"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
While the above description explains the principles behind a ROSCA, they however vary
considerably in their functioning and organization. Typical variations include:
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.
- 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
- 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
Literature Review 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
- 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.
- 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.