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Microcredit institutions like the Grameen Bank and Kiva.org have gained international recognition in recent years for supporting the small business activities of poor people who lack access to traditional sources of credit. These organizations have played a critical role in the alleviation of poverty and the empowerment of women worldwide. Although these programs rightly receive a lot of attention from Western media outlets and political elites, many Western readers might be surprised to learn that many communities in developing countries operate their own lending organizations, many of which predate the international microcredit movement. Called rotating savings and credit associations, or ROSCAs, these organizations allow small groups of people to pool their resources for the purposes of saving and lending. Sociologist Nicole Woolsey Biggart believes that the conditions that are common to successful ROSCAs may suggest the necessary conditions for successful microcredit arrangements.
ROSCAs occur globally and take many forms, but most often they consist of a group of people who agree to make regular contributions to a fund, which is then given to each member in rotation. For example, six people may agree to give $10 to a fund every month for six months. Each month, a different member of the group collects the $50 contributed by the other five members and uses it for their business expenses or personal consumption. This arrangement allows people who can’t normally raise substantial capital to have periodic access to such funds. ROSCAs occur in developing countries in Asia, Africa, and South America, and they often go by local names: tontines in West Africa, hui in China, njangi in Cameroon, stokvel in South Africa, tandas in Mexico, and chits or kuries in India. Given the lack of external regulation and the incentive for ROSCAs members to stop contributing after their turn to collect, it is remarkable how low the default rate is among ROSCAs worldwide. Biggart believes that the success of ROSCAs can be attributed to five common characteristics:
A communally based social order. Roscas most often occur in societies founded on strong communal ties, such as kinship networks or common identification with a native place. This subordination to group identify and mutual obligation is a powerful force which deters default. As with microcredit institutions, the majority of ROSCAs benefit women.
Obligations that are held to be collective in nature. In many of the communal societies where ROSCAs occur, failure to pay would result not only in individual shaming but also in tarnishing the family name. Thus, many families feel an obligation to pay off a family member’s debt. Another strategy to prevent default is to put the newest members at the end of the rotation, where they will be merely collecting past contributions rather than receiving a loan.
Social and economic stability. Roscas often exclude people who are deemed too economically unstable or morally questionable.
Social and economic isolation. Individual reputation becomes much more important in areas with low rates of geographic mobility. Because people don’t have any alternative to maintaining their local reputation, the incentive to behave responsibly is high.
Similarity among ROSCAs members in social status. Rosca members often have similar social status, since a powerful member could potentially exploit the other members without consequence. Roscas rely on the powerful force of peer pressure.
From a Systems of Exchange perspective, ROSCAs are primarily a Communal System.2 They exist only within social groups bound together by kinship ties, clan membership, or common identity with a geographic location. Furthermore, they rely on these social ties to ensure responsible behavior. Members who default can face a ruined personal and family reputation, as well as additional sanctions by the community. Despite their communal nature, ROSCAs also exhibit the instrumental rationality which defines Associative Systems of Exchange; ROSCAs are mutually beneficial to all their members because they allow people to access more substantial sums of capital.
Photo by Shamseya.org.
Biggart, Nicole Woolsey. (2001). “Banking on Each Other: The Situational Logic of Rotating Savings and Credit Associations.” Advances in Qualitative Organization Research 3: 129-153.
Biggart, Nicole Woolsey and Rick Delbridge. (2004). “Systems of Exchange.” Academy of Management Review 29(1): pp. 28-49.