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Why use ROSCAs when you can use banks? Theory, and evidence from Ethiopia

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  • Abbi M Kedir
  • Richard Disney
  • Indraneel Dasgupta

Abstract

Much of the existing literature on the use of informal credit arrangements such as ROSCAs (Rotating and Credit Saving Associations) theorises the use of such institutions as arising from market failures in the development of formal saving and credit mechanisms. As economic development proceeds, formal institutions might therefore be expected to displace ROSCAs. We show, using household data for Ethiopia, that in fact use of formal institutions and ROSCAs can co-exist, even in the same household. We examine usage of both formal and informal institutions across the household income gradient, and provide a theoretical model consistent with these empirical facts.

Suggested Citation

  • Abbi M Kedir & Richard Disney & Indraneel Dasgupta, 2011. "Why use ROSCAs when you can use banks? Theory, and evidence from Ethiopia," Discussion Papers in Economics 11/32, Division of Economics, School of Business, University of Leicester, revised Jun 2011.
    • Handle: RePEc:lec:leecon:11/32
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    Cited by:

    1. AMANKWAH, ERNEST & Gockel, Fritz Augustine & Osei-Assibey, Eric, 2019. "Pareto Superior dimension of Rotating Savings and Credit Associations (ROSCAs) in Ghana: Evidence from Asunafo North Municipality of Ghana," MPRA Paper 96308, University Library of Munich, Germany.
    2. Alem, Yonas & Hassen, Sied & Köhlin, Gunnar, 2014. "Adoption and disadoption of electric cookstoves in urban Ethiopia: Evidence from panel data," Resource and Energy Economics, Elsevier, vol. 38(C), pages 110-124.
    3. BOUSALAM, Issam & HAMZAOUI, Moustapha, 2015. "Bank-based investing RoSCA for Islamic finance: a new alternative to drain households savings and reduce financial exclusion," MPRA Paper 67510, University Library of Munich, Germany, revised 30 Oct 2015.
    4. Alem, Yonas & Hassen, Sied & Kohlin, Gunnar, 2013. "The Dynamics of Electric Cookstove Adoption: Panel Data Evidence from Ethiopia," RFF Working Paper Series dp-13-03-efd, Resources for the Future.
    5. Eun Jin Ryu & Aya Suzuki, 2021. "ROSCAS as Insurance: Comparing Formal and Informal Methods of Saving among the Unskilled Workers in the Ethiopian Cut‐Flower Industry," The Developing Economies, Institute of Developing Economies, vol. 59(3), pages 243-274, September.

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    More about this item

    Keywords

    Household saving; Credit institutions; ROSCAs; Ethiopia;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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