Rotating Credit and Savings Associations

credit and savings
Seeing as formal financial institutions are hard to come by for the world’s poor, many come together in order to form Rotating Credit and Savings Associations, or ROSCAs. This is an informal group where members implement a group savings system.

While somewhat informal, ROSCA memberships are very popular throughout the developing world. In 1986, estimates were made that ROSCA participation ranged from 50 to 95 percent of the adult population in rural areas in Liberia, Ivory Coast, Togo and Nigeria. Later studies showed no decrease in ROSCA numbers. High ROSCA membership has also been found in Cameroon, Nigeria, Bolivia, Ghana, Taiwan and Argentina.

Members of ROSCA meet up at given intervals, at which time they all give an agreed upon amount of money, with possibly differing amounts per person depending on the group. These meetings can be daily, weekly, monthly or following any set time period the group decides.

During each meeting, one of the members receives a large sum of money. This can be done on a rotating or lottery-type basis. Once each member has had their turn receiving the large sum of money, the ROSCA can disband or begin a new cycle.

Members hold each other accountable, as each payment is made in the presence of the entire group.

After the whole rotation is complete, usually, no member has gained any more money than given in the first place. Why do people decide to form ROSCAs rather than save the money on their own?

ROSCAs provide a savings system in which an individual can have a large sum of money out of their hands to save for a later date, making it easier to have self discipline and not spend the money during less desperate times. Married women have utilized ROSCAs in order to keep money safe from the rest of the household when others want immediate consumption.

When ROSCA participants were asked about their reasons for joining, many stated, “You can’t save alone” and that the system gave them “the strength to save” or a “forced commitment to saving,” which some participants felt they needed.

ROSCAs have also worked as insurance. If a member of a ROSCA goes through an unexpected expense, they may be able to take out the next large sum with the group’s support, making it possible for them to pull themselves back on their feet.

These ROSCAs have shown the power of community bonding and lending, and how even in remote areas of the world, where educational and financial opportunities are rare, people are able to come together and create a financial lending system to raise everyone up.

– Courtney Prentice

Sources: Investopedia, SSCNet, JSTOR, Systems of Exchange
Photo: Keetria