Better from a friend or from a bank? Kyrgyzstan between informal and formal financial services

A third of Kyrgyzstan’s GDP sits in informal institutions. I spoke to people who use these systems to find out how it works — and why it’s important.

Iliyas Mamadiyarov
17 June 2018

Market at Jalal-Abad, Kyrgyzstan. Photo BY-NC-ND 2.0: Marco Fieber / Flickr. Some rights reserved.As the taxi driver prepares to embark on his daily route connecting Bishkek, the capital of Kyrgyzstan, to Talas, a city located in the country’s north east, a passer-by hands him stacks of money. The man explains that the money (which is the national currency, the som) is for his village. The driver appears accustomed to this sort of request: he charges his fee and takes the stacks. Once we depart, I ask the driver about this financial transfer, and he explains that the funds are meant to cover the person’s sherine obligations. “You know, his sherine is quite a costly one, I wonder why do people go on with this system?”

Sherine is the Kyrgyz term that designates an informal financial institution widespread across Kyrgyzstan, a country in the heart of Central Asia that achieved independence following the dissolution of the Soviet Union in 1991. This system corresponds to what economists term Rotating Savings and Credit Associations (ROSCAs). The concept describes a group of individuals who agree to make a number of financial contributions to a common pot over a predefined period of time. At the group’s regular meetings, the pot’s lump sum is given in turn to each contributor for their personal use, until eventually every group member has had their turn in using the funds, which ends a sherine life cycle.

ROSCAs have been around for centuries all over the world, albeit under different denominations. As prominent US political scientist Robert Putnam puts it in his seminal book Making Democracy Work: Civic Traditions in Modern Italy, ROSCAs have been found from “Nigeria to Scotland, from Peru to Vietnam, from Japan to Egypt, from West Indian immigrants in the eastern United States to Chicanos in the West, from illiterate Chinese villagers to bank managers and economic forecasters in Mexico City.” Putnam goes as far as to claim that many US savings and loan associations owe their beginnings to ROSCAs.

As it stands today, sherine is a widespread informal financial institution in Kyrgyzstan. But while the working mechanisms and structures of ROSCAs have been widely studied across the world, little information is available about the socio-economic role this associational form yields within Kyrgyzstan. Given that a great share of the country’s population engages in sherine, what is its effectiveness in alleviating poverty and insuring sustainable economic growth?

A bank or a friend: who do you trust more?

In 2014, The Economist suggested that adults in developing countries are half as likely to have an account in a formal financial institution as their counterparts in developed countries. Among other reasons, this is due to myopia, namely the failure to recognise the benefits of long-term savings and the desire to pursue immediate gratification instead. Yet ROSCAs, albeit informal, are savings institutions. In Kyrgyzstan, their proliferation may not be necessarily tied to economic short-sightedness, but are rather a question of trust.

“As a rule, sherine members are people from your birtuugan (relatives), friends or co-workers,” says Aijarkyn, a resident of Ming-Bulak village in the north-east of the country. “It’s just not possible for a random person to become part of a sherine, as you have to trust the person to let them be part of it. This is because it’s possible that he collects the pot and takes off, failing to commit to the group’s financial obligations,” she continues.

A wife and mother of five, Aijarkyn is a 51-year-old music teacher at a secondary school. In the course of three decades, she has been participating actively in various ROSCA groups. “My husband and I took part in sherine for the first time during the Soviet period. The participants were the immediate friends and members of my husband’s family. Within our family, we would spend the returns generated by sherine to purchase items for the household,” she tells me. “One good thing about ROSCA is that you can buy big furniture. For instance, once a member of my husband’s family was able to buy a big flat screen TV. If it wasn’t for sherine, he would never have been able to save enough to afford it.”

For Altyn Kapalova, an anthropologist and researcher at the University of Central Asia, trust is one of the defining elements for Kyrgyz ROSCAs. “Certainly, informal financial institutions possess a high degree of trust, as they are formed by the people themselves. These structures do not allow in a random individual. The control mechanisms inside ROSCAs are powerful, too,” she explains. Kapalova believes that the dozens of microfinance associations spread across Kyrgyzstan — in other words, formal financial institutions — are equally popular among the country’s population. However, ROSCAs prevail because of how rapidly they can mobilise funds. In a sense, ROSCAs are better suited to provide financial help to members during critical circumstances when funds are needed at a moment’s notice, such as for the organisation of funerals following a sudden death in a family, the celebration of marriages, the birth of a child, anniversaries and other occasions.

