Rotating Savings and Credit Associations, Credit Markets and Efficiency

Abstract

This paper examines the allocative performance of rotating savings and credit associations (roseas), a financial institution which is observed world-wide. We develop a model in which individuals save for an indivisible good and study roseas which distribute funds using random allocation and bidding. The allocations achieved by the two types of rosca are compared with that achieved by a credit market and with efficient allocations more generally. We find that neither type of rosea is efficient and that individuals are better off with a credit market than a bidding rosea. Nonetheless, a random rosea may sometimes yield a higher level of ex ante expected utility to prospective participants than would a credit market.

Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged?

“…This verifies the claim of (i) Besley et al (1994) that efficiency of a cooperative is mixed when contrasted with formal credit markets; and (ii) Hart and Moore (1998) that a cooperative works well when it is focused on a limited scope of activities. This result does not incorporate the lower transaction costs of a cooperative stemming from its organization as a non-profit entity.…”

“…The cases with low initial home price, high income, low income multiplier, high confidence level and high risk constitute the instance cited in Besley et al (1994) and Hart and Moore (1998), where a ROSCA (in our case the cooperative mortgage) is pareto-superior over a formal credit market (in our case the formal mortgage). However, this is reversed for high initial home price, low income, high income multiplier, low confidence level and low risk.…”

“…Besley et al (1994) and U.S. This is attributed in the literature to the (i) Inability of consumers to evaluate the quality of goods (or service) promised (or delivered) (see Hansmann, 1980); (ii) Inability of consumers to observe (or measure) the output (or benefit) (see Easley and O'Hara, 1983); (iii) Adaptability to a changing economic environment (see Emmons and Mueller, 1997); (iv) Narrowly defined activity where members have homogeneity of opinion (see Hart and Moore, 1998); (v) Mitigation of received the fund once.…”

“…For some values of these parameters, a cooperative constitutes a special case reported in Besley et al (1994) and Hart and Moore (1998), which is pareto-superior to the formal mortgage.…”

Can an Islamic model of housing finance cooperative elevate the economic status of the underprivileged?

“…12 , 13 , 14 . Besley et al (1993) find ROSCAs to be appealing, as they provide a pareto-superior solution to the problem of purchasing an indivisible (lumpy) good (such as a home). This is attributed by them to the improvement in social welfare stemming from intertemporal trade due to the mobilization of savings (under ROSCAs), which otherwise would have been idle under autarky.…”