Rotating Credit and Savings Association (ROSCA)

A Rotating Credit and Savings Association or ROSCA is an alternative financial vehicle in which a group of individuals fills the role of an informal financial institution. This happens via repeated contributions and withdrawals to and from a common fund. Rotating Credit and Savings Associations are most common in developing economies or among immigrant groups in the developed world. Early examples of ROSCAs appeared in South America, Africa, and Asia.

In an ROSCA, members pool their money into a common fund, generally structured around monthly contributions, and single members withdraw money from it as a lump sum at the beginning of each cycle. This continues for as long as the group exists.

According to the Federal Reserve Bank of Philadelphia, an organizer might establish an ROSCA in the event that she or he requires a lump sum of $1000. In this case, the ROSCA organizer could gather nine trustworthy individuals and require each of them to contribute $100 to the fund. At the meeting’s conclusion, the organizer would take home a lump sum of $1000. In the second meeting, another member would take home the next $1000. This would continue until everyone has a turn with the proceeds. If meetings are held monthly, the ROSCA would last 10 months, after which it would disband. The organizer generally receives the first distribution, with successive distributions determined by random assignment, social stature, or other factors.

ROSCAs exist in areas wherein access to formal financial institutions is limited. Memberships may be based on familial, ethnic or geographical lines, and the structure of payments and withdrawals varies from group to group. Transactions can take place as often as daily or every six months, and recipients of funds are commonly chosen based on financial need or lottery.

ROSCAs have both economic and social functions. While the primary objective is usually to achieve the group’s financial goals, ROSCA meetings can also provide opportunities for eating, drinking, and networking. In many places, meetings happen according to a group’s rituals. For example, in Cameroon, ROSCAs are called djanggi, and participants exchange greetings and share kola nuts. Drinking occurs after the meeting has concluded. The nature of a particular ROSCA is highly dependent on its members and the group’s history together; therefore, ROSCAs are hard to standardize and vary drastically across the world.

Replicating ROSCAs among groups that are not familiar with the concept (and/or in areas with more established and accessible financial systems) is still being tested, and the Philadelphia Fed has called for more data to better understand the model.