ROSCAs vs Microfinance
Leon Di, Product Marketing @ WeTrust
ROSCAs
ROSCA stands for “Rotating Savings and Credit Association”. They are also known as Trusted Lending Circles, a term used by the WeTrust team for our products. In a ROSCA, a group of individuals who agree to contribute money into a pool for a defined period of time, in order to save and borrow together. The members of a ROSCA act as a bank to each other. ROSCAs a form of combined peer-to-peer banking and peer-to-peer lending mostly common found in developing countries and immigrant communities in the West.
Individuals in the ROSCA select each other, ensuring that the relationship is based on trust between the participants. Meetings are scheduled and in each meeting each member has to contribute the same amount, and one member of the ROSCA takes the pool of money for that time period. It’s very simple: no money is ever kept, and each member is permitted to have access to a large sum of money at least once during the lifecycle of the ROSCA.
ROSCAs are now being developed using Blockchain on cryptocurrencies networks. At this time, these projects, such as WeTrust, are still in their infancy, and their success largely depends on the trustworthiness of the network they are built on.
Microfinance
Unemployed or low-income individuals and groups frequently don’t have access to loans, savings accounts or insurances. Microfinance is a growing movement that ensures that these types of financial services are provided to those who cannot afford them. By providing these types of services, microfinance aims to alleviate poverty while providing people an opportunity to become self-sufficient. Microfinance is available through various institutions, ranging from small non-profit organizations to larger banks. It differs from normal banking in that microfinance generally offers recipients business management education in addition to financial support. A true microfinance institution should insure that the financial support provided will promote economic development, employment and growth through the support of micro-entrepreneurs or small businesses. Microfinance is mostly used in developing countries, and the clients are usually female, self-employed, and small business owners.
The concept of Microfinance has existed since at least the 1980s, but it has recently gained popularity due to Muhammad Yunus. His wildly successful microfinance institution, Grameen Bank, was the first in the world specializing in microfinance. The loans issued by Grameen Bank are repaid more than 97 percent of the time, a repayment rate higher than that of any other banking system.
The most recent data from the World Bank estimates there are more than 7,000 microfinance institutions worldwide, serving 16 million clients. In total, microfinance institutions have provided more than $2.25 billion in loans and other financial help.
ROSCAs vs Microfinance
Although they both provide financial services to those that the normal banking system neglects, ROSCAS function at a more communal level, consisting of a group of trusted people who act as a bank for a determined period (cooperative banking). The members of the ROSCA offer loans and savings to each other at a fine grained level. In microfinance, people must still deal with an institution (oftentimes a bank). Unlike microfinance institutions, ROSCAs are part of the informal economy, acting outside of government supervision and being free of taxations. ROSCAS have the benefit of being a “community-driven” system, in which the participants encourage themselves to behave honestly for the benefit of the group. The individual members of the ROSCA help each other, and can even contribute with non-capital resources such as information and education.
