SOCIO-ECONOMIC EFFECTS OF ROSCAS ON THE RURAL POOR IN BUYANJA VILLAGE KYEIZOBA SUB COUNTY BUSHENYI DISTRICT

INTRODUCTION

1.0 BACKGROUND TO THE STUDY

The Rotating Savings and Credit Association (ROSCA) is a financial institution which is observed around the world, mainly in developing countries. Bouman (1995) lists about 80 countries in which ROSCAs are known to operate. ROSCAs flourish in economic settings where formal financial institutions seem to fail to meet the needs of a large fraction of the population. In general terms, a ROSCA can be defined as ‘a voluntary grouping of individuals who agree to contribute financially at each of a set of uniformly-spaced dates towards the creation of a fund,  which  will then be allotted  in accordance with some prearranged principle to  each member of the group in turn’ (Calomiris and Rajaraman, 1998).

The members agree to contribute a certain amount at each interval, and this amount is usually agreed upon at the start of the scheme. By principle, the contribution is based on balanced reciprocity, meaning each member draws out as much as he puts in (Bouman, 1995). The fund is given in whole or in part to each contributor in turn (Ardener, 2010) (O’reilly, 1996). Once a member has received the fund, he/she will no longer be a candidate for future allocations until the ROSCA cycle ends (Thieme, 2004), although they are obliged to contribute until the cycle ends (Anderson, 2002). Upon completion of a cycle, the members can decide to continue, disband or quit the ROSCA (Eroglu, 2010).

In India, ROSCAs seem to have emerged in the southern part of the subcontinent. Today they are known throughout the country as ‘chit funds’, or ‘chits’ in short. ‘Chitty’ is a Tamil word meaning written piece of paper or palm leaf. In fact, traditionally, there is one written piece of paper for each participant, which serves as a lot to determine the order of receipt. Radhakrishnan et al. (1975) cite evidence that chit funds had been in existence in the form of grain chits well before the introduction of money. Such ROSCAs in kind still exist, even in comparatively well-developed villages. On the other hand, India probably also has the most professionally organised formal ROSCAs in the world. In major cities, large chit fund companies run as many as 10,000 auction ROSCAs simultaneously. These are regulated, just as banks are regulated in the Western world. The Chit Fund Act obliges every organiser of a ROSCA to register with a government authority, to deposit some reserves  to  compensate  participants  in  the  case  of  bankruptcy,  and  to  end  auctions prematurely at specified bid ceilings (Radhakrishnan, 1977). In consequence, ROSCAs which are not registered with the government are illegal. In rural settings ROSCAs are almost never registered. Perhaps this explains why informal ROSCAs  in  India  have  received  so  little  attention  from  researchers  compared  to  informal ROSCAs  in  African  countries, Calomiris and Rajaraman (1998).

For  less  developed  countries,  little  is  known  about  general  participation  rates  in ROSCAs because, first, ROSCAs are mostly operated on an informal basis and, in this case, do not  appear  in  any  financial  statistics,  and,  second,  in  such  countries,  large-scale  sample surveys  are  typically  rare.  Even in India, where there is the exemplary National Sample Survey Organisation (NSSO) and ROSCAs play an important role, the NSSO does not canvas participation in ROSCAs.  For  some African countries,  somewhat  rough estimates of ROSCA participation are  reported  by anthropological authors  and  range  between 45 and  95%  of households. ROSCAs, in West Africa also known as tontines, are the most important in- formal  saving  collecting  institution  in  developing  countries  Gugerty (2000) provides a good, up-to-date survey of this literature.

The only developed  country  for  which  substantial  ROSCA  participation  is  documented  is  Taiwan. Levenson and Besley (1996) report that, in 1991, about 80% of the households participated in at least one ROSCA. This does not mean, however, that ROSCAs are completely unheard of in Western countries. With the international migration of labour, ROSCAs seem to have spread to any place where people from areas where ROSCAs traditionally play an important role have settled. Ardener and Burman (1995) report existence of ROSCAs among employees of the International Monetary Fund headquarters in Washington D. C. as well as among Asian immigrants in London.

In the case of Uganda, 27% of the Ugandan population save with informal financial institutions, whereas only 22% save with formal financial institutions (Dfid, 2007). The informal financial institutions include; microfinance institutions (MFIs) which are organizations that offer financial services to low income populations. Almost all give loans to their members, and many offer insurance, deposit and other services.

