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Cambridge Endowment for Research in Finance (CERF)


PI: Kai Liu

Title: Roscas and formal credit markets: theory and evidence

Rotating savings and credit associations (Roscas) have been the most prominent informal financial arrangements in developing countries despite the recent expansion and development of financial systems. Using a large microcredit reform which improves access to formal credits for rural households, we provide the first empirical evidence on how Roscas interact with the development of formal credit markets. An economic behavioral model is used to understand the economic incentives underlying participation in Roscas. From the model we can evaluate the value of a micro-finance program under different informal financial arrangements and inform policy makers of the optimal design of micro-finance programs.

Key Research Findings to date: Our preliminary empirical results reveal that the effects of Village Fund credit provision on roscas are positive across all the outcomes considered both in the short and over the long run.The effects on whether household participated in rosca and the payments made by households into roscas are statistically significant with the long-run effects sizing slightly larger. These are robust to the addition of household-level controls and fixed effects. All the outcomes are conditional on households ever engaged in rosca over the estimation period and hence can be thought of as an intensive margin of rosca participation.

Project Update - August 2023