Rotating savings and credit association
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.
The first academic description of ROSCAs was by Shirely Ardener in 1964. 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." They are also known as tandas (Latin America), chama (Swahili-speaking East Africa), ekub (Ethiopia), partnerhand (West Indies), cundinas (Mexico), ayuuto (Somalia), stokvel (South Africa), hagbad (Somaliland), susu (West Africa and the Caribbean), hui, 會 (Chinese communities in East & SE Asia), paluwagan (Philippines), Gam'eya جمعية (Middle East), kye (계) (South Korea), tanomoshiko (頼母子講) (Japan), pandeiros (Brazil), cuchubál (Guatemala), juntas or quiniela (Peru), C.A.R. Țigănesc/Roata (România), arisan (Indonesia) and dhukuti or dhikuti (Nepal).
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 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. 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:
- 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
Variously called "committee" in India and Pakistan, Ekub in Ethiopia, Susus in Southern Africa and the Caribbean, "Seettuva" in Sri Lanka, tontines in West Africa, tanomoshiko or mujin in pre-1945 Japan, wichin gye in Korea, arisan in Indonesia, likelembas 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. 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. 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.
Rotating or accumulating?
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. 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.
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. 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 percent 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.
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". A few of the existing products include eMoneyPool, created by two brothers living in Phoenix, Arizona; Monk, founded by ex-googler and ex-intel employees in Silicon Valley; Puddle, a google-venture backed startups, 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, a patent pending UK based organisation facilitating online 'Pardner's' between verified individuals, founded in 2010.
StepLadder, founded in 2016 by finance professionals with distinguished academic work on Consorcios in Brazil is joining the UK market for ROSCA-based collaborative finance by serving prospective first-time UK home buyers.
In 2017 the first block-chain based ROSCA platform was developed utilising smart-contracts on the Ethereum network. The WeTrust platform raised $6.5M market capital in an ICO that ended in April 2017. Its current market capital has since tripled within 10 days of coin issuance.
- Ardener, Shirley (Vol. 94, No. 2, Jul. - Dec., 1964 of The Journal of the Royal Anthropological Institute of Great Britain and Ireland). "The Comparative Study of Rotating Credit Associations". www.jstor.org. JSTOR i331098. Check date values in:
- 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
- Stuart Rutherford. The Poor & Their Money Oxford University Press, Delhi, 2000
- "Consorcios and Brazils Consumer Credit Innovation" (PDF).
- Clifford Geertz. The Rotating Credit Association: a middle rung in development. Cambridge, Massachusetts, United States: Massachusetts Institute of Technology, Center for International Studies, 1956.
- "Banco Central do Brasil Relatorio de Inclusao Financiera No.3, 2015" (PDF).
- William J. Grant & 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.
- Hugh Allen and Mark Staehle. Village Savings and Loan Associations (VSLAs) Programme Guide, Field Operations Manual. VSL Associates, Solingen, 2007.
- "Traditional Mexican Savings System's Popularity Grows".
- "System, Method and computer program for operating web-based collective e-money lending/borrowing circles between members and non-members of social networking websites".
- "Pardner in Financial Progress".
- "Companies House".
- "Consorcios and Brazils Consumer Credit Innovation" (PDF).
- 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.
- 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.