African Indigenous Financial Institutions

The Case of Congo and Liberia

Julia Smith-Omomo

• Publisher: Palgrave Macmillan
• Year: 2018
• Print ISBN:
  9783319980102
• eBook ISBN:
  9783319980119
• Topic: Social Sciences
• Subtopic: Development Economics
• Index: Social Sciences

This book examines engagements with financial services in contexts of conflict. Using Liberia and the Democratic Republic of the Congo as case studies, it explores informal financial and business strategies and how these shift during conflict. Through a combination of regression analyses and panel data modeling with fixed effects, the project research indicates that conflict has a stronger effect on the nature of demand for credit and savings services than it has on the actual performance of financial institutions. In examining these patterns, the importance of networks and family becomes increasingly important—not just in the ways they are important to us as individuals, but as important determinants of post-war outcomes.

                                              

                                              

                                               

© The Author(s) 2019

Julia Smith-OmomoAfrican Indigenous Financial Institutionshttps://doi.org/10.1007/978-3-319-98011-9_1

Begin Abstract

1. Introduction

Julia Smith-Omomo¹

(1)

Independent Researcher, Washington, DC, USA

Julia Smith-Omomo

End Abstract

Shortly before writing this book, I was in Butembo, North Kivu, for the wedding of a colleague with 13 of my co-workers at the time, all field staff working for an agricultural development non-governmental organization (NGO). We had all travelled from Beni by road, a distance of 50 kilometres, and planned to stay there for one night. But on the day of the wedding, the road back to Beni was attacked.

My husband called me, but as we spoke, there was the ringing “ping” of message notifications incoming. “I have to go”, I said. And that would be the last time I spoke to him for two days. The messages, however, would not stop.

Rebels had taken over Kabasha, which lay on the road back from Butembo to Beni. Villagers were fleeing the area, and the rebels were searching cars that passed along the road for soldiers. My pings were the volley of informational updates about what was heard, what had been said, and what reporters were saying.

“It sounds serious”, our logistician said, who didn’t have data on his phone to read the WhatsApp messages. “Yes, it does. I might have to return to the United States”, I responded, unwilling to absorb the information. The military was forced out of Kabasha and Katungula, two towns along the road, by the National Movement of Revolutionaries (MNR).

It was that third part of the wedding, after the civil ceremony and the church ceremony, where everyone goes to a new location to eat and listen to speeches. We filed in, and I found my co-workers. Many of them had no idea what was happening on the road to Beni. In between the amplified outbursts of the master of ceremonies and the revelry of wedding party members, my phone received a volley of updates about the fighting. By the end of the day, the military managed to regain control of their posts, forcing the rebels into the nearby forest. But MNR regrouped and re-attacked the next morning. On Sunday morning, intense fighting between the MNR rebels and the military broke out. Villages emptied as farmers hoping to avoid crossfire fled to nearby settlements. Our path back to Beni was blocked. While my co-workers wanted to rely on the wisdom of local taxi drivers as an indication of when it would be safe to drive back to Beni, reports that cars were still being searched for military personnel made me uneasy.

The team were all throughout Butembo, but we kept in touch with text messages and WhatsApp. We decided to wait until Monday. But on Monday morning, friendly fire erupted inside of Butembo. We checked flight options, which would have gotten us back to Beni within minutes. There was no flight on Monday, nor on Tuesday. But we could charter a plane.

Permission granted from the US side, I checked with our accountant, who was in Butembo along with us for the wedding, on our liquidity. No, was the answer. There was no way to withdraw the organization’s funds in Butembo. Or at least not on such short notice.

Could I pay out of pocket and be reimbursed later? Conceivably, yes, but the timing would be tight as I had also requested to leave the country by the end of the week.

That night, driving his motorcycle in Butembo on his evening rounds, our accountant met with an accident and fell face first into concrete. His face had met pavement, and his lip had split from nose to chin. There was no way I was going to be paid back. “I’ve lost my beauty”, he bemoaned in the hospital.

