However, a ROSCA’s simplicity is counterbalanced by risk and lack of flexibility: • All ROSCA members receive the same amount of money in a predetermined order. Each must wait her turn regardless of need, and there is no flexibility to contribute more or less than the agreed amount. • The fund does not grow in value, as no loans are made and no interest is paid. • Those who are last in line risk not receiving their payout if the group disbands. When a ROSCA collapses, members who have not yet received their proceeds have no recourse. As a result of these limitations, informal secondary markets may be created, whereby one member pays a premium to another member to switch turns. These premiums sometimes exceed 50 percent or more of the value of the proceeds. Accumulating Savings and Credit Associations While still indigenous, an ASCA is a more flexible and more complex group savings mechanism than a ROSCA. Like a ROSCA, group members
save regularly, but the combined contributions are not distributed at each meeting; instead, savings are pooled for the purpose of lending to members. While all members save, not everyone borrows. Members borrow only when needed, in amounts that they and the rest of the members are confident will be repaid. Since members do not all transact in the same way, ASCAs are more complex than ROSCAs. Members may borrow different amounts on different dates for different periods. Interest payments provide a return on savings that is shared fairly among the group. ASCAs may be “time-bound,” with members saving, borrowing, and repaying for a predetermined amount of time, usually 6–12 months. However, given the diversity of indigenous ASCAs, the cycle can vary in length, with some choosing to operate indefinitely (see box 6.3). Depending on the time frame and the simplicity of their structure, ASCAs can operate without keeping any records by periodically dividing the accumulated funds equally. However, more complicated ASCAs require bookkeeping, particularly those that deal in large amounts or operate for long periods of time.
Box 6.3 Rural ASCAs in India In northern India, the good ASCA leaders and bookkeepers are known in the community, so setting up a new ASCA involves little more than identifying reliable members with a shared need for financial services. Furthermore, ASCAs have adopted several measures to address the seasonality of rural cash flows: • They start operations during surplus seasons.
• They take top-up contributions, often Rs100 per share, during start-up. • During lean seasons members can defer contributions by converting the required savings amount into short-term loans of up to two months. • They are much stricter about loan repayment at the end of the cycle (usually another surplus season) than they are in the middle.
Source: Abhijit and Matthews 2009.
Community-Based Providers
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