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Why Use Roscas When You Can Use Banks? Theory And Evidence From Ethiopia

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  • Abbi 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 Kedir & Richard Disney & Indraneel Dasgupta, "undated". "Why Use Roscas When You Can Use Banks? Theory And Evidence From Ethiopia," Discussion Papers 11/05, University of Nottingham, CREDIT.
  • Handle: RePEc:not:notcre:11/05
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    References listed on IDEAS

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    2. Besley, Timothy & Coate, Stephen & Loury, Glenn, 1993. "The Economics of Rotating Savings and Credit Associations," American Economic Review, American Economic Association, vol. 83(4), pages 792-810, September.
    3. Olivier Dagnelie & Philippe Lemay‐Boucher, 2012. "Rosca Participation in Benin: A Commitment Issue," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(2), pages 235-252, April.
    4. Handa, Sudhanshu & Kirton, Claremont, 1999. "The economics of rotating savings and credit associations: evidence from the Jamaican 'Partner'," Journal of Development Economics, Elsevier, vol. 60(1), pages 173-194, October.
    5. Siwan Anderson & Jean-Marie Baland, 2002. "The Economics of Roscas and Intrahousehold Resource Allocation," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 963-995.
    6. Carpenter, Seth B & Jensen, Robert T, 2002. "Household Participation in Formal and Informal Savings Mechanisms: Evidence from Pakistan," Review of Development Economics, Wiley Blackwell, vol. 6(3), pages 314-328, October.
    7. Cleveland, William S. & Devlin, Susan J. & Grosse, Eric, 1988. "Regression by local fitting : Methods, properties, and computational algorithms," Journal of Econometrics, Elsevier, vol. 37(1), pages 87-114, January.
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    9. Timothy Besley & Stephen Coate & Glenn Loury, 1994. "Rotating Savings and Credit Associations, Credit Markets and Efficiency," Review of Economic Studies, Oxford University Press, vol. 61(4), pages 701-719.
    10. Calomiris, Charles W. & Rajaraman, Indira, 1998. "The role of ROSCAs: lumpy durables or event insurance?," Journal of Development Economics, Elsevier, vol. 56(1), pages 207-216, June.
    11. Ambec, Stefan & Treich, Nicolas, 2007. "Roscas as financial agreements to cope with self-control problems," Journal of Development Economics, Elsevier, vol. 82(1), pages 120-137, January.
    12. Stefan Klonner, 2003. "Rotating Savings and Credit Associations When Participants are Risk Averse," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 979-1005, August.
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    Cited by:

    1. 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.
    2. 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.
    3. Alem, Yonas & Hassen, Sied & Kohlin, Gunnar, 2013. "The Dynamics of Electric Cookstove Adoption: Panel Data Evidence from Ethiopia," Discussion Papers dp-13-03-efd, Resources For the Future.

    More about this item

    Keywords

    Household saving; Credit institutions; ROSCAs; Ethiopia;

    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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