This points to a crucial aspect of ROSCAs in Kyrgyzstan, where informal financial structures seem to be preferred to formal ones. As Andrea Bohnstedt found in her study of informal systems in Kenya, accessibility and flexibility determined the pervasiveness of ROSCAs, a pattern which can also be observed in Kyrgyzstan. For instance, Ming-Bulak village residents cite the less onerous and more rapid fund mobilisation in the informal sector as one of the main reasons they prefer it to formal institutions such as banks. “I have heard that it’s possible to make a deposit in a bank,” Aijarkyn explains. “However, it remains difficult for me to do this because of the many formal papers that I am required to hand in.”

The delicate formal-informal interplay in Kyrgyzstan

Since financial transactions inside sherine are not registered, it is extremely difficult to calculate the exact number of these institutions. The picture is also blurred by the at times contradictory information provided by sherine participants. “There are at least ten sherines in our village,” says Gulmira, a resident of Tchat-Bazar village in north-east Talas who has been actively taking part in a ROSCA for the last five years. For Kalbubu, a resident of the same village, this number is not even close to accurate. “Possibly every household participates in some sort of sherine. Say the population of Tchat-Bazar is 3,000, then we can presume that there are at least 2,000 people taking part in sherines. So, possibly, there may be up to 1,000 active sherines,” she says.

Still, it is possible to come to a rough estimate of the money circulating in the informal financial system in Kyrgyzstan. Azattyk reports that approximately 2 billion USD originating from informal structures such as sherine are spent annually in the country. These expenses reflect the diverse types of economic transactions that take place within Kyrgyzstan’s rich informal networks. Apart from sherine, these include diverse social gatherings such as weddings, birthdays, and anniversaries (commonly known in Kyrgyz as toi) where invitees are expected to make a financial donation to the hosting family.

Approximately 2 billion USD originating from informal structures such as sherine are spent annually in the country

All in all, the financial turnover in the informal sector represents a staggering one third of Kyrgyzstan’s official GDP of 6.55 billion USD. This has a significant impact on its formal counterpart, such as banks and microfinance institutions. The law in Kyrgyzstan stipulates that the latter should “provide accessible microfinance services to alleviate poverty, increase employment, assist in development of entrepreneurship and social mobilization of the population.” But given the size of the informal sector, serious doubts remains on the extent these formal institutions actually achieve their goals. “You know, in our village, it’s a common issue. We get loans from a microcredit institution to pay sherine dues,” says Gulmira, the resident of Tchat-Bazar village. “And when the time comes to pay interest rates on the loan, we go through much pain to find the funds. People go to other microfinance companies or pawnshops to find the money. So many people left their jewelleries at various pawnshops.”

Inevitably, this problem has caught the attention of Kyrgyzstan’s lawmakers. In 2012, Ulukbek Kochkorov, Deputy Chairman of the parliamentary Committee on Economic and Fiscal Policy, headed an initiative to introduce amendments to the law on microfinance institutions. According to him, Kyrgyzstan has too many microfinance associations that disburse loans without necessarily inquiring on the funds final use. “Microfinance associations are not interested if their borrowers squander loans at gambling or host a lavish toi,” Kochkorov said during an interview with the BBC World Service. “What matters to these institutions is to make a profit by reselling the collateral for a price much higher than it was initially assessed.”

In a country known for weak rule of law, and given that most borrowers come from Kyrgyzstan’s poor and predominantly rural population, who struggle to grasp the terms of the loans they take up, it is possible that the country’s microfinance bubble may burst, significantly damaging the informal financial sector in the process.

But for now, sherine participants seem to have much more pressing problems to deal with on a daily basis. “You know, it’s difficult to save money in the village,” says Kalbubu, also a resident of Tchat-Bazar village. “This is why sherine provides a great opportunity to save up and purchase something useful for the household.”


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