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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. Members all chip in regularly and take turns withdrawing accumulated sums.
Economist F. J. A. Bouman described ROSCAs as "the poor man's bank, where money is not idle for long but changes hands rapidly, satisfying both consumption and production needs."[1]
Terminology
ROSCAs are known by various names around the world, and some of those names become loanwords between languages, including various ones that have made their way into English, especially in regional usage. For example, ROSCAs are also known as tandas (or by other names) in Latin America, chamas in Swahili-speaking East Africa, kameti (کمیٹی) in Pakistan, visi (વિસિ) among Gujaratis in India, equb (ekub) (እቁብ) in Ethiopia, partnerhands, pardna or pardner in the West Indies,[2]cundinas in Mexico, hagbad in Somalia, stokvels in South Africa, susus or osusus in West Africa and the Caribbean, hui (會) in Chinese communities in East and Southeast Asia, hội/hụi (會) in Vietnam, paluwagan in the Philippines, gam'eya (جمعية) in Egypt, dart دارت in Morocco, gye (계/契) in South Korea, tanomoshiko (頼母子講) in Japan (or mujin in pre-1945 eras), wichin gye in Korea, committees or chit funds in India, pandeiros in Brazil, cuchubál in Guatemala, juntas, quiniela or panderos in Peru, C.A.R. Țigănesc/Roata in Romania, arisan in Indonesia, lenshare (เล่นแชร์) in Thailand, dhukuti or dhikuti (धुकुटी/ढिकुटी) in Nepal, gün in Turkey, ménage or menodge in Scotland,[3]seettuva in Sri Lanka, likelembas in the Democratic Republic of the Congo, xitique in Mozambique, djanggis in Cameroon and صندوق in Sudan, and Lawm Sum[4] in Zomi regions in both Chin State in Myanmar and Lamka in India.
Structure
Meetings can be regular or tied to seasonal cash flow cycles in rural communities. These usually coincide with the crop harvest for farmers and pay dates for the employed members where people have sure funds on hand. A slot is equivalent to one periodic money withdrawal. To determine the order of money distribution among members, a drawing of slots is done and agreed upon before the start of periodic fund accumulation. A member can swap his slot with another through mutual agreement depending on the intended purpose. Such slot switching is allowed before the fund accumulation or periodic money withdrawal. A member who availed more than one slot may have the reserved right to choose the other slot pay date. Nevertheless, to avoid confusion, the organizer should be informed of the changes before the payment process. Each member contributes the same amount at each meeting, and one member takes the whole sum once. As a result, each member can 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.[5]
Every member sees every transaction during the meetings. Since no money has to be retained inside the group, no records must be kept. However, some maintain a crude list of slots. These characteristics make the system a model of transparency and simplicity well adapted to communities with low literacy levels 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 six months. Each member receives at least once the amount collected. This reduces the size of the loss should someone take funds early and not pay back.
In addition to their simplicity of structure, ROSCAs compensate when two key conditions exist, which make them competitive alternative financial products, even in relatively sophisticated economies:[6]
Erosion of buying power of accumulated savings over long savings horizons in inflationary conditions
Failure of the normal financing market to provide credit to credit worthy borrowers, often due to opportunity cost, regulation, or operational expense
Diversity and distribution
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."[7]
The individuals in the ROSCA select each other, which ensures that participation is based on trust and social forces (social capital), and a genuine commitment to participate. In Brazilian consorcios, groups of strangers are assembled into a ROSCA unit by an agent or intermediary, whose role in facilitating the group formation and on-going administration is remunerated. As at 2015, over five million active ROSCA users were reported in Brazil.[8] As the consorcio runs its term, many of the same features of social capital and compliance manifest, as members of the group develop personal contact and trust.