ROSCAs are different from, Savings and Credit Cooperatives (SACCOs) are user owned financial intermediaries with members who typically share a common bond base on geographical area, employer, community, or other affiliation and have equal voting rights (CGAP 2005). Accumulated Savings and Credit Associations (ASCAs) where group members mobilize savings and pass them on to one member on a rotational basis and no interest is charged on that money, informal insurance schemes such as (Munno Mukabi), Village Savings and Credit Associations (VSCAs) Where members mobilize savings and members who access them have to pay back principle and interest in an agreed period of time and moneylenders (Micro Finance Africa, 2000).

ROSCAs are defined as a type of saving systems were members meet at a specific period of time they contribute a specific amount of money and is given to one member at a time on a rotational basis until the whole group of members have received the money equivalent to their total amount contributed to the group, Gugerty (2000), unlike other saving types this type of saving enables members to gave a lumpsum amount of money at once which otherwise they wouldn’t be able to save for themselves, in this systems the members are close friends who do sometimes the same thing therefore they have almost the same goals in life.

According to Gugerty, (2005) an estimated 2.2 million Ugandans are ROSCA members. And ROSCAs are spread to almost every smallest village in Uganda with membership reaching 95% of the population in some villages. The spread of ROSCAs has not excluded Buyanja Village Kyeizoba Sub County Bushenyi District prompting the researcher to investigate its socio-economic impact.

1.1 STATEMENT OF THE PROBLEM

The Association of Microfinance Institutions of Uganda (2010), revealed that majority of un educated Uganda have little or no access to formal finance institutions with the fear that banks are for the educated, leaving a large pool of them unbanked. Saving is essential to improve an individual economic welfare to enable them break from the viscous cycle of poverty in order to enable them increase on their investments and make sustainable economic decisions, (Orebiyi, 2002).

According to World Bank, (2010), majority of Ugandans in rural areas are poor and don’t have access to credit since banks are located only in urban areas and most of the people in rural areas don’t have security to enable them access loans in banks so as to break from the vicious cycle of poverty. Therefore small associations like ROSCAs have helped thousands of Ugandans in rural areas to access credit which could not be possible in formal financial institutions like banks which require collateral as security which most of these individuals do not have. To meet the ever increasing financial demand the rural people of Buyanja village Kyeizoba sub-county Bushenyi district have designed informal micro finance services such as ROSCAs to meet their financial needs (Mutesasira et al, 1999), It is however not clear how ROSCAs has affected the people in Buyanja Village, This study therefore intends to investigate into socio-economic effects of ROSCAs on the Rural poor in Buyanja village Kyeizoba sub county Bushenyi district.

1.2 PURPOSE OF THE STUDY

The study will aim at establishing the socio-economic effects of ROSCAs on the rural poor in Buyanja Village, Kyeizoba Sub County, in Bushenyi District.

1.3 OBJECTIVES OF THE STUDY

1. To establish how ROSCAs are started and managed by the rural poor in Buyanja Village Kyeizoba Sub County Bushenyi District.
2. Establish the challenges faced by ROSCAs in Buyanja Village Kyeizoba Sub County Bushenyi District.
3. To examine the social and economic effects of ROSCAs on the rural poor in Buyanja Village Kyeizoba Sub County Bushenyi District.
4. To suggest strategies for enhancing the contribution of ROSCAs the social and economic wellbeing of the rural poor in Buyanja Village Kyeizoba Sub County Bushenyi District.

1.4 RESEARCH QUESTIONS

1. How are ROSCAs started and managed by the rural poor in Buyanja Village Kyeizoba Sub County Bushenyi District?
2. What are the challenges of ROSCAs in Buyanja Village Kyeizoba Sub County Bushenyi District?
3. What are effects of ROSCAs on the rural poor in Buyanja Village Kyeizoba Sub County Bushenyi District?
4. What are strategies to enhance the contribution of ROSCAs to the social and economic wellbeing of the rural poor in Buyanja Village Kyeizoba Sub County Bushenyi District?

1.5 SCOPE OF THE STUDY

1.5.1 Content scope

The study will focus on the socio-economic effects of ROSCAs on the rural poor in Buyanja Village Kyeizoba Sub County, Bushenyi District.

