Rotating Savings and Credit Associations (ROSCA)

Rotating Savings and Credit Associations (ROSCA) are among the oldest and most prevalent savings institutions found in the world and play an important role in savings mobilization in many developing economies. They are locally organized groups that meet at regular intervals; at each meeting members contribute funds that are given in turn to one or more of the members. Once every participant has received funds, they can either disband or begin another round.

Communities have developed organically in many rural areas of the developing world that lack formal banking services, providing another option toward gaining access to financial capital. Savings groups vary from informal rotating savings and credit associations (ROSCAs) to more structured accumulating savings and credit associations (ASCAs). Common to all associations is voluntary membership based on trust, full transparency, and the existence of a strong social unity between group members.

ROSCAs are based on seasonal cycles in which, once each group member has contributed to the pot, it is then taken home by one or more members, thereby negating the need for formal records. This model is well adapted to communities with low literacy levels and weak systems for protecting property rights. ASCAs appoint a group member to manage an internal savings fund and keep detailed records. After the group has agreed to an interest rate and loan period, funds are lent out. Once the loans are paid off on the fund, plus profit accumulated from loan interest, the proceeds are distributed to members. The group may then re-form, perhaps with some changes in membership, and a new cycle begins.

The more formalized and sophisticated savings and credit associations may request a business plan to be submitted in order to gain loan approval, and some aspect of business and money management training might be provided. However, the basic model always ensures that group members uniformly benefit from the process; i.e., there is no one individual who profits more than others, and above all, the associations benefit the whole village as funds remain within the community. Loans acquired from within the community may be used to purchase land or livestock, or even create a new enterprise, thus additionally contributing to the growth of the community.

In the absence of traditional banking services, participating in savings and credit associations is an excellent method for the rural poor to self-manage their finances and ensure a basic level of economic stability. Hugh Allen, a microfinance expert with over three decades of experience, states: “The very poor may, then, be best served by member-managed micro-institutions that can operate flexibly and profitably and can offer appropriate services at a smaller scale until such time as the economy grows to the extent that the pot of money and the scale of the average microenterprise are large enough to attract the regulated formal sector.”

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