The tontines

Different types of tontines

African tontines

They are present in most sub-Saharan countries where they have overtaken the traditional financial system.
Because of the low level of population access to the banking system, the tontine circuits are playing a major role in the funding of the African economies, especially in Cameroon and in Benin.
The development of African tontines is partially accounted for by the failure of international development agencies which have long ignored the specificities of local cultures.
The mistrust shown towards financial institutions and their complex operational patterns did amplify African populations' trend towards the ancient and the deeply-anchored methods.

There are three major kinds of tontines: mutual tontine, commercial tontine and financial tontine.

Mutual tontine

It is the most widespread kind of tontine. It is organized around individuals who know each other. Tontine participants take turns in benefiting from the funds available within the association. The receipt order is known in advance but may vary according to needs. Interests may not be required which means that free loans are available in return for the payment of an annuity whose periodicity is predefined.

Tontine members are, therefore, both creditors and debtors, taking turns in this regard but loans and debts get cancelled at the end of the cycle.

This scheme allows the first beneficiary to get an interest-free loan while the last beneficiary raises a capital throughout this period without receiving interests. The tontine's last beneficiary may be at a serious disadvantage in the event of high inflation. However, and with the exception of the last member, the other participants to the tontine will benefit from the funds more rapidly than if they had otherwise chosen to save individually. Once everyone has benefited from the fund, a new cycle starts all over again.

Commercial tontine

In order to make safe investments, tontine members pay a travelling banker according to the safe custody rate. At the end of the term, each participant receives sums corresponding to his or her total deposits devoid of safe custody charges.

Financial tontine

It is similar to microcredit. It provides the possibility for each affiliate of borrowing the collected sum according to a bid system. Every day, the sums capitalized shall be "sold" to the highest bidder. Interests are received on each borrowed sum and stand for the tontine's financial profit. The financial profit will then be repaid at the end of the cycle proportionally to the share of each contributor.

On the margin of banking circuits, the tontine principle allows to provide a financial system for populations who have no access to the classical banking system. Each kind of tontine is likened to a life insurance product (mutual tontine), a deposit bank (commercial tontine), or to a microcredit (financial tontine). It is worth noting that SME/SMI take full advantage of this system. Apart from the financial aspect, the meetings organized by craft-specialized tontines allow information exchange which is useful to all of them in the exercise of their activities.

The status of African tontines

They are not recognized by the fiscal administration which blames them for being an obstacle to development due to the informal nature of its investments.

The role of African tontines

Their role is twofold: It is monetary and mostly social.

African tontines make it possible to build savings and to benefit from a loan outside the banking system. They also allow to face contingencies such as death, sickness and hospitalization.

Tontines consolidate social ties through meetings and parties organized around tontines or simply due to the fact of the individual responsibilities they trigger. F. Bouman defines in 1977 the idea of tontine as a tool of saving and rotational credit which ensures a strong social tie between each member.

Asian tontines

They are present in most Asian countries regardless of their level of development. Unlike their African counterparts, Asian tontines are quite often recognized commercial companies which operate like any other financial institution. Their duration, management patterns and funding terms are defined by contract.

Asian tontines status

Most countries have made legislations in this field. But such legislations differ from a country to another. In Japan, Taiwan and South Korea, where the first laws date back to the start of the 20th century, tontines are institutions whose status may be likened to that of banks. In other Asian countries, the authorities have outlined a legal framework confined to the protection of the tontine members.

The role of Asian tontines

With most tontines having financial roles, their finality has mainly shifted towards credit. Even though family-assisting tontines still exist, the social dimension is visibly in decline as regards African practices and disappears completely in the presence of commercial companies. Saving tontines whereby participants related by specific ties (family, neighborhood, ...) receive in turn the capital collected are also present.

How traditional African and Asian tontines operate

In the countries where they are not recognized by the authorities, the organization of tontines remains traditional. Although the basic rules are governed by some writings, it is the given speech that conveys the strength of these associations.

Establishment of tontines

In most cases the affiliates are of rural origin and know each other. Affiliation is, therefore, selective, hence the so-called closed tontines, and this privacy-based selectivity (clan, family, neighbours, neighborhood) ensures their success. There is obligation to pay one's debt (contributions) not to be socially excluded. Trust is of major importance as it ensures security.

Open tontines are larger. They are established on the initiative of an individual or a group of individuals who know each other, forming the core. They sponsor other members who, on their turn, sponsor others. These individuals are not related. It is on the size of the tontine circle and the nature of its members that rest the confidence and the security of the tontine.

Duration

The duration of a tontine depends on the agreements brokered upon its creation. It can last a single cycle or can be automatically renewed for an unlimited period.

The life of tontines

In African countries, members' meetings are particularly significant, and happen on a regular basis. The attendance of every member is mandatory and any failure may result in sanction or loss of confidence vis-à-vis the other members. It is in the course of such meetings that decisions are taken. These meetings also take place in Asian tontines but the latter do not play the same role. Meetings are much more casual in Asia than they are in Africa.

Management and funding

The tontine president generally comes from the founders' circle. He ensures the due process of the tontine, chairs meetings, ensures the implementation of decisions, … The trust he displays is crucial to the affiliation of new members.

He is usually supported by vice presidents, a secretary in charge of archives who ensures compliance with the bylaws and counter-signs any order of payment. Finally, the treasurer is responsible for the funds collected and his personal capital is a guarantee for any gaps that may occur between the tontine's books and the funds perceived.

Tontines in industrialized countries

The basic principle is the same. The different types of tontines meet needs that may be likened to those in life, saving or credit insurance. Therefore, the wide range of products is likely to attract a large part of the population: raising a capital to meet children's needs (studies, projects, …), raising an additional capital for retirement, legacy of a capital or an estate property by a living person to one's children or to the spouse outliving the other, low-rate loans. Tontines, whose ultimate purpose is saving, stand as an investment alternative to the classical financial system.

Return is very attractive, especially in periods of financial crisis because the sums invested stay within the tontine until the end of the term. This is likely to allow long-term investment (from 10 to 15 years), thus, optimizing opportunities/arbitration and the promotion of investment. There is, therefore, a strong resistance to stock market variations. The expected profits are comparable to the classical saving products. They are generally comprised between 6% to 9% a year.
Returns are often in accordance with:

• age upon affiliation in the tontine. Life expectancy is a return element. The eldest shareholders who remain alive on the dissolution of the tontine get a bonus which is calculated according to age.
• the duration of the tontine, which could last several decades.

Even if this tontine pact is not a financial product, it remains, nonetheless, a mutual saving system which reduces risks for the affiliates. The terms chosen for "affiliates" and "associates refer respectively to the underwriter and the insured.

Drawbacks

The funds and the investment products are generally blocked until the end of the tontine's life. The recovery of the sums is, therefore, seldom possible before term. When it is allowed, the recovery of the funds is only possible in the pattern of credits. Entry fees are often higher than those withheld for a classical life insurance.

Advantages

In order not to lose the capital in the event of death before the end of the cycle, some tontines propose the payment of this capital to the beneficiaries (following the purchase of a counter insurance). It is not uncommon for such operation to be accompanied by an advantageous taxation. Some legislations have declared the capital invested not liable to wealth taxation or have allowed fiscal relief similar to life products.
There are no management expenses. The only fees are those for entry. At the end of the cycle, the dead affiliates' capital increases that of the living ones, which stands as a consistent gain.