1.5.2 Geographical scope

The study will be conducted in Buyanja Village Kyeizoba Sub County Bushenyi District.

1.5.3 Time scope

The study will cover a period of five months from March to August 2016.

1.6 SIGNIFICANCE OF THE STUDY

The study will shade light on the contribution of Rotating Savings and Credit Associations (ROSCAs) especially on the rural poor.

The study will also contribute to the body of knowledge about the role of Rotating Savings and Credit Associations in household income of its members.

The findings will help Policy makers to understand the contribution of ROSCAs to household income of mostly the rural poor.

In addition, the findings will equip the policy makers with concrete data that will enable them to make and policies governing   credit   accessibility   among   the rural poor.

The study will also enable policy makers and mostly government to borrow a leaf from the contributions of ROSCAs and see how to integrate them to other government poverty eradication programmes.

1.7 DEFINITION OF KEY TERMS

Rotating Savings and Credit Association (ROSCAs); is a voluntary grouping of individuals who agree to contribute financially at each of a set of uniformly-spaced dates towards the creation of a fund,  which  will then be allotted  in accordance with some prearranged principle to  each member of the group in turn.

A Savings and Credit Co-operative (SACCO) is a democratic, unique member driven, self-help co-operative. It is owned, governed and managed by its members who have the same common bond: working for the same employer, belonging to the same church, labour union, social fraternity or living/working in the same community.

Microfinance

Microfinance institutions are financial institution which gives credit to low income earners.

Microfinance

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter reviews what other scholars have laid down the effects of ROSCAs on the rural poor. The focus will therefore be put on how ROSCAs are started and managed; the socio-economic impact of ROSCAs on the rural poor; challenges faced by ROSCAs and strategies for the sustainability of ROSCAs among the rural poor.

2.1 HOW ROSCAS ARE STARTED AND MANAGED

Ardener (1964) described ROSCAs as an association formed upon a core of participants who agree to make regular contributions to a fund which is given in whole or in part to each contributor in rotation. Bouman (1979), goes on to define ROSCAs as a group of individuals who come together and make regular cyclical contributions to a common fund which is then given as a lumpsum to one member in each cycle. A member will lend money to other members through his/her monthly contributions. After having received the lumpsum, when it is his/her turn, he/she then pays back the amount in further monthly contributions and this explains the name for ROSCAs. Depending on the cycle in which a member receives his/her lumpsum, members alternate between lenders and borrowers. There is therefore a mutual give and take involved in ROSCAs.

Members participating in a ROSCA are selected based on ethnic lines or geographic limitations. According to Geertz (1963), ROSCAs consist of groups of people between 4-15 who already have a relationship of some sort such as employment in the same organization, same ethnic background, friendship, neighbourhood or business ties.

The amount to be contributed in each cycle is decided based on the number of participating members, the total winning amount that each member can get and other socio-economic factors. Bouman (1979) asserted that contributions can also be in form of shares, thus allowing a member to have more than one share or contribution in a particular cycle, increasing their chances of winning the lumpsum but also increasing the regular contributions to be made.

The frequency with which contributions have to be made in each cycle is the cycle period. This can be daily, bi-weekly, monthly and bi-monthly, depending on the amount to be contributed, Usually, the little the amount, the shorter the cycle period.

Bouman (1979) postulated that the basis of selecting the winner of the lumpsum is decided by one of the following ways:

By consensus, where by common agreement between members, the amount is given to the member who is in most need of finance.

By lots, where a lottery determines who gets the lumpsum in a particular way.  Members who have received the lumpsum do not participate in subsequent lotteries but continue to make contributions.

Bouman (1979) further suggests three forms of ROSCAs including; Simple or Random ROSCA; in a simple ROSCA, each individual contributes a predetermined fixed sum to a universal fund and it is given to one member who becomes the first on the cycle.  The fund rotates to another participant or member at the next meeting until all members have had a turn at the lumpsum.  In a random ROSCA, the contributions are fixed, and everyone contributes the same amount at each meeting and receives the same amount when their turn arrives.  By the end of the ROSCA everyone will have received, in lumpsum, the total of their monthly contribution.  In that sense, there is no net gain or loss for any participant.

