ASCA is an acronym for accumulating savings and credit association. It is an informal bank which collects equal contributions of money from members, equivalent to investment deposits; lends money to members mainly and distributes the capital and earnings in equal dividends to members at the end of each operating cycle.
Immediately after the first circle, the next cycle begins with new investment deposits. ASCA charges borrowers a fixed percentage dividend rate, equivalent to a fixed percentage dividend rate paid on preference shares.
The association is managed by the members themselves. This informal financial institution exists in Malawi and in other African and non-African countries and is indigenous to them.
Recently, the ASCA mode of banking has migrated to microfinance in the form of popular and successful informal village savings and loan associations (VS & LAs). VS & LAs have adopted all the features of the ASCA.
Where necessary, however, they have made changes some of which, such as naming investment deposits shares, and naming the fixed dividend rate charged on loans a service charge, are merely cosmetic.
Others, such as the provision of cash boxes with locks and key, elaborate record keeping of share and other transactions, and division of labour between treasurers and money-counters, are substantive changes. Can the ASCA mode migrate to formal banking as well?
Migrating to formal banking would open opportunities for ASCAs to extend their activities beyond accepting deposits and extending credit to their customers.
They would take on such normal commercial banking roles as keeping valuables for their customers, making payments and receiving money on behalf of their customers, giving advice to their customers, transferring money at home and abroad on behalf of their customers, and selling and buying foreign exchange, which they do not perform as informal financial institutions.
In some respects, the ASCA mode of banking is similar to the Islamic mode of banking. Therefore, if the ASCA mode of banking were to migrate to formal banking, it would bring with it many of the advantages of Islamic banking without the stigma attached to religious principles on which Islamic banking is based because ASCA banking is based on secular principles.
For example, both ASCA and Islamic modes of banking are dividend rather than interest-based. In other words, depositors are paid dividends and not interest; and lenders earn dividends and not interest. Dividends vary with performance.
Receipt of dividends is therefore fair because it is related to the performance of loans or deposits. Interest is a fixed charge. Paying or charging a fixed rate of interest is like reaping where one did not sow and this is considered to be unfair.
The other characteristic that the two modes of banking share is that they are equity-based rather than debt-based. Being equity-based means that each lender takes an investment interest in the business of the borrower for which the lender is paid a dividend.-The author is University of Malawi professor emeritus of economics.