Understanding ROSCAs: A Guide to Committees and BCs

Did you know the mohalley wali committee/beesee/kametti/veecee that you or your ami or dadi would take part in has a long history AND it is used in every corner of the world! So much so, in Pakistan 41% of the population does it (Oraan research, 2018).

The official term for it is ROSCA,  which stands for Rotating Savings and Credit Association. This is a financial system that has been used for centuries in various cultures around the world. It involves a group of people pooling their money together and taking turns receiving a lump sum of cash.

What are ROSCAs?

ROSCA, or Rotating Savings and Credit Association, is a traditional financial system that involves a group of people pooling their money together and taking turns receiving a lump sum of cash. Each member contributes a fixed amount of money to the group on a regular basis, and the total amount is then given to one member each cycle. This cycle continues until each member has received their lump sum. ROSCA is also known as Committees and BCs in some cultures.

In France ROSCAs are called tontines, in South Africa they are called Susu

Tontines are a type of group savings where members contribute to a fund and receive periodic payments until the last member dies, at which point the remaining funds are distributed to the surviving members. Susu is a West African term for informal savings clubs where members pool their money for a fixed period of time and then receive their contributions plus interest. Committee savings involve a group of people contributing money regularly and using the fund for a specific purpose, such as investing in property. Group savings involve a larger group of people contributing money regularly to a fund that is then used for a collective purpose, such as a community project.

Benefits of Community Savings

Community savings systems offer many benefits, including financial inclusion, social cohesion, risk sharing, access to credit, reduced dependence on traditional financial institutions, savings discipline, and financial education. Financial exclusion, or the inability to access formal financial services, affects millions of people worldwide. Community savings systems offer an alternative way for people to save money and access credit, regardless of their income or credit history. By pooling their resources together, community savers can also reduce their individual risks and increase their financial security. Community savings also promote social cohesion and trust among members, as they work together to achieve common goals. Additionally, community savings can offer valuable financial education and help develop savings discipline.

Community Savings Practices

Community savings practices involve regular contributions, group decisions, transparent accounting, consensus building, collective responsibility, and borrowing from the group fund. Regular contributions are essential for the success of community savings systems, as they ensure that there is enough money in the fund to distribute to members. Group decisions are made collectively, and transparency in accounting is critical for building trust among members. Consensus building is essential to ensure that everyone agrees on the rules and procedures of the community savings system. Collective responsibility means that all members are responsible for the success or failure of the system, and borrowing from the group fund is a way for members to access credit without going through formal financial institutions.

Community Savings Challenges

While community savings systems offer many benefits, there are also challenges. Limited funds, disagreements among members, trust issues, risk of default, lack of formal regulations, and limited access to technology are all challenges that community savers may face. Limited funds can lead to a lack of access to credit or lower lump sum payments. Disagreements among members can lead to the breakdown of the system. Trust issues can arise if there is not enough transparency or accountability in the accounting. The risk of default is a concern if a member is unable to contribute or repay their borrowed funds.

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Community savings practices such as ROSCA and other types of savings and credit associations have been utilized for centuries in many cultures around the world to promote financial inclusion, social cohesion, risk sharing, and access to credit. When Banks are reluctant to trust users without a credit history, informally institutions like this step in to help people achieve their dreams.  While community savings systems have their challenges, they offer an alternative way for people to save money and access credit, regardless of their income or credit history. With the advent of technology, digital committee apps such as Oraan are making it easier than ever for people to form and manage their community savings systems. Oraan offers an easy-to-use interface that allows users to create a digital savings circle, invite friends and family to join, and automate contributions and payments. As technology continues to advance, we can expect more innovative solutions to help people build financial stability and improve their overall well-being through community savings.

Did you know the mohalley wali committee/beesee/kametti/veecee/kitty that you, your mom or dadi would been a part of are not just a Pakistani thing?! In fact, these savings groups are used all over the world, and in Pakistan, 41% of people are part of them (according to Oraan research in 2018). Isn’t that fascinating?

What's This All About?

It is officially known as ROSCA, which stands for Rotating Savings and Credit Association. It's an old and popular way of saving money in many cultures across the globe. A ROSCA, or Rotating Savings and Credit Association, is like a savings club. Everyone in the group contributes a set amount of money regularly. Then, each cycle, one member gets the total amount collected. This goes on until everyone has had their turn.

ROSCAs are known by different names in various parts of the world. For example, they are called "Chit Funds" in India, "Tandas" in Mexico, "Partnerhand" in the Caribbean, "Arisan" in Indonesia, "Hui" in China, "Committees" in Pakistan, "Tontines" in West Africa and France, and "Susu" in Ghana and other parts of West Africa. Each of these names reflects local cultural adaptations of the ROSCA concept.

Where did it all start:

The history of ROSCAs reveals their significant role in various societies, particularly in China during the late Qing and Republican eras. They were crucial as grassroots savings and credit institutions, often overshadowing more formal banking systems in urban areas. ROSCAs were not only economically rational and value-producing for members but also contributed to economic development in underbanked communities. Post-1980s, particularly in Chinese-speaking regions, ROSCAs stimulated consumer demand, supported microentrepreneurs with better rates than formal banks, and funded labor migration, thus aiding modern growth.

But wait, what are the benefits:

They help include more people in financial activities, encourage cooperation, and allow people to save and borrow money. This is especially useful for those who can't use regular banks. By saving together, people can reduce risks and increase their financial security. These savings groups also build trust and teach members about managing money.

‍Some challenges with this model?!

While community and group savings systems offer many benefits, there are also challenges. Limited funds, disagreements among members, trust issues, risk of default, lack of formal regulations, and limited access to technology are all challenges that community savers may face. Limited funds can lead to a lack of access to credit or lower lump sum payments. Disagreements among members can lead to the breakdown of the system. Trust issues can arise if there is not enough transparency or accountability in the accounting. The risk of default is a concern if a member is unable to contribute or repay their borrowed funds.

Community savings like ROSCAs have been important for people who can't easily use banks. They help people save and borrow money together. However, managing these savings can be tough. Oraan, a digital committee app, is solving this by making it easy to set up and manage these savings online. Oraan is building a community of trusted individuals so that Oraan savers can quickly start their savings, pay digitally, maintain their privacy, and build their credit scores.