The Consumer Durable ROSCA; this is mostly popular among women and has a slight variation on the random ROSCA. As in random ROSCA, the leader organizes the group who contribute a fixed amount to the fund. Instead of rotating a lumpsum of funds, however participants receive a physical good such as an asset, for example a car that the group has agreed upon at the beginning of the ROSCA (Mukumbe, 1998).  The organiser usually obtains a discounted price for the goods in exchange for the guaranteed purchase of a certain number of goods in the coming months. Thus participants in consume durable ROSCAs can attain the purchasing power necessary to negotiate goods at a lower price.

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Discounting or Bidding ROSCAs; these use bidding as a means of determining the order by which participants receive the pot.  As in the random ROSCA, the organiser in exchange for assembling the participants receives the pot first. To  determine the  order  in  which the  participant would  receive the  pot,  a  system of  bidding is introduced in the rounds.  At the beginning of each rotation, the organiser contacts the participants who have not yet received the pot in order to forgo in exchange for early receipt of the pot.   The person, who submits the highest bid for the rotation, therefore translates into a discount for some of the participants (Dzingira, 2000).

ROSCAs require very little record keeping. But it is always safe to keep the record of the amounts collected, attendance at each meeting and who receives the lumpsum on which date.  In case there is a conflict between members regarding the procedure or if the group decides to continue its activities and begun another cycle, such records help everyone remember what was decided and agreed on the previous meetings.

2.2 THE SOCIO-ECONOMIC EFFECTS OF ROSCAS ON THE RURAL POOR

A study by Okirigiti, (2015) in Kenya revealed that majority of the women who are members in these organizations contended that their household incomes had improved significantly; they were able to pay school fees for their children, engage in small scale businesses and are able to save some amount.  The rural women have knowledge, skills, potential and are able to mobilize resources.

ROSCAs enable women to deal with a wide variety of needs, including household savings and financing of economic activities (Anderson and Baland, 2002). Besley, et al, (1993) also demonstrate that ROSCAs are more efficient than autarchic saving and improve the individual welfare of those excluded by formal credit markets. In a follow-up study (Besley, et al, 1994), they compare random ROSCAs against formal credit market solutions; the ROSCAs were more efficient for the criterion of expected utility.

ROSCAs serve as a vehicle for saving in households where there are conflicting preferences over immediate consumption versus saving among household members.  Anderson and Baland, (2002) are of the view that ROSCAs are regarded as a sourcing commitment device whereby people can save their money for future use by contributing in ROSCAs.  Members save for buying durables in the long run (Besley et al, 1993).

ROSCAs provide insurance to its participants even in the presence of formal credit markets by providing an additional instrument for its participants to share shocks among them.  ROSCAs insure members against the consequences of illness, accidents or death.  According to Kaseke, (1998) most people in Zimbabwean rural areas especially farmers engage in ROSCAs as they provide a social security function and protects them against contingencies such as sickness and death.  In the event of such problems many often use the money from ROSCAs to cover the expenses incurred.  According to Anderson & Baland (2002), in Kenyan rural areas formal markets for insurance are virtually non- existant;   when funds are distributed via an auction mechanism ROSCAs can serve as insurance mechanisms because participants may access money when they need it.

Since ROSCAs are performed by assembling participants of a closely knit community who are aware of each other’s credit worthiness, costs associated with bank lending such as running a credit history, requiring collateral and performing pre-loan and post-loan monitoring are not experienced.  According to Chami and Fischer (1995), lower transaction costs are passed on along to ROSCA members which may result in lower cost loans or higher yielding service plan.

Fewer transaction costs also enable ROSCA members to receive loans quickly.  While borrowers with as little or no credit history may experience some difficulty or delay in accessing funds from financial institutions, ROSCA members may have funds in as little as a day. Additionally, many meetings are routinely held at a member’s home making it convenient for members to meet without incurring costs (Bouman and Haeteveld, 1976).

Furthermore, ROSCA meetings are social gatherings where members share a common language and culture.  For individuals unfamiliar with financial institutions and the banking concepts associated with them, being able to access funds generated by the community can prove to be less intimidating.   According to Chami and Fischer, (1995), ROSCAs exhibit a certain degree of flexibility with characteristics such as loan amount, duration, regularity of meetings and rotational decisions depend upon the members’ discretion.   ROSCAs have been cited as a good source of obtaining small loans which banks are normally reluctant to give to someone with little credit history.

