsto