Abstract
Using data from a unique field survey in urban Benin, we investigate the sustainability of Rotating Savings and Credit Associations (ROSCAs) over time. We test the theories from the relevant literature that suggest that ROSCAs can be designed in a manner that minimizes the likelihood of enforcement problems occurring. The data paint a picture of inherent instability: over a 2-year period, one in three groups experienced enforcement problems; two-thirds of which collapsed. The results highlight the importance of the order of pot allocation, ruling structure, and social connectedness in minimizing the risk of enforcement problems occurring. Repeated interactions among members can also enhance sustainability over time.
Résumé
À l’aide des données d’une enquête de terrain unique réalisée dans les zones urbaines du Bénin, nous étudions la perennité des associations rotatives d’épargne et de crédit (AREC) sur la durée. Nous testons les théories de la littérature sur le sujet, qui suggèrent que les AREC peuvent être conçues de façon à minimiser la probabilité de problèmes d’exécution. Les données brossent un tableau d’instabilité inhérente: sur une période de deux ans, un groupe sur trois a eu des problèmes d’exécution, dont les deux tiers se sont effondrés. Les résultats soulignent l’importance de l’ordre d’attribution des pots, de la structure dirigeante et des liens sociaux pour minimiser le risque de problèmes d’exécution. Des interactions répétées entre les membres peuvent également améliorer la durabilité avec le temps.
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Notes
For example, when Dupas et al. (2012) offered to remove the cost of opening a bank account for rural Kenyans, only 18% actively used the accounts while over 40% of their sample continued to use a ROSCA. Bouman (1995) refers to many African countries showing high participation rates, from 50 to 95%. In Benin, (Dagnelie and LeMay-Boucher, 2012) find that around 20% of individuals are members of a ROSCA.
However, a shortcoming of Handa and Kirton (1999) is that their regressions are based on retrospective information, so any groups that have collapsed were, by implication, omitted from the study—we show that often groups that have experienced problems collapsed (therefore, the sample is biased toward those groups better equipped to deal with enforcement problems).
More details about the survey methodology can be found in Appendix A.
The sampling of this study was initially intended to examine the different characteristics explaining ROSCA membership at the individual level (Dagnelie and LeMay-Boucher, 2012). Our sample was thus formed of randomly selected member and non-member individuals. The present study is a by-product of this fieldwork and so the sampling was not designed to primarily target and maximise the number of ROSCAs. Thus, we have a large number of households sampled compared to the number of ROSCAs.
However, there were no cases where the correct individual was located and (s)he refused to be surveyed again.
This paper observes groups over time, without interference. We do not consider whether exogenously switching institutional characteristics has any impact on a given set of groups in the context of a field experiment. Such treatments, while potentially feasible, could also have important negative consequences on their sustainability and operations. Our preliminary fieldwork suggested that such experiments would either be difficult to implement or risky and as such not workable in this context.
Anderson et al. (2009) refer to enforcement problems as a scenario where a member ceases to make payments before a cycle has been completed, or where a member receives an unfavourable rank and leaves the group before making any payments. Given the low occurrence of non-payments, it was not possible to construct a count variable for the number of non-payments in a given ROSCA cycle. Alternatively, the number of excluded members is also a relatively rare occurrence and as such could not be used in our analysis. Only 4 groups (out of 97) have had to exclude members since the group started their activities (thus, over the entire life of the group and this can date back to many years before 2004).
In the original survey in 2004, a number of groups listed that they excluded members for issues relating to non-payment. However, none of the groups surveyed again in 2006—and thus included in the sample of 97 here—listed this as one of their sanctioning mechanisms.
Common answers were that new members must ‘have an income-generating job’ or simply ‘have good morals’.
A plausible assumption often made in the ROSCA literature is that the same set of incentives will apply to all members and thus the group as a whole. One can justify this via the observation that members are often relatively homogenous individuals (e.g. employed in the same trade or coming from the same neighbourhood) who are able to commit to the same saving patterns over time.
There is no significant difference, in terms of motivation for joining, between fixed and random groups in our sample.
