Rotating savings and credit associations : characterization with particular reference to the Ethiopian IQQUB

Informal Savings and Credit Association (ROSCAS) have remained popular in many developing countries for over a long period of time. In fact, in some countries, such as Ethiopia, they have become increasingly popular among almost all sections of society. However, their emerging features and flexibility are little understood by those interested in savings mobilization and credit provision in developing countries. Existing economic models of ROSCAs are based on the experience of a limited number of countries and, thus, have failed to fully explain the distinct characteristics and dynamism of this fascinating financial intermediary. On the other hand, interesting forms of ROSCAs, such as the Ethiopian iqqub, are little known. Using evidence from Ethiopia and other developing countries, this paper identifies the distinct characteristics of ROSCAs and discusses how they minimize risk arising from problems of adverse selection and of moral hazards. The findings of the study have generated interesting policy implications for the promotion of informal finance in developing countries. (Sav Dev/DÜI)