Rotating Savings and Credit Association
Encyclopedia
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."
Every transaction is seen by every member during the meetings. Since no money has to be retained inside the group, no records have to be kept. These characteristics make the system a model of transparency and simplicity that is well adapted to communities with low levels of literacy
and weak systems for protecting collective property rights.
The system further reduces the risk to members because it is time limited—typically lasting no more than 6 months. This reduces the size of the loss, should someone take funds early and not pay back.
in West Africa and the Caribbean, tontine
s in Cambodia, wichin gye in Korea
, arisan in Indonesia
, likelemba
s in the Democratic Republic of the Congo
, xitique in Mozambique
and djanggis in Cameroon, ROSCAs are informal
or 'pre-co-operative' microfinance
groups that have been documented around the developing world. A famous early study by anthropologist Clifford Geertz
documented the arisans of Modjokuto in Eastern Java. He described them as "an "intermediate" institution growing up within peasant social structure, to harmonize agrarian economic patterns with commercial ones, to act as a bridge between peasant and trader attitudes toward money and its uses."
The individuals in the ROSCA select each other, which ensures that participation is based on trust and social forces (see Social capital
), and a genuine commitment to participate.
International development
practitioners have been intrigued for years by the potential benefits of attempting to link ROSCAs and ASCAs to formal financial systems. But such linkages tend to defeat the voluntary purpose of these groups and distort member incentives towards securing access to external funds. CARE
, an American NGO, has spread standardized ASCAs to reach 2 million people in Africa. These standardized ASCAs are called Village Savings and Loan Associations (VSLAs), and they usually comprise 10 to 20 participants who conduct saving and loan activities for a fixed period, usually 12 months. Unlike informal ASCAs, these use a triple-locked box to secure the funds, have standardized election procedures and maintain a careful separation of various duties, such as record-keeping, money-counting, meeting facilitation etc. Interest rates on loans typically vary from 5-10% a month, while cycle-end pay-outs in most groups range from 30-60% of invested capital.
Another interesting variant on this theme are the terminating deposits that formed part of product line of building societies
in the last half of the nineteenth century. These provided many workers with the funds required to finance their own homes.
Structure
Meetings can be regular or tied to seasonal cash flow cycles in rural communities. Each member contributes the same amount at each meeting, and one member takes the whole sum once. As a result, each member is able to access a larger sum of money during the life of the ROSCA, and use it for whatever purpose she or he wishes. This method of saving is a popular alternative to the risks of saving at home, where family and relatives may demand access to savings.Every transaction is seen by every member during the meetings. Since no money has to be retained inside the group, no records have to be kept. These characteristics make the system a model of transparency and simplicity that is well adapted to communities with low levels of literacy
Orality
Orality is thought and verbal expression in societies where the technologies of literacy are unfamiliar to most of the population. The study of orality is closely allied to the study of oral tradition...
and weak systems for protecting collective property rights.
The system further reduces the risk to members because it is time limited—typically lasting no more than 6 months. This reduces the size of the loss, should someone take funds early and not pay back.
Diversity and distribution
Variously called sususSusu account
Susu collectors are one of the oldest financial groups in Africa. Based largely in Ghana they provide an informal means for Ghanaians to securely save and access their own money, and gain limited access to credit, a form of microfinance. Money looked after for an individual by a Susu collector is...
in West Africa and the Caribbean, tontine
Tontine
A tontine is an investment scheme for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their...
s in Cambodia, wichin gye in Korea
Korea
Korea ) is an East Asian geographic region that is currently divided into two separate sovereign states — North Korea and South Korea. Located on the Korean Peninsula, Korea is bordered by the People's Republic of China to the northwest, Russia to the northeast, and is separated from Japan to the...
, arisan in Indonesia
Indonesia
Indonesia , officially the Republic of Indonesia , is a country in Southeast Asia and Oceania. Indonesia is an archipelago comprising approximately 13,000 islands. It has 33 provinces with over 238 million people, and is the world's fourth most populous country. Indonesia is a republic, with an...
, likelemba
Likelemba
Likelemba is an African system of solidarity savings mechanism where several members put a certain sum of money in a "pot" and every month, the total amount contained in the pot is then donated to one of the participating members - a sort of little lottery....
s in the Democratic Republic of the Congo
Democratic Republic of the Congo
The Democratic Republic of the Congo is a state located in Central Africa. It is the second largest country in Africa by area and the eleventh largest in the world...
