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A Comparison between Formal and Informal Mutual-credit Arrangements

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  • Francesco Reito
  • Salvatore Spagano

Abstract

type="main"> We analyze under what conditions a group of potential entrepreneurs prefer to form a Rotating Savings and Credit Association (ROSCA), or a mutual-guarantee association, which we interpret in a rotating scheme and call Rotating Savings and Collateral Association (ROSCoA). We argue that: (1) ROSCAs (ROSCoAs) are likely to be more developed in countries with high (low) bank concentration; (2) the individual flow of savings required to participate in a ROSCoA is generally lower than that needed in a ROSCA; (3) under the assumption that members share their project income at the end of each period, ROSCAs and ROsCoAs are sustainable even without the use of sanctioning mechanisms.

Suggested Citation

  • Francesco Reito & Salvatore Spagano, 2014. "A Comparison between Formal and Informal Mutual-credit Arrangements," The Developing Economies, Institute of Developing Economies, vol. 52(2), pages 179-201, June.
    • Handle: RePEc:bla:deveco:v:52:y:2014:i:2:p:179-201
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