"The Mutuality of Credit: Rotating Savings and Credit Associations"

Rotating Savings and Credit Associations (ROSCAs) are essentially a group of individuals who come together and make regular cyclical contributions to a common fund, which is then given as a lump sum to one member in each cycle. For example, a group of 12 persons may contribute Rs. 100 (US$33) per month for 12 months. The Rs. 1,200 collected each month is given to one member. Thus, a member will lend' money to other members through his regular monthly contributions. After having received the lump sum amount when it is his turn (i.e. borrow' from the group), he then pays back the amount in regular/further monthly contributions. This explains the name rotating savings and credit associations' for such groups [Bouman, 1979: 253]. Depending on the cycle in which a member receives his/her lump sum, members alternate between being lenders and borrowers. That is, there is a mutual give-and-take involved in ROSCAs.

While the above description explains the principles behind a ROSCA, they however vary considerably in their functioning and organization. Typical variations include:
Members participating in a ROSCA are selected by the organizer based on ethnic lines or geographical limitations. ROSCAs are organized for members of the same ethic background, same place of origin, same native language speaking persons etc. It may also be organized on the basis of a street in a settlement, or the settlement as a whole.
Contribution amount:
The amount to be contributed in each cycle is decided based on the number of participating members, the total winning amount that each member can get, and other socio-economic factors. Contributions can also be in the form of shares' thus allowing a member to have more than one share or contribution in a particular cycle - increasing his chances of winning the lump sum, but also increasing the regular contributions he has to make [Bouman, 1979:258].
Cycle period:
Cycle periods - frequency with which contributions has to be made in each cycle. This can be daily, weekly, biweekly, monthly and half-yearly, depending on the amount to be contributed. Usually, smaller the amount, shorter the cycle period
Mode of selecting winner':
The basis of deciding the winner of the lump sum is decided in any one of three ways: By consensus, where by common agreement between members, the amount is usually given to a member who is in most need for finance. By lots, where a lottery determines who gets the lump sum in a particular cycle. Members who have received the lump sum do not participate in subsequent lotteries, but continue to make their contributions. By bidding, where the lump sum amount is bid for by the members during each cycle. Thus the member who wins the bid will receive the lump sum minus the bid amount; other members pay their contributions minus their share of the bid amount.

ROSCAs can be seen in almost every society around the world, and have been in existence for a considerable period of time. They are flexible and adapt themselves easily to rural and urban peculiarities as well as existing community patterns of grouping/organizing. This flexibility is one reason for their worldwide popularity.

Literature Review of ROSCAs

Issue Discussion References
Advantages of ROSCAs
  • The basic advantage of the ROSCA is that it offers an opportunity for members to save, and at the same time keep such savings fairly liquid and maximizing return.
  • It facilitates the availability of a lump sum of money, which allows for higher investment to be made earlier than accumulation of savings.
  • Most ROSCAs are organized along democratic lines, where operating procedures and other details are decided/ agreed upon by its members.
  • Profits (in the form of bid amounts, for example) and other returns on accumulated contributions are equally distributed to all members.
  • Risk of default is shared by all members and therefore sets up peer pressure to ensure that all members make their contributions on time.
Bouman, 1979
Geertz, 1962:241-263
Disadvantages of ROSCAs
  • There is a risk of mismanagement, fraud and bankruptcy by the organizer where he absconds with the accumulated contributions.
  • Timing of the receipt of funds by a member may not necessarily coincide with his need for finance.
  • The cyclical timing also applies to savings, where a member cannot save when he has surplus funds, but has to wait for the ROSCA meetings.
Key Implications of ROSCAs:
  • The ROSCA provides a means for the utilization of surplus funds and savings of low-income households- an easy and local savings mechanism.
  • The ROSCA employs democratic (in most types) to decide the organizational and operational aspects, and thus encourages community interaction - involvement of community in interaction and participation.
  • It respects existing community leadership patterns and decision-making processes - use of community patterns in designing savings and credit programmes.

Return to the ICM-Suppliers PageReturn to the ICM-Suppliers Page

Hari Srinivas -
Return to the ICM Homepage