, xitique in Mozambique
Mozambique
Mozambique, officially the Republic of Mozambique , is a country in southeastern Africa bordered by the Indian Ocean to the east, Tanzania to the north, Malawi and Zambia to the northwest, Zimbabwe to the west and Swaziland and South Africa to the southwest...
and djanggis in Cameroon, ROSCAs are informal
Informal economy
The informal sector or informal economy as defined by governments, scholars, banks, etc. is the part of an economy that is not taxed, monitored by any form of government, or included in any gross national product , unlike the formal economy....
or 'pre-co-operative' microfinance
Microfinance
Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services....
groups that have been documented around the developing world. A famous early study by anthropologist Clifford Geertz
Clifford Geertz
Clifford James Geertz was an American anthropologist who is remembered mostly for his strong support for and influence on the practice of symbolic anthropology, and who was considered "for three decades...the single most influential cultural anthropologist in the United States." He served until...
documented the arisans of Modjokuto in Eastern Java. He described them as "an "intermediate" institution growing up within peasant social structure, to harmonize agrarian economic patterns with commercial ones, to act as a bridge between peasant and trader attitudes toward money and its uses."
The individuals in the ROSCA select each other, which ensures that participation is based on trust and social forces (see Social capital
Social capital
Social capital is a sociological concept, which refers to connections within and between social networks. The concept of social capital highlights the value of social relations and the role of cooperation and confidence to get collective or economic results. The term social capital is frequently...
), and a genuine commitment to participate.
Rotating or accumulating?
ROSCAs can be compared and contrasted with Accumulating Savings & Credit Associations or ASCAs. Documented extensively in South Asia by Rutherford, ASCAs are also time-limited, informal microfinance groups. Unlike ROSCAs however, they appoint one of their members to manage an internal fund. Records are kept and surplus lent out. After a pre-agreed period (often 6–12 months) all the loans are called back and the fund, plus accumulated profit, is distributed to the members.International development
International development
International development or global development is a concept that lacks a universally accepted definition, but it is most used in a holistic and multi-disciplinary context of human development — the development of greater quality of life for humans...
practitioners have been intrigued for years by the potential benefits of attempting to link ROSCAs and ASCAs to formal financial systems. But such linkages tend to defeat the voluntary purpose of these groups and distort member incentives towards securing access to external funds. CARE
CARE (relief)
CARE is a broad-spectrum secular relief, humanitarian, and development non-governmental organization fighting global poverty. It is non-political, non-sectarian and operates annually in more than 70 countries across the globe.One of the organization’s primary focuses in its fight to eradicate...
, an American NGO, has spread standardized ASCAs to reach 2 million people in Africa. These standardized ASCAs are called Village Savings and Loan Associations (VSLAs), and they usually comprise 10 to 20 participants who conduct saving and loan activities for a fixed period, usually 12 months. Unlike informal ASCAs, these use a triple-locked box to secure the funds, have standardized election procedures and maintain a careful separation of various duties, such as record-keeping, money-counting, meeting facilitation etc. Interest rates on loans typically vary from 5-10% a month, while cycle-end pay-outs in most groups range from 30-60% of invested capital.
Another interesting variant on this theme are the terminating deposits that formed part of product line of building societies
Building society
A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially mortgage lending. These institutions are found in the United Kingdom and several other countries.The term "building society"...
in the last half of the nineteenth century. These provided many workers with the funds required to finance their own homes.
See also
- Bond of associationBond of associationThe bond of association or common bond is the social connection among the members of credit unions and co-operative banks. Common bonds substitute for collateral in the early stages of financial system development...
- Chit fundChit FundA Chit fund is a kind of savings scheme practiced in India. A Chit fund company means a company managing, conducting or supervising, as foremen, agent or in any other capacity, chits as defined in Section 2 of the Chit Funds Act, 1982...
- Friendly societyFriendly societyA friendly society is a mutual association for insurance, pensions or savings and loan-like purposes, or cooperative banking. It is a mutual organization or benefit society composed of a body of people who join together for a common financial or social purpose...
- Solidarity lendingSolidarity lendingSolidarity lending is a lending practice where small groups borrow collectively and group members encourage one another to repay. It is an important building block of microfinance.-How it Works:...
- Terminating deposit
- TontineTontineA tontine is an investment scheme for raising capital, devised in the 17th century and relatively widespread in the 18th and 19th. It combines features of a group annuity and a lottery. Each subscriber pays an agreed sum into the fund, and thereafter receives an annuity. As members die, their...
External links
- A Typology of Informal Credit Suppliers: ROSCAs - The Global Development Research Center (GDRC)
- ROSCA Bibliography - The Global Development Research Center (GDRC)
- Chit site in Kerala, India
- Appropedia:Rotating Savings and Credit Association - more information shared at AppropediaAppropediaAppropedia is a website for collaborative solutions in sustainability, poverty reduction and international development, with a particular focus on appropriate technology. Appropedia is a wiki-based website like Wikipedia, a website where a large number of participants are allowed to create and...
, the international development wiki