The Simple Analytics of ROSCAs

To see how ROSCAs work, we give an example of a case where the order in which individuals obtain the pot is predetermined. We follow it in section 3.2.2 with a discussion of why the ROSCA doesn't fall apart. We begin with a group of individuals who voluntarily commit to putting resources into a common pot at regular intervals. At each meeting, every participant adds her share to the pot. The order of who gets the pot is decided at the first meeting by picking names from a hat. To see one appeal...

Efficiency

Let's consider production loans villagers, say, want to borrow to buy sewing machines to start small tailoring businesses.6 Maximizing efficiency does not imply that everyone in a village should have access to credit. Instead, only the most productive villagers should get access those with mediocre prospects should be excluded (at least if efficiency is the sole criterion). Specifically, all villagers should be given the chance to buy sewing machines if (and only if) their expected returns are...

Roots of Microfinance ROSCAs and Credit Cooperatives

See Rutherford 2004, Ruthven 2001, and Ruthven and Kumar 2002. The studies are available at www.man.ac.uk idpm. 2. Over time, ROSCA members move in and out of the groups, so that eventually the members may include friends of friends and acquaintances of acquaintances. We discuss how this affects enforcement possibilities. The Indian self-help groups described in chapter 2 are a kind of credit cooperative. In India, chit funds, a kind of commercialized ROSCA, are run as businesses by managers...

The Group Lending Methodology

Access to finance via groups is not new. The example of ROSCAs in chapter 3 shows how groups function to give participants access to a pot of communal money, and credit cooperatives similarly function to allow members to obtain loans from their peers. The place of groups in microfinance, however, strengthens and extends earlier uses of groups although not without some added costs . To see this, we describe Grameen-style group lending. The model has been adapted in different contexts, but...

Why Doesnt Capital Naturally Flow to the Poor

From the viewpoint of basic economics, the need for microfinance is somewhat surprising. One of the first lessons in introductory economics is the principle of diminishing marginal returns to capital, which says that enterprises with relatively little capital should be able to earn higher returns on their investments than enterprises with a great deal of capital. Poorer enterprises should thus be able to pay banks higher interest rates than richer enterprises. Money should flow from rich...