Types
ROSCAs can be compared and contrasted with accumulating savings and credit associations (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 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.[9] 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 is 30–60% of invested capital.[10]
As of the end of June 2012 development agencies (including CARE, Oxfam, CRS and PLAN) were carrying out projects reaching 1.8 million members in 23 countries, mostly in Africa[citation needed]. The Savings Group Information Exchange, a project of the Bill and Melinda Gates Foundation, provides researchers with an on-line database where indicators like savings and loans per member, country, return on assets and percentage of female members can be compared.
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.
Online ROSCAs
Carlos Veléz-Ibáñez, an anthropology professor at Arizona State University, stated that "technology has added a new twist to the savings pools, with 'electronic cundinas[ROSCAs]' being organized on Web sites that can bring together people from across the United States".[11] A few of the existing products include eMoneyPool, created by two brothers living in Phoenix, Arizona; Monk, founded by ex-Google and ex-Intel employees in Silicon Valley; Puddle, a Google-venture backed startup, Moneyfellows UK & African based online mobile and web platform digitizing the ROSCA model; ROSCA Finance, a patent pending startup creating a global, autonomous money sharing platform founded by former Santander bankers; Esusu, founded by ex-Goldman Sachs, PwC and LinkedIn employees in New York and Partnerhand,[12] a patent pending[13] UK based organisation facilitating online 'Pardner's'[14] between verified individuals, founded in 2010.
StepLadder, founded in 2016[15] by finance professionals with distinguished academic work on Consorcios in Brazil[6] is joining the UK market for ROSCA-based collaborative finance by serving prospective first-time UK home buyers.[16] In October 2017 Finlok platform launched a digital ROSCA product in India leveraging NPCI's Unified Payment Interface.
Aturi Africa has automated and digitized Chama financial services with the goal of offering these services to millions of people in Africa and around the world. The FinTechStartUp was founded by an ex-Safaricom employee from Kenya and it launched in late 2020.
A more complete version of a savings club for buying vehicles launched in the United States on 2022. savings.club enables users to join clubs administrated by the company and leverages on credit card payments and rates much lower than traditional auto loans.[17]
History
Informal agreements of this type have arisen all over the world for centuries.[18] The first academic description of them was by Shirley Ardener in 1964.[19] In 1983, F. J. A. Bouman described ROSCAs as "the poor man's bank, where money is not idle for long but changes hands rapidly, satisfying both consumption and production needs."[1] In a 1995 article on the origins and development of the concept,[18] Bouman explained that "It represents a contract. Members of the association — the parties to the contract — agree to pool certain resources that are then given, in whole or in part, to each in turn. Resources in the pool can be labor, goods or money." Related to that point, Bouman also explained that "The ROSCA has several functions: insurance, socializing [mutual assistance], and economic. The former has been the basis of the ROSCA. Since the sixties, increased commercialization and monetization have put the emphasis on the economic function."[18] Bouman also explained that because (1) breach of contract is an inherent risk of ROSCAs and (2) in many countries' legal systems, recourse to law courts for remedy is not available for ROSCA contract breaches, ROSCAs have been criticized and discouraged in some times and places.[18]
Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, and a verifiable credit history. It is designed to support entrepreneurship and alleviate poverty. Many recipients are illiterate, and therefore unable to complete paperwork required to get conventional loans. As of 2009 an estimated 74 million people held microloans that totaled nearly US$40 billion. Grameen Bank reports that repayment success rates are between 95 and 98 percent. The first economist who had invented the idea of micro loans was The Very Reverend Jonathan Swift in the 1720’s. Microcredit is part of microfinance, which provides a wider range of financial services, especially savings accounts, to the poor. Modern microcredit is generally considered to have originated with the Grameen Bank founded in Bangladesh in 1983 by their current Chief Adviser Muhammad Yunus. Many traditional banks subsequently introduced microcredit despite initial misgivings. The United Nations declared 2005 the International Year of Microcredit. As of 2012, microcredit is widely used in developing countries and is presented as having "enormous potential as a tool for poverty alleviation."
Microfinance consists of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems, among other services. Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient. ID Ghana is an example of a microfinance institution.
A consortium is an association of two or more individuals, companies, organizations, or governments with the objective of participating in a common activity or pooling their resources for achieving a common goal.