Without repayment guaranteed, I found myself in front of an ATM the next day.

The needs of the present were more urgent than the needs of the future. Like many of my study subjects, I found myself tapping my savings for much more than I intended to.

Take a look at some of the following examples and try to see what they have in common:

Freddy went to visit a friend in prison and the guard accused him of trying to free the prisoner he was visiting, and took him into prison. Freddy contacted a friend of his who was a businessman, who bailed out Freddy for $400, the amount requested by the soldier. Freddy hasn’t been able to repay this loan to his friend who bailed him out.

Sam suffered a hit to his savings when his wife gave birth, and was forced to stop his trading work for about a week due to taxes. But perhaps the biggest hit to his savings in 2014 was due to the kidnapping of his brother. Without the identity of his kidnapper known, Sam’s extended family paid a ransom sum of $7000.

During a period of frequent massacres, the military prevented Saul from going to his field, losing him some income from his cacao cultivation. This may have been in his best interests, however, since on another occasion when he was at his field, rebels started attacking his workers and killed several people. He was unharmed, but his bike was stolen. Saul applied to a formal cooperative for a loan but he says “they had a meeting about me, but then I kept returning and returning and they didn’t make a decision and I got tired”. In the meantime, he applied for and was successfully given a loan of $150 from a tontine, or informal savings group, with a 10% interest rate.

It doesn’t take an economist to notice the similar behaviour across these cases. In my case, I simply relied on savings I had collected through my stable, US-based job, whereas in others, individuals turned to informal sources for loans they sometimes couldn’t pay back. But across these cases, a common theme of valuing the present over the future emerges, in line with what behavioural economists call “hyperbolic discounting”.

The concept of behavioural economics, or economics where people don’t act in predictable, linearly consistent fashions, has gained increasing interest in recent years, even leading to Nobel Prize recognition in 2017. Psychologists and economists have started to collaborate, in ways that are producing exciting new research . I am neither of these, but I am capable of making bad decisions in much safer environments than the ones I have studied. Across these cases, the decisions made are remarkable not for what they tell us about individuals, but as societies as a whole.

If there are patterns in financial practices during conflict that can’t be explained by traditional economics, then what these are and what influences these patterns should be of great interest to relief and development workers. This book is an investigation into this. Much of it is based on original research conducted in Liberia and the Democratic Republic of the Congo (DRC), including interviews with cooperative managers, mutual savings group committee members, bank managers and accountants, and financial service users from all walks of life, including rural farmers in remote villages in Eastern Congo and Northern Liberia. It is grounded in—and hopefully adds to the conversation on—the discourse in the microfinance community regarding performance metrics and behavioural economics.

Ultimately, of course, the reliability of the provided information will depend on gatekeepers’ perception of the researcher—their motivations, capacity, and integrity, none of which I claim to have in impeccable condition. This becomes especially critical in contexts which, having been exposed to conflict perpetrated by foreign forces, may be extra sensitive to cooperation with foreigners. As Bearak¹ tells in Kalyvas’ book, when a journalist was once investigating a massacre in Kashmir respondents started arguing with each other: “His translator leaned over him and whispered: ‘They are debating whether it is for the greater good of the village to lie to you, and if so, what are right lies to tell.’” Gatekeepers of information for this book, such as institutional managers, may have been either selective in the information provided, highlighted positive biases, or presented outright inflated or outdated data due to a combination of their cultural differences from me. The manager of one branch of a cooperative, for example, when asked what the average staff salary at his branch was, simply told me “Here in Congo, we don’t have salaries. We live in the informal”, although his counterpart in Butembo’s branch of the same cooperative was able to provide an average figure of $200 a month for staff.

