A Comparison between Formal and Informal Mutual‐credit Arrangements

In: The developing economies: the journal of the Institute of Developing Economies, Tokyo, Japan, Band 52, Heft 2, S. 179-201

Abstract

We analyze under what conditions a group of potential entrepreneurs prefer to form a Rotating Savings and Credit Association (ROSCA), or a mutual‐guarantee association, which we interpret in a rotating scheme and call Rotating Savings and Collateral Association (ROSCoA). We argue that: (1) ROSCAs (ROSCoAs) are likely to be more developed in countries with high (low) bank concentration; (2) the individual flow of savings required to participate in a ROSCoA is generally lower than that needed in a ROSCA; (3) under the assumption that members share their project income at the end of each period, ROSCAs and ROsCoAs are sustainable even without the use of sanctioning mechanisms.