ROSCAs are used for many different reasons such as start-up capital of small businesses. In Asia Small business capitalization has been attributed to the existence of ROSCAs which save as a source of startup capital. In essence, ROSCAs serve economic more than social reasons. According to Light, (1972) surveys suggest that the Japanese ROSCA (Tanomoshi).  Korean ROSCA (KYE), West Indian ROSCA (susu) are used more for business enterprises.  This therefore shows that ROSCAs help people startup businesses at the same time improving their livelihoods as the business owners will be able to divert funds to engage in other activities. They can also finance other activities such as sending children to school, acquiring assets, access to health care facilities and many others.

ROSCAs can also be used by other people to acquire assets such as livestock and heavy farming machinery which according to the Sustainable Livelihood Framework help them increase their physical asset base. This consequently helps improve their livelihoods.

The ROSCA supporters believe that group-based savings and loans programs are the best alternatives for poor in rural areas due to their ability to reach a massive scale, their cost effectiveness, and their high-level of efficiency (Fanta, 2003). Savings deposited can give members access to a much-needed financial safety net against minor illnesses, smooth consumption, or pay their children’s education expenses, and be used to start up or expand micro businesses. The history of ROSCA existed before the introduction of money in the economy where the barter system existed; people of village formed ROSCA by making periodical contribution of grain such as wheat, rice, corn, and other paddy.

Yusuf et al. (2009) find that the informal financial institution plays an important role in reducing poverty among the members. The authors view ROSCAs as a method of mobilizing funds that not only provides a means by which members have access to funds.

Getting access to a useful lump sum through building mutual savings is central to informal group finance schemes. In ROSCAs, the equal periodic savings of every member are pooled and given to each member in turn: there are therefore as many poolings as there are members and the cycle ends when each member has taken her prize (Imran et al, 2002). ROSCAs can be seen as a form of cheap financial intermediation, turning small amounts of weekly savings into a few larger loans.

Woolsey, (2001) notes that ROSCAs are important in many developing countries in Africa, South America, and Asia, and have common circumstances or attributes: (1) a communally-based social order, (2) obligations that are held to be collective in nature, (3) social and economic stability, (4) social and economic isolation, and (5) similarity among ROSCA members in social status. The author further states that the actors in this world, especially poor ones with little or no access to banks or other regulated financial institutions, come to see ROSCAs as a natural and efficacious strategy for capital accumulation and lending purposes.

In financial institutions savings are transformed into deposits, which may either be normal savings or time fixed deposits. These constitute the bulk of their working capital, if on lent. In other words the core resources used in financial institutions are comprised of deposits from the public, which is one of their primary resources of funds. For this reason financial institutions have a task of attracting customers to keep deposits with them. This is known as savings mobilization. It involves tapping the savings the public may hold by provision of several assets in which people can save, (Mpuga, 1999).

Financial institutions provide a system where savers deposit their amounts and borrowers can access such amounts. This ensures an efficient transformation of mobilized funds into real productive capital. Financial institutions comprise of both the formal and informal sector.

The mobilization of savings and channeling credit to the lower income group in both the rural and urban areas is done by the informal sector, (Dmitri et al, 2006). They play a significant role in savings mobilization for example microfinance institutions though they are not allowed to mobilize deposits; they fill the gap left by formal institutions (Kasekende, 2007). The formal sector includes central bank, commercial banks, credit institutions, development banks and so on.

For financial intermediaries, savings mobilization increases the supply of internally generated funds that can be invested in housing, microenterprise and small business loans, (www.woccu.org/education/savimgs).

Savings is a foundational pillar in inclusive financial system. Savings contributes to financial inclusion at the client, microfinance institutions and industry levels. Savings services strengthen the finances of low- income households, savings deposits strengthen the funding base or microfinance and are the basis for a competitive, efficient and sound microfinance industry,(Alliance for financial inclusion policy/ formalizing microsavings,2010).

On a micro level, there’s of course an extensive body of academic research to explain how a well developed (deep) financial market contributes to economic growth in a country, an industry and in individual firms,( Levine,2005). Further it shows that financial development reduces income inequality in general, has a disproportionately positive impact on the income of the poor, and that it contributes to poverty alleviation, (Beck,et.al,2007).