Costly information is also often a cause of urban bias, in addition to a lack of interest, oftentimes, in more challenging research assignments. As Stathis Kalyvas notes, “Not coincidentally, one of the most intensely studied conflicts is Northern Ireland: an English-speaking country with good hotels, very pleasant scenery, temperate climate, tasty local cuisine,² and most important, not a high level of danger.”³ But as Kat Nickerson colourfully recalls, travelling in the Eastern DRC can only be safely done if you are integrated into a local host family:

Traveling by car for any length of time is an impossible task for there are no dependable gas stations, hotels, stores, or restaurants in the rural areas—and above all, no law enforcement agencies. That means no police force and above all, no one to turn to if something goes wrong unless you’ve been adopted by the local tribe. No one travels far in the Congo except for Congolese soldiers grouped together in small bands who walk the roads by day with automatic weapons in hand dispensing justice to those who pay them the highest fees. … Pulling into a border town feels very much like entering the bar scene in Star Wars I where violent assaults literally occur at the “drop of a hat”.⁴

In the absence of an armed escort, the research is limited to the cities of, in Liberia, Palala, Gbarnga, Sanoyea, Buchanan, Gbarma, Kakata, and Monrovia; and in the DRC, Butembo and Beni; with an acknowledgement that the experiences of financial service users here is not representative of those hardest hit by the conflict. It is also, certainly, not an attempt to speak for all African indigenous financial institutions, but rather a select few under stress from political conflict.

The research takes the reader through several arguments: For one, I point out that the literature does a very good job of analysing macroeconomic changes to countries due to conflict, but probably less as well a job of including the informal economy, which can often be quite a large factor to omit. In Chap. 2, the real work of this book will be laid out, starting with a discussion of socio-behavioural changes observed in a study conducted in post-war Liberia. Individual coping mechanisms during the conflict are presented, including a range of financial mechanisms relied upon and informal business practices. These are compared to financial mechanisms used before the war.

In Chap. 3, I unpack a second landscape of financial mechanisms, this time with greater empirical precision in determining aspects of efficiency. In the DRC, similar member-owned and indigenous financial institutions as are found in Liberia strengthen a framework for understanding the informal economy and user strategies. My research is used to construct categories of financial institutions, including informal ones, which are currently generalized in the literature without distinction, especially between exploitative ones and solidarity-based ones. By visiting all of these and treating them as comparable, I found I could ask the same questions to managers, staff, and accountants as I could to intermediaries of smaller loans.

Part of the data collected is used, in Chap. 4, to try to isolate the effect of conflict on performance of the financial institutions. In providing tentative regressions of the data, the direction of the findings suggests some probable underlying relationships, including a slight increase in demand for credit and an increase in Portfolio at Risk only in the formal sector. Including the informal sector therefore creates a fuller picture of the demand for financial services as a coping mechanism during conflict than not including the informal sector.

In Chap. 5, I provide two case studies, one of an informal financial service provider in an area considered post-conflict, and one which is considered heavily exposed to conflict. Here, over 200 respondents shared their experiences with financial services over the previous year, providing qualitative evidence that supports a narrative of hyperbolic discounting leading to fragmented formal networks—and short-term thinking that may be having an effect on the sustainability of livelihoods.

In Chap. 6, more structural equation modelling helps me find a phenomenon of increasing reliance by borrowers on informal financial service providers during conflict. An investigation into why this may be happening is explored, pulling in some of the myriad experiences recounted by survey respondents.

In Chap. 7, the effects of conflict on family structures is taken into account, such as the adoption of related children, labour patterns, and decisions related to engaging in secondary jobs. Overall, and not surprisingly, the research indicates an increase in the adoption of extended family members and charitable giving, and higher rates of underemployment and part-time work...

Table of contents

• Cover
• Front Matter
• 1. Introduction
• 2. Certainty Premiums and Cognitive Loads
• 3. Monrovia Transfigured
• 4. Shadows Are Weaker
• 5. What’s War Got to Do With This?
• 6. Is Microfinance by Itself Transformative in Post-conflict Contexts?
• 7. Social-Behavioural Changes
• 8. Stress Limits and Sparse Networks
• 9. No Easy Answers
• Correction to: Shadows Are Weaker
• Back Matter