See pages 796 and 806 of Besley et al. (1993) for detailed derivations. In brief, the value of expected lifetime utility of all members in the model presented increases in both c and t, consumption and duration, respectively. Thus, increasing every members’ expected lifetime utility—which depends on their membership of the ROSCA—should help to deter default.
Putnam et al. (1993, p. 167) define social capital as “…features of social organisation such as trust, norms and networks that can improve the efficiency of society by facilitating coordinated actions”.
We also ran the analysis with the dependent variable equal to 1 for a group that collapsed due to enforcement problems (this was the case for 23 groups). The results were broadly similar. However, we prefer the dependent variable as defined here as it follows the relevant theoretical literature more closely.
The breakdown for the frequency of meeting for all groups is as follows: monthly (36 groups); twice per month (8); every 10 days (3); weekly (34); every 5 days (12); twice per week (2); every 2 days (1) and daily (1).
The results regarding sanctions remain unchanged when the variable is specified differently, whereby we restrict the ‘more severe’ sanctions to just those where property is seized, or a member is fined; not shown, but available upon request.
There is, of course, a well-known counter argument here that groups containing many members of the same family might see the sanctioning/enforcement mechanisms undermined due to a reluctance to punish each other (see, e.g., Sharma and Zeller 1997).
The average cycle length is 13 months. The variable ‘number of cycles completed’ varies from less than 1 to over 130, (mean of 8.6).
For this analysis, survival models are an alternative technique that could be used. However, our survey did not ask the exact date at which problems occurred or the group disbanded, it asks only whether this happened during a 2-year period.
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Appendices
Appendix A: Survey Methodology
Our survey was carried out in two of the poorest areas of the city of Cotonou, namely Vossa and Enagnon. Households were selected according to the following process: After obtaining a map of Enagnon, we performed a simple random selection of lots out of all those identified. In Vossa, we used a pseudo-random process, by which every tenth lot according to a specific direction was picked up. Starting points were selected to be equidistant from one another and so that they covered the whole district. In these two districts, it is often the case that many households live on the same lot in semi-detached rooms. Enumerators selected one room per lot according to a clockwise selection, varying from lot to lot (for the first lot of the day, they selected the first room clockwise, for the second one, the second room clockwise, and so on). Overall, only 3 households categorically refused to be surveyed and were replaced by other randomly selected households. Enumerators were asked to pass several times and at different times of the day, until contacts were established in such a way that none of the selected households were skipped. The most qualified of our enumerators also acted as a supervisor and visited many households already interviewed in order to check the accuracy of the responses. We compensated every household for their time by donating 1500 CFA francs (around 3 USD).
Appendix B: Attrition Regression; Probit Estimation
1 | |
|---|---|
Membership size | − 0.002 |
(0.003) | |
# of cycles completed | 0.002 |
(0.003) | |
Random | 0.167 |
(0.096) | |
Need | 0.038 |
(0.117) | |
President | − 0.107 |
(0.112) | |
Paid | − 0.020 |
(0.076) | |
President × paid | − 0.062 |
(0.131) | |
Written rules | − 0.141 |
(0.091) | |
More severe sanctions | − 0.029 |
(0.104) | |
Pot size (CFA 100,000s) | 0.016 |
(0.027) | |
Monthly meetings | − 0.095 |
(0.091) | |
Survived past problems | 0.140 |
(0.099) | |
Single ethnicity | 0.025 |
(0.099) | |
Only men | − 0.098 |
(0.097) | |
Only women | − 0.118 |
(0.113) | |
Group started among: | |
Friends | − 0.079 |
(0.152) | |
Members of same trade | − 0.122 |
(0.170) | |
Neighbours | − 0.090 |
(0.168) | |
Other | 0.183 |
(0.188) | |
Survey on new members | − 0.084 |
(0.107) | |
New members must be known | − 0.018 |
(0.088) | |
Other conditions | 0.000 |
(0.104) | |
n | 181 |
Pseudo-R2 | 0.09 |
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McNabb, K., LeMay-Boucher, P. & Bonan, J. Enforcement Problems in ROSCAs: Evidence from Benin. Eur J Dev Res 31, 1389–1415 (2019). https://doi.org/10.1057/s41287-019-00215-5
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DOI: https://doi.org/10.1057/s41287-019-00215-5