Understanding How ROSCAS Work
Ever heard of ROSCAS? ROSCA is an acronym for Rotating Savings and Credit Associations.
ROSCAs are amongst the oldest and most traditional savings institutions in the world and play a vital role in society. ROSCAs’ vary but most have similarities regarding structure. They are informal financial institutions that through repetitive contributions allow members to borrow from the common fund of the group. This is common among low-income earners because they are unable to access funds, from formal lending institutions. Members pool their money together as a common fund, structured in a way that there is a minimum monthly contribution.
Structure
- Members regularly contribute a minimum dictated amount by the group.
- Meetings occur mostly on a monthly basis or bi-weekly basis.
- Once the contribution is made, there is one member who takes the whole sum amount at once.
- In other groups, the entire sum amount is dispersed to different members who need it.
- The expectation from the group is that each member will have benefited from the fund and will return the favor down the line.
- Since it’s an open structure most groups, do not keep records.
- This is because the level of literacy amongst most members is low and they have weak systems for protecting collective property.
- Members within a Roscas setting do not pay interest. To avoid defaulters groups are encouraged to keep records for accountability, this reduces the risk in case a member collects funds and doesn’t pay back. Most teams last between six months to one year depending on the number of members.
Purpose of ROSCAs’
Women in the low-income earning groups are the most who join ROSCAs’. They are most common because their commitment to pay loans is much higher than the possibility of men paying. This enables them to pay for food, medication, and even fees for their children. Members expect that a lump sum is better than accumulating the funds on your own. Thus it’s much easier to be in a group, get lump sum money, and satisfy your particular need than in the event of another member reciprocating the same. Others join ROSCAs to subject themselves to a specific savings and investment group to commit themselves to saving or get the strength to save.
Mode of Selecting Recipient of Funds
Different ways can be used depending on the needs of the individuals. Mostly selection is made by consensus. Members agree between themselves on who has the greatest need to finance and what is allocated. In other groups, lots are cast, and the lottery determines who gets the lump sum in a particular cycle by assigning numbers to each. Members who have then received the funds do not participate in the subsequent lottery but continue to make contributions toward the next member.
Breaking down ROSCAS’
Memberships are based on social groupings or the circle of members in a certain neighborhood. Thus they do not last for long, and it’s easy to dissolve them once members have all received from the cycle.
ROSCAs are most common around the world. They are flexible and are easily adapted to any setting either rural or urban and elite or non-elite. Their flexibility is more reason why they are common.
Advantages of ROSCAS
1. Simple rules and procedures involved in joining and borrowing.
2. no record-keeping skills are needed among members.
3. no external money lenders /financial institutions are involved.
4. no storage facility is needed as money is redistributed immediately after collection.
5. Amounts contributed are easily decided upon making it flexible for members.
6. transparency on cash contributions and lending.
Disadvantages of ROSCAS
1. risk of defaulters from any member.
2. there is no return on investment, and no interest cost is charged during reimbursement.
Ending thought
ROSCAS offers an important role in small growing businesses. They serve the lower-income earners who are unable to access funds from lending institutions. This has empowered people who are in these groups it’s advisable as the rotation cycles increase to formalize the ROSCAS into a different institution and inform of a Self -help group.
Bibliography
https://investeddevelopment.com/blog/2012/04/the-benefits-of-informal-savings-groups/
https://www.economist.com/blogs/freeexchange/2015/01/islamic-microfinance
Categorised in: Chama types, General, Investment groups
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