The Economics of Rotating Savings and Credit Association: Evidence from Ethiopia

Using a unique individual level data on the membership of Rotating Savings and Credit Associations (ROSCAs) collected in 1994 from seven major urban centres in Ethiopia, we provide one of the few econometric tests of the economic theory of ROSCAs. In recognition of the heterogeneity of rosca types across space, we provide basic information about the characteristics of roscas in urban areas of Ethiopia. In addition, we use individual and household level data to describe the characteristics of both rosca participants and non-participants. The findings from the descriptive part of the analysis indicate that most of the rosca members are female, relatively richer and the major motive to join roscas is to buy consumer durables. For instance, Over 45% of households reported that they joined roscas with a purpose to buy durables. In terms of frequency of saving, most rosca members tend to save weekly and monthly, the latter being the predominant choice and a non-negligible amount is being mobilise through the informal institutions. The econometric evidence shows an inverse relationship between volume of rosca contribution and size of rosca as predicted by theory. In addition, we find an inverse relationship between frequency of rosca draw/saving and amount of saving. The welfare position of the household-food expenditurehas been found to be a significant determinant of the volume of rosca contribution but not the decision to join rosca. Most of our findings are consistent with findings elsewhere.