Design of informal finance system: a case of ROSCA

Abstract

Rotating savings and credit association (ROSCA) is a well known informal financial association widely used in many countries around the world with long histories. By considering extra profits that such a system can provide when compared to banking transactions, we develop optimization problems to achieve an optimal design of a ROSCA. We find that ROSCAs might attract households when deposit and loan rates from formal banking systems are not favorable. Furthermore, optimal rates and optimal orders to maximize system outputs are reported.