A Rotating Saving and Credit Association is a 13-century old peer-lending and peer-banking institution considered to be a form of collaborative finance. A group of people get together to pool a certain amount of money every month and a member takes the fund home every month until everyone has taken the full pool once.
The ROSCA is an economic, social, and cultural institution as is witnessed by the varied practices of ROSCAs, depending on where in the world the group is based. The overall value of ROSCAs is estimated to be over $500 billion worldwide.
“An association formed upon a core of participants who agree to make regular contributions to a fund which is given, in whole or in part, to each contributor in a rotation.”
Who uses it and why?
Traditionally, it has primarily been women in most cultures who get together to start these savings circles, although men participate in this practice as well. Here in the West, it is used by people who may not qualify for a loan or other credit facilities.
The ROSCAs “are attractive for many families because they allow them to save, have a large sum of money available for a big-ticket purchase or pay medical bills”.
These types of circles are mostly found in Africa, Caribbean, Latin America, and parts of Asia, where they go by many different names. Some of the most common ones are ayuuto, hagbad, pardner, cundinas/juntas, ekub, tanda, susu, and kameti/visi.
Trust is the most critical component in ROSCAs which is why they have been so popular in immigrant and other close-knit communities in the West, who are not fully integrated in the system yet. They are most common in developing economies without robust financial and legal infrastructure.
What it is not
A way to make or earn money. Some people promote it as a form of income which it is not. It is simply a method to save money with a group, and for most members, a way to get an interest-free loan which in reality is just an advance on a sum they have committed to save in the short term.
There have been reports of rotation saving circles being promoted as a money-making scheme in the West, particularly among the Black community in the United States, which turned out to be outright pyramid schemes. This is the reason why they have remained an informal system.
How it works
•Some friends/family get together and create a funding pool.
•Each person in the group contributes a set amount to the common pool each month.
•Each person selects when they will be paid during the cycle.
•Every month, one person in the group takes the pool money home until everyone has taken it one time. Then the group is restarted or ended.
Usually, ROSCAs do not cost anything but they do not generate any revenue either. When the credit association part is utilised, a fee or interest may be charged to the credit recipients, but any profits are returned to the pool for collective use and to protect against future risk.
A simple example
A group of 12 friends decide to save €100 each month for a year (one cycle is one year in this case). At the end of every month, each member contributes €100 so the full pool is €1,200 each month. One member is given the $1,200 that month. At the end of the second month, everyone pays in €100 again. Another member takes home the €1,200 the second month. This goes on for 12 months until everyone in the group has taken the money once.
At the end, each person has managed to save €1,200 and the group has saved €14,400 in the first year.
The good and the bad
- Great way of saving
- Promotes commitment.
- Social savings
- Helping family/friends
- Delinquency rate of 0.05%
- No interest payments.
- Incentives to save are included but not compulsory.
Traditionally, the bad side has been the risk associated with it. While trust is central to all such groups, there is nonetheless a small chance that someone who has already received the funding defaults. This means the group loses the pool one time which can add up to anything from €100 (a single contribution if the person is the last) to max one full pool (€1,200 in the example above).
Additionally, one person takes lots of cash in one go, which is a safety risk in areas that lack easily accessible formal banking or high crime rates. It might be a great risk if that cash is the only savings a person has.
Final Note
All in all, it is an enduring financial system that has managed to survive in all sorts of economic and social systems that have taken root across the world in the last millennium. They promise to be an important and integral part of the Economy 2.0 where social/communal aspects are assuming a central role.
