> Posted by Stuart Rutherford and Paul Vander Meer

ROSCAs, or rotating savings and credit associations¹, have enjoyed good press lately in the United States. The New York Times just ran a story about ROSCA users in some states earning themselves formal credit scores; Kim Wilson at Tufts University tells of a New York banker who awarded an immigrant family a mortgage after reviewing their success in making ROSCA payments²; and the U.S. Financial Diaries research project notes that ROSCAs can be the “preferred” financial tool even for people using formal banks. eMoneyPool, based in Arizona, offers Americans the chance to join simplified online ROSCAs. There are online ROSCAs in India, too, and researchers from Ithaca College note that in India “ROSCAs remain strong despite greater financial inclusion.” Similar studies find the same in other developing countries and in this post we introduce the ROSCAs of Chulin, some of the best-structured ROSCAs on the planet.

The renewed interest in ROSCAs is welcome. They are arguably the world’s most elegant, most efficient, and most reliable informal financial device, capable, at their best, of transforming the economies of whole communities, as we show in this blog. After years of relative neglect from proponents of “financial inclusion,” why are they now getting the attention they deserve?

Natural immunity

The ROSCA’s reputation is on the rise just as microcredit’s is tottering. After a spectacular crash in India and serious difficulties elsewhere, microcredit has been accused, sometimes fairly, of bad practices. Overselling of loans, harsh collection practices, and price-gouging, have produced the “dark side of microfinance” – extreme repayment stress and grossly over-indebted clients. When profit-hungry financial centers are linked to some of the world’s poorest people the outcome is not always attractive.

ROSCAs are immune to these ills. The money they circulate comes from the members, not from outside, guaranteeing that the volumes involved are manageable by the users. Not all ROSCAs charge for their loans, but when they do the price is set by the members, and returns to them as interest on their savings. ROSCA users are not pressured into borrowing, over-indebtedness is rare, and price-gouging and the loss of resources to outsiders simply don’t happen.

Doing the job that’s really needed

With microcredit’s halo tarnished, where can poor people enjoy good financial services? Mobile-phone banking has grown astonishingly fast, and is sometimes presented as the quickest route to “financial inclusion.” But this claim – so far – is misleading. Mobile-money systems remain for now largely limited to moving money through spaceOnly rarely do they move money through time, so true intermediation (savings and credit) is still mostly absent.

ROSCAs, though, are supremely efficient at intermediation: savings flow to borrowers instantly, leaving no money lying idle and requiring minimal record-keeping. Even so, researchers remain hesitant: they note the ROSCA’s virtues but warn of its limitations. The resulting message is that if we can’t “improve” them, we’d better ignore them. That is a mistake. After a millennium of trial and error, the best ROSCAs are already close to the optimum.

What’s not wrong with the ROSCA

ROSCAs face four criticisms. The first is that they are inflexible, in that users can’t get the lump sum they need at the time they need it, and that the amount that is paid-in each round doesn’t vary to suit the individual member. The second is that they cannot handle the large sums needed to propel household or village economic growth. The third is that they are unreliable, because early takers of the prize can cheat by discontinuing their deposits. The fourth is that they do not adapt easily to modern, more individualized livelihoods.

But good ROSCAs avoid these limitations. Our example is the farmers’ ROSCAs in the Taiwanese village of Chulin, 60 of which author Paul Vander Meer tracked in detail over two decades, complete with round-by-round records of every transaction made. His monograph³ about them is a manual of how local people can construct a powerful intermediation system.

The Chulin villagers used “bidding” ROSCAs: an auction among the members decided who should take the prize each round, with the winners’ bids enjoyed as interest by the other members. They were “principal-and-associate” ROSCAs: someone needing money (the principal) proposed the ROSCA and chose the members (the associates). The principal took the first prize in full, without having to bid, and in return he (sometimes she) managed the ROSCA, taking responsibility for ensuring that everyone paid in full. Most villagers took part in multiple ROSCAs, often concurrently.

Flexible

Members could hold more than one share each, so richer and poorer households could be in the same ROSCA. A villager who needed funds could propose a new ROSCA, bid high in a current one to secure the prize, participate in several ROSCAs at once, or hold more than one share in one or more ROSCAs – or he could do all of these. The study’s analysis of share-holding and bidding patterns shows this clearly, and it provides detailed case studies showing how members constructed their financial and farming lives to their greatest benefit.

