What is Rotating Savings and Credit Association (ROSCA)?
Rotating Savings and Credit Associations (ROSCAs) are financial instruments in which the members are a trusted social network that includes friends, relatives, family, neighbours, and colleagues. The members agree to contribute an equal amount of money, typically on a monthly basis for a defined period. At the end of each cycle, a different member picks up the lump sum.
ROSCA is a global phenomenon, and these informal microfinance groups have been documented around the developing world by different names. In India and Pakistan, it’s called committee or chit fund, Susus in Southern Africa and the Caribbean, Ekub in Ethiopia, Seettuva in Sri Lanka, Tanomoshi-ko or Mujin in pre-1945 Japan, Tontines in West Africa, Arisan in Indonesia, Wichin Gye in Korea, Xitique in Mozambique and Djanggis in Cameroon, and likelembas in the Democratic Republic of the Congo.
Millions of low-income people across the world use ROSCAs as instruments of savings and credit. These people are vulnerable to income volatility; ROSCAs offers them a unique option to save and borrow.
How Rotating Savings and Credit Association (ROSCA) Works?
The concept of ROSCA concept is well-known and practised all over the world. But how exactly does it work?
In a ROSCA, members contribute their money into a common fund. Usually, ROSCAs are structured around monthly contributions. A member takes the money collected as a lump sum at the beginning of each cycle. This cycle continues for as long as the group exists.
ROSCAs operate by either:
- Giving the total money to the individual who is in need. One can receive the pot just once.
- Conducting a lottery. Those members who already received their payouts are excluded from the lottery.
- Bidding. The members who want the money bid to take the amount home.
ROSCAs, generally exist in areas where a large segment of people has limited access to formal banking institutions. ROSCA memberships may be within families, ethnic groups or based on geographical aspects.
Let’s understand how ROSCA works with the help of an example:
Assume that you save ₹100 every month to buy a motorcycle that would cost you ₹1,000. So, it will take you 10 months to save enough money to buy the bike. But, what if there are 10 people having the same goal, and each of their goals is achieved 90% faster?
In ROSCA, each member contributes ₹100 each month. So, at the end of the month, the total fund value is ₹1000. Each month, one person is selected to take the lump sum to achieve the goal; next month another member is chosen and so on. So, 9 out of 10 members will receive ₹1,000 faster while each member contributes ₹100 each month.
Digital Rotating Savings and Credit Association (ROSCA)
Technology has added a new twist to the savings pools, with digital ROSCAs being organised on Web sites and mobile apps that bring together people from across the country. In response to the surge of peer-to-peer and crowdfunding platforms flooding the alternative finance market, digital ROSCAs have emerged to enable people to save and borrow easily and in a hassle-free manner. Right from the formation of group, schedules & auctions to managing collections and disbursement of prize money, everything can be done on smartphones with a few clicks of a button. The MoneyClub is India’s best AI-driven platform that is digitising the ROSCA model.
Advantages of Rotating Savings and Credit Association(ROSCA)
- It has a clear beginning and end.
- There is no need to store the funds as money goes from one member’s account to another’s.
- It is a great saving instrument in rural areas where formal savings institutions are absent.
- There are a wide variety of ROSCAs – market, religious, office, ethnic, or neighbourhood.
- There is transparency due to group regulation.
- It is an efficient business model. Money is put in the ‘pot’, the meeting/auction occurs, and the money is distributed.
- It can be tailored to the income of the group.
- The savings of many are collected to form a lump sum, which one person can use it to pay school fees buy household durables, home repairs, cover unplanned expenses and medical emergencies.
Rotating Savings and Credit Association (ROSCA) as a Savings Instrument
You can’t save alone – it is easy to misuse money. Saving money at home can make you extravagant in using it. Doing it with other members helps you to save. You can use ROSCA to save for short-term goals, such as buying a vehicle or setting up a business. ROSCAs are especially useful for goals that can crop up anytime during the tenure of the group, such as a child’s wedding or the purchase of a house.
Rotating Savings and Credit Association (ROSCA) as an insurance
The traditional social obligations to help kinsmen, and sometimes neighbours and workmates, quickly come into effect as word gets around among members of the ROSCA, who will adjust the order of rotation to enable the unlucky one to receive a turn. The speed with which ROSCAs can usually react to their members’ needs can rarely be matched by distant, impersonal banking systems.
Rotating Savings and Credit Association (ROSCA) creates a strong social bond
Reciprocity and commitment to the group are essential in order for the ROSCA to be sustainable, and this is mainly achieved through social enforcement and trust. Members of a ROSCA feel a stronger connection within themselves as compared to the rest of the community. Ample instances have demonstrated that ROSCA comes together to help a member in trouble and have foregone their personal interests in such a case. Members feel stronger as an individual when they are a part of a group!
Disadvantages of Rotating Savings and Credit Association (ROSCA)
The Disadvantges of ROSCAs are:
- If the ROSCA distributes money by prior agreement or by lottery, it is unlikely to be available at the time when you need it the most.
- Since the amount of money is fixed, it may not match an individual’s investment plans adequately.
ROSCA enables people to reach their goals faster while improving their financial well-being. Digital ROSCA has just begun its journey and is all set to gain consumer attention and be known as an effective saving and credit solution. Many people across the world might be unaware of ROSCA now, but very soon, things are going to change.