Collaborative finance is a category of financial transaction that occurs directly between individuals without the

intermediation An intermediary, also known as a middleman or go-between, is defined differently by context. In law or diplomacy, an intermediary is a third party who offers intermediation services between two parties. In trade or barter, an intermediary acts ...

of a traditional financial institution. This new way to manage informal financial transactions has been enabled by advances in

social media Social media are interactive technologies that facilitate the Content creation, creation, information exchange, sharing and news aggregator, aggregation of Content (media), content (such as ideas, interests, and other forms of expression) amongs ...

and peer-to-peer online platforms. The wide variety of collaborative finance resources may vary not only in their organizational and operational aspects but also by geographical region, share of the financial market, etc. It is precisely this heterogeneity that enables the informal savings and credit activity to profitably reach those income-groups not served by commercial banks and other financial institutions. It is their informality, adaptability and flexibility of operations – characteristics which reduce their transaction costs and confers upon them their

comparative advantage Comparative advantage in an economic model is the advantage over others in producing a particular Goods (economics), good. A good can be produced at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior t ...

and economic rationale. Collaborative Finance is characterized by highly personalized loan transactions entailing face-to-face dealings with borrowers and flexibility in respect to loan purpose, interest rates, collateral requirements, maturity periods and debt rescheduling. The Following are the features of collaborative finance that make it attractive to low income households: * It does not require a license – most informal suppliers work without an operating license to supply money. * It is non-profit motivated – profit, if any, is ploughed back into the community and its members. * It has multiple proprietorship – proprietorship lies not with one or two persons, but the group as a whole. * It does not need collateral – collateral and guarantees of repayment is ensured by, for example, peer pressure. * It has specific borrowers identified – most of whom are members of the community. * It has close informational links – between members that ensure repayment. * It facilitates reciprocation of credit disbursal – there is a give-and-take attitude, where borrowers and lenders interchange their roles. * It is not regulated by the central bank – with respect to limits and restrictions, reporting requirements etc. * It encourages community participation in other fields of development – the participatory approach of informal initiatives is easily replicable to a wide range of other community development issues.

Origin

The concept has been championed by Don Tapscott and Anthony D. Williams, co-authors of the book ''MacroWikinomics: rebooting business and the world''. Don Tapscott, Anthony D. Williams, ''MacroWikinomics: rebooting business and the world'', Portfolio Hardcover, 2010

Development

Rotating Saving Associations

A Rotating Savings and Credit Association (ROSCA) is a group of individuals who agree to meet for a defined period of time in order to save and borrow together. "ROSCAs are the poor man's bank, where money is not idle for long but changes hands rapidly, satisfying both consumption and production needs."F.J.A. Bouman, ''Indigenous savings & credit societies in the developing world'' in Von Pischke, Adams & Donald (eds.) ''Rural Financial Markets in the Developing World'' World Bank, Washington, 1983 ROSCAs are essentially a group of individuals who come together and make regular cyclical contributions to a common fund, which is then given as a lump sum to one member in each cycle. For example, a group of 12 persons may contribute US$35 per month for 12 months. The US$420 collected each month is given to one member. Thus, a member will 'lend' money to other members through his regular monthly contributions. After having received the lump sum amount when it is his turn (i.e. 'borrow' from the group), he then pays back the amount in regular/further monthly contributions. This explains the name rotating savings and credit associations' for such groups. Depending on the cycle in which a member receives his/her lump sum, members alternate between being lenders and borrowers. That is, there is a mutual give-and-take involved in ROSCAs. There is also a growing interest in

peer-to-peer lending Peer-to-peer lending, also abbreviated as P2P lending, is the practice of loan, lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online ...

and neighbourhood service systems: rather than consumers renting services from businesses, platforms are emerging to facilitate shared usage with each other.

Collaborative lifestyles

This system is based on the sharing and exchange of resources and assets such as space, skills, time and money. Such a system, while on-trend and sensible, will further dampen demand for and purchase of new products making economic growth very difficult.

Category examples

Local currency In economics, a local currency is a currency that can be spent in a particular geographical locality at participating organisations. A regional currency is a form of local currency encompassing a larger geographical area, while a community curren ...

Peer-to-peer lending Peer-to-peer lending, also abbreviated as P2P lending, is the practice of loan, lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online ...

* Complementary currency *

Microfinance Microfinance consists of financial services targeting individuals and small businesses (SMEs) who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; saving ...

Electronic money Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet. Types of digital cu ...

Collaborative consumption Collaborative consumption is the set of those resource circulation systems in which consumers both "obtain" and "provide", temporarily or permanently, valuable resources or service (economics), services through direct interaction with other con ...

* Rotating Savings and Credit Association * Time banks * LETS * Virtual currency * Mutual credit * Global Resource Bank

References