Rotating Saving and Credit Associations (ROSCAs)

Abstract

Rotating saving and credit associations (roscas) are the simplest form of collective financial institution. A rosca is a group of individuals who meet at regular intervals, each of whom contributes at each meeting a pre-determined amount to a collective ‘pot’ which is then given to one member. The latter is then excluded from receiving the pot in future meetings, while still being obliged to contribute to the pot. The meeting process repeats itself until each member has received the pot, thereby completing a cycle. Then the rosca can start a new cycle. From this description, the main virtues of roscas are clear: they do not require storage of funds, accounting and durations of obligations are transparent, and there are no complicated interest payments or debt management. Roscas are very popular in developing countries. For instance, average membership rates in Indonesia have been estimated at 40 per cent of the population (Armendariz de Aghion and Morduch 2005), 20 per cent in Taiwan (Levenson and Besley 1996) and 40 per cent in a Kenyan slum (Anderson and Baland 2002). Although roscas do exist alongside more formal financial institutions, they are often the sole saving and credit institution in many rural areas.