MFIs that intermediate deposits are the best positioned to sustain growth and innovation. MFIs that are funding growth by mobilizing local savings as regulated financial intermediaries have derived benefits from deposit-based funding in at least three ways. First, deposits tend to be more stable and scalable funding source relative to other options. Microcredit organizations typically face challenges with wholesale funding related to finance costs, term structure, currency risk, administrative effort and ultimately getting enough capital to fund growth that keeps up with demand. Also the recent international financial crisis has demonstrated the liquidity risks associated with over dependence on foreign debt funding.

2.3 CHALLENGES FACED BY ROSCAS

Defaulting is one major problem associated with ROSCA.  Some members may default and this will result in uncertainty that can stem from the possibility of a low payout from the ROSCA arising from the depletion of members.  Sometimes, the member who gets the pot first or second is most likely to default and this will inconvenience other members who are last on the cycle.

There is always a last person in the rotation to benefit from the fund and this person could have saved as an individual with the same result. Similarly, people who take their turn towards the end of the rotation and have been saving all along do not receive any interest.  Early winners get interest free loans while late winners borrow an amount which is almost worthless than earlier loans. According to Makumbe (1996) this may not matter if the period over which the money saved is short, that is a matter of days or weeks but does matter if it is longer and if inflation rates are fluctuating.

The ROSCA fund may be used for other purposes other than the intended use. According to World Bank (1986), there are possibilities that the ROSCA disbursement, whenever it occurs may not be sufficient to realize the planned investment opportunity, apart from the possibility that the venture itself may be stressful or unstressful. This is normally popular with consumer durable ROSCA whereby members plan on buying a durable.  In the event that it has become more expensive than anticipated, members may end up opting for the cheapest commodity.

Timing of the receipt of funds by a member may not necessarily coincide with his/her need for finance. Sometimes a member gets the lumpsum on the first or second round then later he/she encounters a problem that requires finance when he/she already has had a chance.

ROSCA are informal savings mechanisms and are therefore not directly linked to the banking system and hence they are unlikely to benefit from additional bank loans since they are not organized as a legal entity. If a member defaults, there cannot be any legal action against such member since ROSCA are not registered.

Risk of mismanagement, fraud or bankruptcy by the leader or organiser of the ROSCA where he can abscond with the accumulated contributions; since there is no constitution or legal paperwork that governs ROSCA, the leaders may misuse the funds for their personal use and no one can ask them. As a result, this may affect the sustainability of the life of a ROSCA.

ROSCA have a limited impact since most people in the villages may not participate in ROSCA. Only a few are economically active and are thus able to engage in ROSCA.  The rest, who include children and the elderly are not economically active but sometimes are the household heads.  This therefore shows that not all people engage in ROSCA.

The cyclical timing of contributions also affects savings. If a member by chance gets surplus funds he/she cannot increase his/her ROSCA contribution but has to wait for the agreed amount and the time. This therefore shows that someone cannot save extra cash in ROSCA but has to adhere to set rules.

2.4 STRATEGIES FOR THE SUSTAINABILITY OF ROSCAS AMONG THE RURAL POOR

Some ROSCA may be dedicated to a particular function to help raise the social standing of the group. For example a ROSCA may be dedicated to particular household purchases, such as saucepans, and members within the group will check on each other to see how the saucepans are being used. Usually, once the group is formed, the members agree about the reason for the group’s formation. This makes it easier for the group members to monitor each other, and ensure that the money received and spent is used for purposes deemed valuable by the group (Gugerty, 2007).  Over time, the money from ROSCA is now also being used to cater towards fixed and working capital on land, housing and enterprises that have problems gaining access to bank credit.

ROSCA are unique in that they offer a high degree of flexibility whereby the amount of money to be saved, the number of people in the group, the interval between meetings and the use to which the money will be put are all determined by those participating (Johnson et al, 2009).

ROSCA follow certain common circumstances to exist such as: The need to be a community-based social order, obligations that are held to be collective in nature, social and Economic Stability, social and Economic Isolation and similarity among ROSCA members in social status (Johnson et al, 2009).

