Tempting Individual to Join a Roscas - Essay Example

?ROSCAS Introduction ROSCAS( hereinafter referred to as “roscas is a credit saving mechanism which is a substitute for saving money through financial institutions in the developing nations. ROSCAS stands for Rotatory Savings and Credit Association. It is way of saving for the poor people who cannot afford to go to banks or other financial institutions. “In these associations, a group of individuals, who typically live in the same community, gather for a series of meetings. At each meeting, each contributes a predetermined amount into a collective “pot” which is then given to one member. The latter is then excluded from receiving the pot in future meetings, while still being obliged to contribute.”(Anderson) It is an association of people who form a community where every individual contributes certain amount of money; the entire amount is thus collected into a pool. The idea behind making everyone contribute is to make sure that the amount of money in the pool remains constant. Once every member has contributed a certain sum of money, then the pot which is generated out of this contribution is given to one of the members of the community as his savings for a definite period. Average membership among adults ranges between 50 and 95 percent in the Republic of Congo, Cameroon, Gambia, and villages of Liberia, Ivory Coast, Togo, and Nigeria. Although roscas do exist in areas where they are formal financial institutions, there is no denying that they still are the most important form of savings and credit institutions in the rural areas. It is a cycle which repeats itself after every round of distribution of money. So when one member gets the pot, he then has to wait for all the other members to get their share of the pot before his turn comes. This allows for stability and continuity for the community and has a uniform system of savings for the poor people. It is the most common form of informal financial institution in the world. It is followed in various parts of Africa as well as Asia where families who cannot afford to save enough money with banks due to lack of facilities end up forming a community of their own in which they follows a rigorous regime of saving and distribution of cash. The idea is to allow each and every member to save enough in order to purchase some or the other indivisible goods. “Rosca members are mostly poor individuals who have little access to formal savings and credit markets because of high transaction costs and incomplete markets. In the literature, roscas are usually regarded as a means for poor people to save money to make an indivisible expense.”(Anderson) Let us now go further into the essay and understand why people are taking up to roscas as a primary means to save money. There are three reasons which shall be looked at the paper, which are as follows: 1. Lack of Self Control 2. Lack of Alternate Commitment Saving Strategies 3. Women’s Role in the Family The first reason talks about the lack of self-control within the community for the rural people. The second reason talks about the lack of other alternatives in such villages which are either too expensive or out of reach for people to have their own savings, and therefore the people indulge in an informal means of savings within their established community. The third reason looks at the role of the woman in the family and explains that since they are running the house it is important for them to have a means to save, as their husbands have been notorious with their expenditure and therefore it is required that women save up to generate income in the family. (Roscas as a source of housing finance for the urban poor) Lack of Self Control: “in the absence of alternative commitment savings strategies, sophisticated people experiencing self-control problems turn to roscas since they would inde?nitely renegotiate with themselves if attempting to save money on their own” Gugerty (2007) One of the most primary reasons regarding the involvement of roscas for the people in the village community is the lack of self-control to save money. It is evident from empirical research as well as the data (Gul and Pesendorfer, 2001, p. 1406) in the African States that people do not exercise enough self-control to save money as there are not enough financial institutions to guard them from the temptation of spending money. However, with the advent of the system of roscas, it has been possible for the people to make themselves deny the urge of spending, instead contributing to the fund of the community which enables them to save more money than they would have had there not been a system like roscas. This system motivates them to save money and resist to temptations, something they themselves have admitted is important and they want to be in that league due to the lack of funds in general. “Agents could be willing to secure their income against internal threats such as temptations and present-biased preferences. Alternatively, individuals could join roscas to protect themselves against external threats such as pressure from their spouse. Our analysis aims at disentangling one from the other.”