A unique discussion came up with a fellow customer while buying my weekly groceries. It caught my attention for the uniqueness, simplicity and yet the potential dangers in it. It’s a way which is used(quite frequently to my surprise) by local people belonging to lower middle class societies to fulfill their debt needs and investment aspirations. It’s something they call the Committee System.
Now the traditional means of getting debt at a local level involves either dealing with a bank (which grants loans based on lots of financial criteria) or borrowing from a friend (lot of trust involved if you ask for a big amount) or the local money lenders (which charge huge interest). These are all difficult avenues for lower middle income class and lower income class people. Similarly investment options are very limited to PPF and Post Office Savings. It is probably these reasons which led to the development of this unique methodology of investment and debt raising. How legal is it I am unable to comment but I thought it would be interesting to share and get views.
The Committee System involves a group of people (can range from 5-20) coming together to form a “Committee” where each person contributes certain amount of money towards a corpus of funds. Typically the person initiating the committee is the cashier and is responsible for each transaction and servicing of everything that goes for that particular committee. So for example lets assume that Mr. X is the cashier of a committee floated by him having 10 members and each member contributes Rs. 10,000 towards the corpus which amounts to Rs. 1,00,000. Now the committee holds an auction among the 10 members for granting this corpus as a debt. The auction amount is basically the interest portion on the corpus. So in our committee of Mr. X with a corpus of Rs. 1,00,000 the auction starts at lets say Rs. 5000. What is means is that the person bidding Rs. 5000 will, if he wins the auction at that bid, take the Rs. 1,00,000 corpus for a cost of Rs. 5000 so effectively he will get Rs. 95,000. The start amount is declared by the cashier because in case their is no higher bid he has to take on the debt. So each member is given a chance to bid. Let’s assume that Mr. Z is the winner of the auction at Rs. 10,000. So Mr. Z will get and Rs. 90,000 (Corpus of Rs. 1,00,000 at a loss of Rs. 10,000). The Rs. 10,000 bid amount is divided among the 10 people forming the committee. So at a investment of Rs. 10,000 each member get profit of Rs. 1,000 upfront. The principal amount has to be paid by Mr. Z in a time-frame (lets assume 12 months) on 15th of each month.
For Investor
Upfront investment = 10,000
Upfront interest = 1,000
Principal per month for 12 months = 833
(Effective Rate of Return) IRR = 20.2% per annum
Similary,
For Borrower
Loan Taken = 1,00,000
Upfront interest paid = 10,000
Principal Installments for 12 months = 8330
Effective interest Rate (IRR) = 20.2% per annum
Innovative and effective ! And most importantly useful for those who can’t get debt from banks. Now obviously there are risks here. The biggest is the credit risk that the person does not pays the principal payments. In that case the burden falls on the cashier to pay the members of committee. For the same reason committee are often formed between close members of society where trust level is high. As I said before, I cannot comment on the legality of this system although my fellow buddy did tell me that they do paperwork (enforceability of which is again doubtful to me).
Have you heard or know such a system in place ? Are there other such unique models out there among the local masses. Let me know 🙂 !
Hi there ! This committee system is the third largest savings channel in Pakistan. But quite different from that practiced in India. In Pakistan, there is no interest involved and each contributor contributes fixed monthly payment. I’ll explain this by an example.
Mr. X (The Head/Arranger/Cashier) proposes to form a committee for Rs.96,000 for 12 months with his friends, Messrs. Y and Z. The arrangement is such that Mr. X will keep the first committee (interchangeably used for first contribution), Mr. Y second and Mr. Z will get in the last. How they rank depends on the needs. So in this case, let’s assume Mr.X needed money so he raised funds from his friends. In this scenario, for Mr.X, he will fulfil his investment needs and for Mr.Z, who will get his share in the last, this would be savings.
Where can i find this committee people in ghazibad.o too need to invest and borrow money i f anyone knows please give me a email with no on drashok2612@gmail.com
Thanks
This looks incredible on surface. But I don’t know how much trust I can put into it.