What Is a Rotating Credit and Savings Association (ROSCA)?

A Rotating Credit and Savings Association (ROSCA) is an alternative financial vehicle in which a group of individuals act as an informal financial institution. This happens via set 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.

ROSCAs provide funding to individuals that might not have access to financial institutions, where these individuals often share familial, ethnic, or geographical aspects.

How a Rotating Credit and Savings Association (ROSCA) Works

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

ROSCAs exist in areas where access to formal financial institutions is limited. Memberships may share familial, ethnic, or geographical aspects, 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.

Key Takeaways

  • A Rotating Credit and Savings Association (ROSCA) is a group of individuals that act as an informal financial institution. 
  • A ROSCA uses a common fund that individuals contribute a set amount to on a regular basis (usually monthly), while one member withdrawals the funds at each meeting. 
  • ROSCAs are popular where banking is limited, such as developing countries like Africa.

Advantages and Disadvantages of a ROSCA

Beyond the benefits of providing access to funding to individuals that might now have access to the banking system, unlike with typical savings, ROSCAs have the added benefit of accountability. Fellow individuals can help make keeping a commitment easier. This includes making a commitment on how to use their withdrawal. As well, money cannot be freely withdrawn, which can be a positive aspect for many. 

ROSCAs pay no interest and control over when you will receive a distribution is generally out of the control of members. Granted, they also don’t charge interest. There’s also the risk that other members won’t meet their obligations of making set, regular payments. 

ROSCAs have social benefits as well. 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.

Example of a ROSCA

An organizer might establish a ROSCA for the amount of $1,000. In this case, the ROSCA organizer could gather nine trustworthy individuals and require each of them to contribute $100 to the fund monthly. At the end of the first monthly meeting, the organizer would take home a lump sum of $1,000. In the second monthly meeting, another member would take home the next $1,000. This would continue until everyone has a turn with the proceeds. At the end of the 10 months when everyone has had a distribution, the ROSCA would disband or begin another round. The organizer generally receives the first distribution, with successive distributions determined by random assignment, social stature, or other factors.