They’ve gotten glowing coverage in the financial inclusion press. They’ve been featured twice in the New York Times in the past two months. They’re the subject of prominent research projects and a new book by a microfinance pioneer. It’s fair to say that savings groups, often called Rotating Savings and Credit Associations (ROSCAs), are “having a moment.” Yet in spite of this momentum, many people – in the developed world at least – are unfamiliar with the approach.
In the developing world, however, these groups have existed for centuries, and they’re so common that they’re known by over 200 names in dozens of countries on three continents. Used to provide access to capital for everything from health care to small business expenses, the groups are generally organized in one of two ways: ROSCAs collect fixed deposits from group members on a set schedule, then disburse the combined pot of money to each member in turn. Accumulating Savings and Credit Associations (ASCAs) function similarly, but along with the rotating payouts, they let the group accrue and lend out additional money – typically with interest – distributing the profit among members. Both ROSCAs and ASCAs typically have a set beginning and end, often lasting from a few months to a year, and members often start up a new group once the cycle has completed.
Why are these groups so popular in developing countries and among financial inclusion advocates? Their features are uniquely suited to low-income communities, and they elegantly address many of the challenges and flaws in the formal microcredit model:
- They can be launched and managed by group members themselves, requiring no outside capital, staff, or training, and their simplicity and transparency make them ideal for communities with low financial literacy levels and weak protections of collective property rights.
- The money these groups lend comes from internal members, not from outside institutions, helping to avoid over-indebtedness, price gouging, and pressure to borrow. What’s more, all interest collected stays within the community.
- They serve remote rural areas that formal financial services can’t reach, and their activities can be easily timed to seasonal cash flow cycles.
- They facilitate savings through group discipline and by taking the money out of the home (where family and relatives may demand access), while providing efficient intermediation, with no idle funds or complex record-keeping.
- Since members select each other based on trust, reputation, and familiarity with each other’s earning potential, the groups minimize the risk of defaults and reach people whose creditworthiness might not be apparent to formal financial institutions.
However, while their advantages are clear and numerous, savings and lending groups do have a few drawbacks. They lack flexibility to meet members’ immediate and varied cash needs, and their requirement for regular equal payments can exclude people with unpredictable income. They tend to offer greater benefit to members who receive their payout earlier in the cycle, and in spite of the social pressures involved, these members sometimes default. In the case of ASCAs, some management and record-keeping skills are needed, along with a safe place to keep the accumulating funds and interest. And significantly, the groups don’t offer access to larger sums, longer-term loans, or a credit score that could provide a bridge to formal financial services.
What if there was a way to preserve the many benefits of the model, while avoiding its downsides? That’s a question the financial inclusion community is increasingly trying to answer. While prominent research initiatives evaluate the impact of savings groups and explore ways to improve them, the Bill and Melinda Gates Foundation has given over $30 million in funding to advance the model. International development powerhouses like CARE, Catholic Relief Services and Plan International have worked to scale and standardize the approach by forming, training, and monitoring new groups. These institutions have been joined by Oxfam America, Freedom from Hunger, USAID, and others to try to expand savings and credit groups to 50 million members globally by 2020. These efforts have resulted in a more flexible model that allows group members to vary the size of their contribution at each meeting, then borrow from the combined savings, and take a final payout based on the amount they’ve contributed. Some programs even provide financial literacy training and help members move into formal banking services.
Meanwhile, for-profit companies are also getting into the game. eMoneyPool connects savings group members via the Internet, automatically debiting and crediting the amounts to their bank accounts. It incentivizes members to take their payment later in the rotation by charging a lower service fee to those who wait, connects responsible members to formal sources of credit, and even guarantees payouts by covering for any member defaults. Meed is inspired by the ROSCA model, but it offers some interesting twists. The company connects its members to its partner banks to provide mobile-based savings and checking accounts and secured credit based on their savings balance. It also links these members to each other, letting them earn a share of the interest generated by other members’ transactions with partner banks. When members invite others to join Meed, these banks give them 25% of the interest generated by the credit transactions of everyone they’ve introduced—plus a weighted share of the interest generated by Meed’s worldwide community. This partnership with banks can boost members’ income and savings, while also connecting them to a broader suite of products, all while giving its partner banks access to a new market.
With the intriguing possibilities that savings and credit groups inspire, other companies and non-profits will likely get involved, expanding the model and taking it in innovative new directions, perhaps increasingly linked to formal finance. So get used to hearing about ROSCAs – they’ve been around for centuries, and they’re not going anywhere anytime soon.