A COMPARISON BETWEEN FORMAL AND INFORMAL MUTUAL-CREDIT ARRANGEMENTS

We analyze under what conditions a group of potential entrepreneurs prefer to form a Rotating Savings and Credit Association (ROSCA), or a mutual-guarantee association, which we interpret in a rotating scheme and call Rotating Savings and Collateral Association (ROSCoA). We argue that: 1) ROSCAs (ROSCoAs) are likely to be more developed in countries with high (low) bank concentration; 2) the individual flow of savings required to be a member of a ROSCoA is generally lower than that needed in a ROSCA; 3) the ex-post contribution of ROSCoA participants is always (weakly) lower than the collateral needed under individual liability lending.