A friendly society is a mutual association for the purposes of insurance, pensions, savings 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. Before modern insurance and the welfare state, friendly societies provided financial and social services to individuals, often according to their religious, political, or trade affiliations. These societies are still widespread in many parts of the developing world, where they are referred to as ROSCAs, ASCAs, burial societies, chit funds, etc.
A chit fund is a type of rotating savings and credit association system practiced in India, Bangladesh, Sri Lanka, Pakistan and other Asian countries. Chit fund schemes may be organized by financial institutions, or informally among friends, relatives, or neighbours. In some variations of chit funds, the savings are for a specific purpose. Chit funds are often microfinance organizations.
Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world.
Susu collectors are a traditional form of financial intermediaries in Africa, predominantly in Ghana. For a small fee they provide an informal means for Ghanaians to securely save and access their own money, and gain some limited access to credit, a form of microfinance. Money looked after for an individual by a Susu collector is held in a Susu account.
Village banking is a microcredit and saving methodology whereby financial services are administered locally in a community bank rather than in a centralized commercial bank. Village banking has its roots in ancient cultures and was most recently adopted for use by micro-finance institutions (MFIs) as a way to control costs. Early village banking methods were innovated by Grameen Bank and then later developed by groups such as FINCA International founder John Hatch. Among US-based non-profit agencies there are at least 31 microfinance institutions (MFIs) that have collectively created over 800 village banking programs in at least 90 countries. And in many of these countries there are host-country MFIs—sometimes dozens—that are village banking practitioners as well. The latest developments globally can be seen in Southeast Asia, where digitization is pacing fast to reach rural areas with hybrid on- and offline solutions.
Kibwezi is a town in Makueni County, Kenya.
In South Africa, a stokvel is an invitation-only club of twelve or more people serving as a rotating credit union or saving scheme. Members contribute fixed sums of money to a central fund on a weekly, fortnightly or monthly basis. The name stokvel originates from the concept of "stock fairs", as the rotating cattle auctions of English settlers in the Eastern Cape during the early 19th century were known.
A self-help group is a financial intermediary committee usually composed of 12 to 25 local women between the ages of 18 and 50. Most self-help groups are in India, though they can be found in other countries, especially in South Asia and Southeast Asia. A SHG is generally a group of people who work on daily wages who form a loose grouping or union. Money is collected from those who are able to donate and given to members in need.
A CVECA is a self-reliant village savings and credit bank. CVECAs are designed to operate in rural areas with clients who are primarily subsistence farmers, with minimal non-farm income. While most banks have less than 250 members, they achieve service flexibility and economies of scale through networking together into regional federations. "Each bank is managed by 2 part-time local staff and a board composed of members, all of whom have minimal education."
An arisan is a form of Rotating Savings and Credit Association in Indonesian culture, a form of Microfinance.
A susu or sou-sou or osusu or asue is a form of rotating savings and credit association, a type of informal savings club arrangement between a small group of people who take turns by throwing hand as the partners call it. The name is used in Africa and the Caribbean. Each person contributes periodically the same amount to a common fund; the total contributions are disbursed to a single member of the group. Each time, the recipient changes so that eventually all members are recipients. Participants of a susu do not make a profit. Instead, small periodic contributions are turned into a larger lump sum of the same value, with the susu acting as a savings club.
Collaborative finance is a category of financial transaction that occurs directly between individuals without the intermediation of a traditional financial institution. This new way to manage informal financial transactions has been enabled by advances in social media 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 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.
HOPE International is a Christian faith-based nonprofit organization based in Lancaster, Pennsylvania that equips individuals living in poverty with savings and microfinance services. HOPE International now operates in over 20 underserved countries and has assisted over 3 million people with small loans and savings services since it began operations in 1997.