Income of the ROSCA members also has a part to play in ROSCA existence. Many studies have shown that these groups are predominantly found amongst the lower income sector of the population. However, Eroglu (2010) is his study explored and discovered a different dimension in regards to participation and income in Turkey. In Turkey, these groups are often found more amongst the middle class members of the population.

ROSCA members are usually from the same social class with similar resources, where everyone has the same amount of ‘power’ in terms of income and saving capacity.  Group members know about each other’s social backgrounds, their history, how they have lived and their general responsibility within the community. According to Ardener (2010), ROSCA are usually made up of members who may be bound together by a mutually moral obligation to each other. This is usually because the members are neighbours, relatives, close friends or from a particular religious circle or ethnic background (Eroglu, 2010). Using this intimate knowledge of each other, they can limit participation to those with the social and moral capital necessary to repay as agreed (Biggart, 2001).

When a member defaults, it affects everyone in the group, not only the ones who may have already received the fund, but also those who are still contributing. Members who miss meetings or fail to bring their contributions are usually fined (these funds collected from these fines are usually distributed amongst the members at the end of the cycle). Anderson & Balland (2002) in their study discovered that among ROSCA groups in Kibera, Nairobi, Kenya, members who missed three meetings were usually expelled from the group. New members are usually added at the end of a rotation. The addition of new members is usually closely vetted, and all other existing members are required to give their full agreement. In order to establish trustworthiness of these members, they receive their “pot” at the end of the rotation.

People in close knit communities find it hard to imagine themselves as not being a member of the community, and will often do anything necessary to belong. This is one of the strongest underlying factors that lead to the success of ROSCA. Members of the group feel obligated to each other, and do not want to bring shame or disappointment to themselves, their families or the group in general. Furthermore, defaulting within a ROSCA may lead to the member being unable to participate in other community-based activities (Anderson, 2002).

ROSCA operate very informally, with few written rules governing their existence. Governance of ROSCA exhibits some similarities to formal finance systems. The groups may be governed in two ways: a president, who is usually the person who initiated the ROSCA may be in charge, or the group may be led by a committee consisting of members such as a president, secretary, treasurer and so on (Dagnelie, 2006). Most ROSCA depend on relationship and social ties, and there is a common and clear understanding between members and their expectations. The default rate is very low, and participation is usually very active.

ROSCA are self-sufficient and self-regulating, and do not get any of their financing from formal finance institutions i.e. they are not subsidized (Bouman, 1995). They operate independently from legal, fiscal and financial authorities in their respective countries.  They do not require a written or formal procedure as do formal financial institutions.

For members that default from contributions, Ardener (1964) asserts that the member who defaults in one ROSCA may not only be sanctioned socially but can also be prevented from further participation in any other ROSCA. The member may suffer to such an extent that he/she may not be accepted as a member of any other.  In West Cameroon, the ROSCA credit institution has been so rooted in the economic and social system that would be a serious deprivation.   The issue of social pressure, reflected in the selection of ROSCA members from among relatives, friends or work colleagues will also reduce risk of default as members do not wish to let their relatives down.  As a result, members will not default contributions because of fear of exclusion and are afraid to disappoint their friends and relatives.

Modifications can be made to rectify the problem of a member not getting a loan at the time they urgently need it.  Interest rates can be charged such that earlier receivers pay more for their loans and late receivers are compensated with higher bonus payments.  According to Bauman (1995), auctions can also be held so that those who need cash urgently may bid for it, with the successful bid being distributed among those who did not win the bid.  Another way of solving this problem could be that the last receivers of the pot become first receivers in the next round.

If the economic situation of the country is unstable, that is high and fluctuating inflationary rates it is better for ROSCA members to agree to contribute an amount which is equivalent to an agreed amount in foreign currency so that the money will not lose its value. This happened in Zimbabwe during the 2008-2009 period where people would contribute amounts in South African Rands or US dollars so that the last person in the cycle would get money that is just as valuable as was the first person.

CHAPTER THREE

RESEARCH METHODOLOGY

3.0 INTRODUCTION

This chapter presents the method that will be used in conducting the study. It describes research methodology, the area of study, the study population and sampling design, sources of data, data collection, data collection procedure and instruments, data analysis tools and limitations to the study.

