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.
How Rotating Savings and Credit Association (ROSCA) Works?
- 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.
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 lending 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
Rotating Savings and Credit Association (ROSCA) as an insurance
Rotating Savings and Credit Association (ROSCA) creates a strong social bond
Disadvantages of Rotating Savings and Credit Association (ROSCA)
- 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.