Overview of Rotating Savings and Credit Association (rosca)

Rosca’s 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, the Rosca can disband or begin another round Besley, Coate and Loury (1993). In joining a Rosca, an individual agrees to a schedule of periodic payments in return for which she receives a lump-sum payment at a future date. Roscas often pay no interest and participants may have little or no control over when they receive the funds.

Participants also bear the risk that other participants may not fulfil their obligations. According to Besley, Coate, & Loury (1993), individuals may join Roscas to finance the purchase of an indivisible durable good, taking advantage of the gains from intertemporal trade between individuals. All individuals except the last improve their welfare by joining a Rosca, as each receives the indivisible durable goods sooner than by saving alone. ROSCAs play in important role as a risk management tool; they can offer an insurance mechanism against income shocks, provided that these shocks are not correlated among participants. They are an extension of traditional savings groups which, as documented by Maloney and Ahmed (1988) are constituted of individuals who regularly or irregularly, deposit funds with an individual or a subset of the group. Funds are returned to individual savers at the end of a given period, and there is no systematic rotational distribution mechanism. Although there are significant financial reasons to join a ROSCA, the main defining characteristic of a performing association lays in the reduction of the risk of opportunistic behavior that result from the peer pressure for performance by all members.

Although ROSCAs are financing instruments mostly used by the poor, they are not exclusively so, contrary to microfinance. According to Adams and Canavesi de Sahonero (1999), the most likely ROSCA subscribers in developing countries can be found among white-collar workers in large cities. Nevertheless, the ROSCA appears as a fairly inflexible system of credit delivery, whose survival relies almost entirely on the use of social pressures to ensure the preservation of the personal resources of group members within the association. Informal finance groups face many challenges due to the fact that their activities and operations are very informal. These challenges include: delayed payments, poor management and governance of the groups, mismanagement of funds and theft. According to Siwan et al. (2003) in Kenya, it shows that ROSCA groups encounter two main problems: there are members who do not regularly pay their contributions and there are members who stop contributing after receiving the pot. Another challenge is the element of negotiability that these systems allow which enables powerful individuals to manipulate the groups to their personal advantage. Also, a few powerful community members take advantage of the weak systems; by quickly setting up a group, collecting funds from other members, taking big loans for themselves and defaulting to pay.

According to FinAcess report (2016), most of the groups reported members leaving the group, followed by those who reported members not paying contributions. These experiences were the most common across all types of groups. The implication of this is that there would be strong effects on cash flow within the group and the reliability with which members receive their payouts. Anderson et al. (2004) also discusses the problems of contributions faced by ROSCAS in Dagoreti and Kibera slum, Kenya finding in particular that those who were late in the order or who had already received the pot often failed to pay. The power dynamics of the social relations in which these systems are embedded are also a key source of their failure. Instances of ROSCA failure due to default suggest the influence of power relations in their operations.