3.1 STUDY DESIGN

The research deign will be descriptive in nature and employing both qualitative and quantitative methods of data collection. The study will use qualitative and quantitative data. The combined analysis is helpful in that qualitative approach generates rich details and valid data which contribute to the depth understanding of the research problem. Quantitative approach generates reliable information based on gathering data using numerical figures. Both approaches will complement each other and help reconcile the findings. Case study design will be adopted in order to get personal opinions from respondents.

3.2 STUDY POPULATION

The study will be conducted among ROSCA members in Buyanja Village Kyeizoba Sub County Bushenyi District. Local leaders, members of ROSCA and former members of ROSCA.

3.3 SAMPLE SIZE

To avoid un-guided generalization, the researcher will sample as suggested by Amin (2005), who suggested that sampling is important in selecting elements from a population in such a way that the sample elements selected represent the population. The researcher will use a sample of 30 respondents will be drawn from the population of about 60 ROSCA members in the village.  The determination of sample will be made in consultation with Amin (2005) who (by help of Kregcie and Morgan, (1970)), suggests the use of a sample table to determine which equivalent sample would ensure representation.

3.4 SAMPLING TECHNIQUE

The study will use both Random sampling and Purposive sampling technique. A simple random sample is a subset of a statistical population in which each member of the subset has an equal probability of being chosen, this will be used because it prevents bias, while purposive sampling  refers to selective or subjective sampling, is a type of non-probability sampling technique, this will be used because it saves time.

Purposive sampling technique will be used to select local leaders while purposive sampling will be sued to select members in the ROSCA both former and current members.

3.5 DATA COLLECTION METHODS AND SOURCES

Data collection methods are an integral part of research design which involves selection of both qualitative and quantitative data (Amin, 2005). The study will employ both primary and secondary data collection approaches.

3.5.1 Primary Data collection

According to Roston, (2001), primary data is that kind of data that has been gathered for the first time, it has never been reported anywhere. Short comings of secondary data sources such as out datedness and inadequacy in terms of coverage, necessitated the use of primary sources for first hand data.

The researcher will use interviews and observation data collection methods  to the respondents to be in position to collect accurate information from all the respondents.

3.5.2 Secondary data Collection

Secondary data collection will explore methods supplementary to the primary method where data will be obtained from records, dissertations,  text  books,  the  internet  and  other  materials (such  as  journals,  newspapers, e.t.c),

3.6 DATA COLLECTION INSTRUMENT

3.6.1 INTERVIEWS

Qualitative data will be collected from the participants using interviews. The interview guide will be structured. The interviews will be held with members, and will take approximately thirty to sixty minutes. This will be used since it’s the best tool for getting first-hand information /views, perceptions, feelings and attitudes of respondents. Both formal interviews will be used to get maximum information from the different respondents to participate in the research.

3.6.2 OBSERVATION 

The researcher will also use observation method to be in position to analyse the records of the members of ROSCA, minutes of the meeting and make conclusion for data collection.

3.7 RELIABILITY AND VALIDITY

The two terminologies emphasis data quality control

3.7.1. Validity

This refers to the extent to which results can be accurately interpreted and generalized to other populations (Oso and Onen, 2008). These writers further define validity as the extent to which instruments measure what they are intended to measure.

The researcher will analyse the data collected and were need arises, the instrument will be re-adjusted and re-designed to improve reliability and validity.

3.7.2. Reliability

Reliability refers to the extent to which an instrument is able to measure one thing over and over again while producing the same results.

3.8 DATA COLLECTION PROCEDURE

Upon receiving the University permission to carry out research, the area of study will be visited for purposes of familiarization.  The researcher will seek permission from staff and once allowed to proceed with research, questionnaires will be issued and interviews will be carried out with the selected staff.

3.9 DATA PROCESSING AND ANALYSIS

The raw data will be coded, edited, and arranged ready for analysing only completed raw data will be analysed using statistical tables and graphs. Qualitative data will be used to analyse the response from the data

3.10 ANTICIPATED PROBLEMS AND LIMITATIONS

Some respondents may be too busy with work related activities however the researcher will persuade the respondents to spare some time to for the interviews.

Most of respondents may fear to give information but the researcher will explain to them that the research is purely for academic purposes.

Some respondents may give false information to protect their images. However, the researcher will assure them of the purpose of information to be collected as being only for academic purpose.

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