A beautifully simple alternative finance scheme
In the newspaper today a reference to ‘partner’ systems and their prevalence amongst the Windrush generation of West Indian immigrants to the UK caught my eye (the reference appears in Hugh Muir’s excellent Hideously Diverse Britain column, which I have recommended before.) I had not come across this exact type of scheme before so I was prompted to do a little research; hopefully some of this will be new to the reader too.
The scheme is beautifully simple in its operation. A group of people make a periodic (say, weekly) fixed contribution into the scheme and each period the sum of those contributions is given to one of the group. One member of the group acts as the chairperson so-to-speak and is tasked with collecting and distributing the monies, and, in cases where the order is not fixed, he or she may also be the one who decides in what order the members will be paid out. When a ‘round’ of the scheme has finished – i.e. everyone has had their ‘pay-day’ - it starts again.
The generic term for such a scheme is a ROSCA, a Rotating Savings and Credit Association (there’s even a Wikipedia entry) but ‘partner’ system is the normal name in the West Indies and it’s no surprise at all that the immigrants would have brought them over - they are extremely common across the West Indies, and the need for financial support systems would presumably be all the greater amongst people starting new lives in a new country.
In fact, under their different local names, ROSCAs are incredibly common all over the developing world (for example participation rates higher than half of overall adult population have been found in various African countries). Furthermore the phenomenon is not limited to developing countries (e.g. 85% of Taiwanese people participate in one) nor indeed to the financially excluded (e.g. schemes have been found to exist amongst bank employees in Bolivia; and amongst three-quarters of a group of urban Zimbabwean market traders, three-quarters of whom also have a bank account).
I love the simplicity and immediacy of the ROSCA system – minimal administration, hardly a need to keep records and none at all to manage funds – but there are other obviously appealing qualities to them including their transparency, their resilience to loss (if a participant does fail the loss to the group is not huge) and their flexibility (they may often operate without a fixed order so that members could request their ‘week’ in case of sudden need). The potential downside of course is that the system is based entirely on trust (once you have had your pay-out, you have no direct financial incentive to continue your contributions for the remainder of the cycle) but in the micro-finance world we frequently see that such self-selecting groups are incredibly strong on this front, due in part to social and cultural pressures. Another nice feature of the ROSCA in this context is that suspected ‘higher-risk’ members can be put at the end of the cycle to discourage such behaviour.
One final aspect took my interest – in some ROSCAs, particularly those that are in a more commercial setting, as opposed to say between friends or work colleagues, the chairperson takes a commission, typically of one member-contribution: notice what a high effective rate of interest this would generally represent – another example of what we at FE are always saying about the high cost of reaching the financially needy!