Substantial sums

The 60 ROSCAs of the Chulin study circulated US $3.4 million during the 1970s and 1980s, or $60,000 per ROSCA, a very large sum in what was then a still poor though rapidly developing country. Participating households formed sums big enough to mechanize their farming and then go on to invest in homes and in off-farm businesses. Households involved in multiple ROSCAs – as many were – saw spectacular economic gains.

Conventional agricultural banking often suffers from mismatches between supply and demand of funds. But in a village-wide system of ROSCAs, demand automatically begets supply: as more and more villagers take part, they bring more and more resources. No less than 88 percent of Chulin’s households participated in the ROSCAs. Many joined wanting to be “forced” to save – and the bidding system ensured their savings were well rewarded. We know of no other intermediation system so well suited to marshaling such a large share of the resources of the village. Conventional banking does not achieve this.

Reliable

A handful of these 60 ROSCAs failed to complete, but only one resulted in losses. This very high success rate came about in part because it was easy for participants to gauge the risks of joining the ROSCAs: they all lived in Chulin or nearby, and everybody’s assets and skills and character were on view, in the fields and workshops.

Adaptable

After two decades of intensive ROSCA use, Chulin’s farms and homes were thoroughly modernized. Villagers diversified into off-farm enterprises, and educated their children who left for salaried jobs in the cities. The village ROSCAs dwindled, and then disappeared, but in the prosperous modern town that serves the village, ROSCAs are now favored by salaried office workers. Like the farmers before them, they enjoy “transparency of risk”: they are aware of each other’s salary level and prospects for continued employment. Rounds take place on the monthly pay-day, bids are accepted by email or text, and payments often made by electronic transfer from bank accounts. One participant told us, this September, that he uses banks but finds the ROSCA a more profitable way to save and by far the best way to borrow.

Spreading the message

Round the world, in villages, markets, factories, and offices, there are people who pursue similar livelihood strategies and are aware of each other’s circumstances. They could benefit from using the Chulin-style bidding ROSCA. How to get the message to them?

One template is the “savings group” movement. In Niger in 1991 Moira Eknes, an open-minded worker at CARE, an NGO, noticed the merits of an indigenous savings-and-loan club, and worked with local people to tell other villagers about it. The idea spread quickly when other NGOs adopted it and international foundations invested in it. By now there may be 10 million users of clubs of this kind. We are fans of this work, but we have one disagreement with them – they didn’t pick the best model. The bidding ROSCA is far more powerful than the modified ASCA (or accumulating savings and credit association) that they promote.

Still, the savings group movement shows how to invest in self-governing intermediation machinery that penetrates more deeply and more equitably into the lives and livelihoods of poor people than microfinance is ever likely to achieve. All we need to do now is to apply the same energy to promoting the ROSCA.

[1] So named by the late Frits Bouman, a brilliant observer of informal finance

[2] Personal correspondence, October 7 2014

[3] Vander Meer, Paul. The Power and Utility of Bidding Roscas in the Economic Take-off of Chulin Village, Taiwan, 1970-1990. Unpublished monograph. Revisions in progress. Electronic copies available after December 1, 2014. Contact paulv@csufresno.edu

Stuart Rutherford has been investigating how poor people manage their money for over 40 years, and summarized his findings in the book The Poor and Their Money. He pioneered the ‘financial diary’ research methodology, findings from which appear in Portfolios of the Poor, a book he co-authored. He has tried to make use of these findings in products designed for the mfi he founded in Bangladesh, SafeSave (see here for the work currently going on). He has also taught, for example at the Boulder MicroFinance Training Course and at Manchester University UK, and has written many research and evaluation reports for international institutions, governments and NGOs.

Paul Vander Meer, a geographer, has written a book on the effects of Farm Plot Dispersal: Lu-liao Village, Taiwan, 1967, and articles pertaining to land consolidation, roscas, and land inheritance in that same village which is formally called Chulin Village. Currently he is writing a monograph tentatively titled: The Power and Utility of Bidding Roscas in the Economic Take-off of Chulin Village Taiwan, 1970-1990. Vander Meer was born in Hsia-men on the southeast coast of China where he learned the Min-nan dialect, the language of the Taiwanese. While pursuing a doctorate at the University of Michigan, he spent a year “reading” with B. H. Farmer, St. John’s College, Cambridge University. He has taught at Temple University and California State University, Fresno.

Image credit: Brett Matthews

Have you read?

300 Households for One Year – Results of the Kenya Financial Diaries

Portfolios of the Poor

What Financial Diaries Reveal about M-Pesa Use