A chama is an informal cooperative society that is normally used to pool and invest savings by people in East Africa, and particularly Kenya. The chama phenomenon is also referred to as "micro-savings groups". "Chama" is the Kiswahili word for "group" or "body". The chama phenomenon arose out of the idea of harambee, which means "all together", in the late 1980s and 1990s. Originally, chamas tended to be exclusively women's groups, but as chamas started to grow in sophistication and success, men started participating in chamas as well. The chama structure is used throughout Africa, but is particularly popular in Kenya where the word originated. In Kenya there are estimated to be 300,000 chamas managing a total of KSH 300 billion in assets. Chamas are known for their exclusivity. In order to join, new members are typically subjected to extensive interviews and must have assurances or guarantees made for them by an existing member. Some sources have estimated that one in three Kenyans is a chama member.
Gam'eya or jameya is a form of rotating savings and credit association (ROSCAS) used in over 89 countries and communities, particularly in the Middle East. It operates when a group come together and contribute a fixed monthly amount into a common pot, each person takes a turn taking all the money at the end of each month. It is also referred to as a chit fund in India and a tanda in Mexico.
Tanomoshiko is a variety of rotating savings and credit association (ROSCA) found in Japan. Historically they played a major role in economic life in Japan and among the Japanese diaspora, and still survive on an informal basis in some parts of the country.
Shirley G. Ardener is a pioneer of research on women and a committed anthropological researcher working with Bakweri people in Cameroon since the 1950s, initially with her husband Edwin Ardener (1927–1987).
References
1 2 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
↑ Fleary, Sinai (June 2024). "Pardna: Keeping Black Money Traditions Alive". The Voice. p.22.
↑ Geertz, Clifford (1956). The Rotating Credit Association: a middle rung in development. Cambridge, Massachusetts, United States: Massachusetts Institute of Technology, Center for International Studies.
↑ Grant, William J.; Allen, Hugh (Fall 2002). "CARE's Mata Matsu Dubara (Women on the Move) Program in Niger". Journal of Microfinance. Provo, Utah: Brigham Young School of Business.
↑ Allen, Hugh; Staehle, Mark (2007). Village Savings and Loan Associations (VSLAs) Programme Guide, Field Operations Manual. Solingen: VSL Associates.
↑ Ardener, Shirley (1964). "The Comparative Study of Rotating Credit Associations". The Journal of the Royal Anthropological Institute of Great Britain and Ireland. 94 (2): 201–229. doi:10.2307/2844382. JSTOR2844382.
Bibliography
Ardener, Shirley and Sandra Burman. "Money-Go-Rounds: The Importance of Rotating Savings and Credit Associations for Women". Oxford: Berg, 1995.
Arnaldo, Mauri, "Economia sommersa, finanza informale e microcredito nei paesi emergenti", A: Mauri & C. Conti (eds.), Finanza informale, finanza etica e finanza internazionale nelle piccole e medie imprese, Milano 2000.
Besley, Timothy, Stephen Coate, and Glenn Loury. "The economics of rotating savings and credit associations." The American Economic Review (1993): 792–810.
Geertz, Clifford. The Rotating Credit Association: a middle rung in development. Cambridge, Massachusetts, United States: Massachusetts Institute of Technology, Center for International Studies, 1956.
Grant, William J. & Hugh Allen. CARE's Mata Matsu Dubara (Women on the Move) Program in Niger. Journal of Microfinance, Brigham Young School of Business, Provo, Utah, Fall, 2002.
Rutherford, Stuart, The Poor and Their Money Oxford University Press, 2000.
van den Brink, Rogier and Jean-Paul Chavas, "The Microeconomics of an Indigenous African Institution: The Rotating Savings and Credit Association." Economic Development and Cultural Change, Volume 45, No. 4, July 1997.
Von Pischke, J. D., Dale W. Adams & Gordon Donald. Rural Financial Markets in Developing Countries. EDI Series in Economic Development, World Bank, Washington, 1983.
De Swaan, Abram and Van der Linden, Marcel. (eds.) "Mutualistic Microfinance, Informal Savings Funds from the Global Periphery to the Core?". Aksant, 2005.
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