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

intermediation Intermediation involves the "matching" of lenders with savings to borrowers who need money by an agent or third party, such as a bank.

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 media technologies that facilitate the creation and sharing of information, ideas, interests, and other forms of expression through virtual communities and networks. While challenges to the definition of ''social me ...

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 transactions costs and confers upon them their comparative advantage and economic rationale. Collaborative Finance is characterized by highly personalized loan transactions entailing face-to-face dealings with borrowers and flexibility in respect of loan purpose, interest rates, collateral requirements, maturity periods and debt rescheduling. 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 Don Tapscott (born June 1, 1947) is a Canadian business executive, author, consultant and speaker, who specializes in business strategy, organizational transformation and the role of technology in business and society. He is the CEO of the Taps ...

and Anthony D. Williams, co-authors of the book "MacroWikinomics: rebooting business and the world".

, Anthony D. Williams, ''MacroWikinomics: rebooting business and the world'',

Portfolio Hardcover Penguin Group is a British trade book publisher and part of Penguin Random House, which is owned by the German media conglomerate Bertelsmann. The new company was created by a merger that was finalised on 1 July 2013, with Bertelsmann initial ...

, 2010

Development

Rotating Saving Associations

A Rotating Savings and Credit Association or 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 Rotating Savings and Credit Associations (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 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 ...

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 curr ...

Peer-to-peer lending Peer-to-peer lending, also abbreviated as P2P lending, is the practice of 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 ...

Complementary currency A complementary currency is a currency or medium of exchange that is not necessarily a national currency, but that is thought of as supplementing or complementing national currencies. Complementary currencies are usually not legal tender and thei ...

* Microfinance *

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 services through direct interaction with other consumers or through a me ...

Rotating Savings and Credit Association A rotating savings and credit association (ROSCA) is a group of individuals who agree to meet for a defined period in order to save and borrow together, a form of combined peer-to-peer banking and peer-to-peer lending. The first academic descrip ...

Time banks In economics, a time-based currency is an alternative currency or exchange system where the unit of account is the person-hour or some other time unit. Some time-based currencies value everyone's contributions equally: one hour equals one service ...

LETS A local exchange trading system (also local employment and trading system or local energy transfer system; abbreviated LETS) is a locally initiated, democratically organised, not-for-profit community enterprise that provides a community infor ...

Virtual currency Virtual currency, or virtual money, is a digital currency that is largely unregulated and issued and usually controlled by its developers and used and accepted electronically among the members of a specific virtual community. In 2014, the Europe ...

Mutual credit "Mutual credit" (sometimes called " multilateral barter" or "credit clearing") is a term mostly used in the field of complementary currencies to describe a common, usually small-scale, endogenous money system. The term implies that creditors and ...

* Global Resource Bank

References