(Oliveir, 2011) It is those threats mentioned above which have made people attractive towards the system of roscas. The system has shown signs of commitment against the one time preference biased expenditure among the people. It allows for a regular way of saving by which the individual is in a zone of doing this on a round basis. Since saving at home is preference based, roscas allows for a routine where people are compelled at a certain period of time to contribute and be involved in the system, whereas in other situation they would have spent the money on some commodity, this time the money is doing rounds in the community, and it comes only once after a long break, which ensures mature spending as well as taking precautions before purchasing goods. Rocas has been instrumental in compelling individuals to save money and contribute towards a fund which enables them to save enough money for themselves. roscas restrict the set of future options as long as the end of the cycle is not reached, compelling the individual to go on saving. (Oliver Dagniele, 2011) This is an extremely intelligent psychological approach which works best with people who are not able to save money on their own. It resists the temptation by making sure that the money reaches the homes of the people and it does not go out of bounds or in the wrong scheme of expenditures. “roscas restrict the set of future options as long as the end of the cycle is not reached, compelling the individual to go on saving”(Olivier, 2011) Lack of Alternate Options: It is interesting to note that roscas is only successful in areas which do not have proper established financial institutions. People in the rural areas do not earn enough money to sustain their living. Since there are no financial institutions, the question is how they then generate savings. Empirical research has also shown that in most of the places the men end up spending a large part of their personal income. It is due to the fact that they want to indulge in their own private sphere and thus do not contribute enough to the household. This is where the importance of roscas has been realised. It is an informal microfinance institution in economically deprived areas which lack development. Since there is a need felt for savings, roscas is the perfect recipe for such people living in less advanced areas. It enables them to foster a saving without having to exercise too much restraint. This is an important reason why someone would want to join roscas. Every individual likes to save, but it is important to make the step and go ahead with a plan. Due to difficulties in having a personalised saving scheme in the households of the people, roscas is an interactive and attractive way in which people can save without having to adhere to strict policies in their own domain. (ROSCAS | Articles about Finance) Women Participation: An overwhelming majority of the roscas members in the States of Africa and Asia are women. This observation is quite interesting as it points out that women are more concerned to save for the household, as all the money they earn goes into the household expenditure. Unlike men who do not indulge in the saving spree, whose personal income goes into their own expenditure, away from the household expenditure, it is the women who have to take the approach of making sure that the house runs efficiently. Since there is lack of income in these rural households, women have turned to roscas to save for the family, their kids as well as the house in general to manage an efficient running of the house. “Children’s’ well-being is strongly correlated with women’s income relative to men’s, where women consistently devote a higher portion of their income to family needs than do men. Men withhold a portion of their income for personal use, even when families live in, or near, poverty. Relative to women, men spend a greater portion of their income on goods such as alcohol and cigarettes, whereas women are more likely to purchase goods for children and for general household consumption. (Hoddinott and Haddad 1995) We can come to a conclusion that the household in such developing nations which are plagued by poverty, the families are conflictual in nature. There is less harmony between the husband and the wife and this leads to a conflict with regard to the money being spent on the family. Wives generally tend to shift their focus on family while the husbands tend to spend more on themselves. Since the wife is burdened to manage the family from her own savings, she is therefore compelled to save as much as she can in order to run the house. This is the prime reason why the women in these rural areas are prone to joining roscas since it is the only credible means to save money. It is also argued that the economic opportunities for women in rural areas do enhance and increase their bargaining power in the household. They tend to be more aggressive in nature and exercise more control over the family than men, and thus they are also forced to save more for their family as an outcome of the bargaining power they have gained. Conclusion: Roscas is a very attractive way to save money in the rural areas which do not have any resources to save money. It allows the people to come together in a form of a community, pool in money and then rotate the distribution on the basis of cycle. It has been credited by many agencies as an excellent means of informal savings for rural areas where they do not have access to proper formal means of savings. The system works very well and has enabled the people to not rely on formal institutions, as they have access to this means of savings. It has been a lucrative form of savings, and due to the lack of financial institutions the people are attractive heavily towards this mechanism to have a means of savings for their families. References Hoddinot and Haddad, 1995. Methods for Microeconometric Risk and Vulnerability Assessments. Social Protection Discussion Paper Series, 0324 Rosca Participation in Benin: A Commitment Issue, Olivier Dagnelie and Philippe Lemay-Bouche, 2011 Gugert, Mary Kay. You Can’t Save Alone: Commitment in Rotating Savings and Credit Associations in Kenya. Anderson, Siwan. The Economics of Roscas and Intrahousehold Resource Allocation. 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[ONLINE] Available at:http://www.business-finance.org/international-finance/the-research-on-the-operating-mechanism-and-operating-efficiency-of-roscas.html. [Accessed 17 November 2011]. Money-go-rounds: the importance of ... - Shirley Ardener, Sandra Burman - Google Books. 2011. Money-go-rounds: the importance of ... - Shirley Ardener, Sandra Burman - Google Books. [ONLINE] Available at: http://books.google.co.in/books?id=V-LWeyoO8psC&dq=roscas+women+participation&lr=&source=gbs_navlinks_s. [Accessed 17 November 2011]. Read More