The raging COVID-19 pandemic is spurring Great Depression-era levels of unemployment, but amid the economic devastation, it may have sparked a renaissance of community-bound savings and loan organizations and services.
In 2020, COVID-19 caused employers to cut 20.5 million jobs last April, tripling the unemployment rate to 14.7% [US Jobless Rate Triples]; a University of Illinois study, meanwhile, has predicted more economic damage, in the form of 100,000 small businesses permanently closing [Small Businesses in Pandemic].
In contrast, people of color, disadvantaged populations, and those living in developing countries, where formal banking services are nonexistent, are strengthening their financial futures by creating and sharing communal funds and building trust through grassroots savings groups, including ROSCAs (rotating savings and credit associations) and ASCAs (accumulated savings and credit associations).
Diana McKnight, a 30-year advocate for community and economic development and a resident of Washington state, said she’d been researching ways to help people of color empower themselves and become more knowledgeable and strategic about their finances. Finally, about three months ago when COVID-19 was at its initial peak in the United States, McKnight launched Extended Family 100, a virtually-run ROSCA that consists of family and friends from across the United States. However, the virus was not McKnight’s motivation to start a ROSCA. The systemic inaccessibility of traditional financial services to people of color was her greatest influence.
“I remember going into a savings and loan with this person who applied for an account, but because they had a low credit score, they were denied an account,” said McKnight who also worked in banking for ten years. “[I]f that person had a job and something going for herself, then she should be able to take $5 and open an account.”
The deficit of traditional financing options for the disadvantaged in a nation where banks and other financial institutions are plenty seemed “ludicrous” to McKnight and the reason these groups turned to ROSCAS, known by many pseudonyms including sou-sous, kitties, ayutos, tontines, and hagbags, to build capital for short and long term goals.
ROSCAs have existed for centuries in various places in South America, Africa, China, Japan, India, Pakistan, Thailand, the Caribbean Islands and elsewhere.
In the United States, a white paper published by the Federal Reserve Bank of Philadelphia, suggests ROSCAs first appeared in the early 1960s. But, Dr. Caroline Shenaz-Hossein, Associate Professor of Business & Society at York University in Toronto Canada and founder of the Diverse Solidarity Economies (DiSE) Collective, said the existence in ROSCAs in the US and Canada dated back to the Underground Railroad.
“I can speculate that as long as Black people have been coming to the Americas, there have been cooperatives existing, like arts, music, and food. Money is no different,” Dr. Hossein said.
How it all works
A ROSCA is a type of savings fund compiled by a community of people who come together to make regular contributions to a common fund. These funds are flexible and adaptive for rural, urban, or virtual communities.
A common theme for any ROSCA is its democratic and social aspects. Members work collectively to meet individual goals, educate themselves, and make decisions about the ways in which to operate, including how and when funds are collected and disbursed.
Deposits and disbursements often happen when members convene. The location can be physical or virtual, and contributions can be made hand to hand or by electronic or digital money transfers.
The most common ROSCA involves regular contributions within a certain period of time, from several months to an entire year. Each time money is collected, that lump sum is given to one member.
The rotation of these funds depends on the number of people in the group. For example, twelve members may contribute $10 each per month, amounting to $120. Each month, a member collects $120 when it is their turn. These distributions are not loans, and depositors can only collect once within that year.
Though a popular method and most ROSCA members share preferences of doing business with people with whom they have relationships, ROSCAs can vary in size, operations, and rules.
“We have had people who preferred sou-sous because they wanted an immediate return, and I’ve had to tell them that’s not Extended Family,” McKnight said.
The Extended Family 100 ROSCA has its own set of rules for its members to follow.
- Members join to meet long-term goals, such as buying a home, purchasing family’s land, or covering the cost of a college education.
- They do not pool their money, though they do share a common commitment to save $100 monthly for at least one year.
- They can borrow from themselves only after they’ve saved at least $800, but every withdrawal must be replenished by an immediate deposit of $100.
- Their electronic contributions go into an accounting system that allows each member to watch their wealth grow and use social media (such as Facebook) to recruit new members, share information, and network with other like-minded people and groups.
In recent years, enthusiasm for using Internet-based ROSCA platforms has increased. Online collaborative lending and savings platforms, like eMoneyPool, Moneyfellows, and Puddle have allowed individuals from various parts of the United States to pool money and save as well as manage their money circles.
Though popular, ROSCAS come with disadvantages
While ROSCAs have their advantages, there are also disadvantages and risks, including the inability to collect interest on long-term savings or to collect funds exactly when needed. ROSCAs are not a part of traditional banking systems, so they are not FDIC or insured by the federal government or any other entity. Also, one person known as the banker or treasurer, collects and holds the funds, which has led to mismanagement, loss, and theft of funds for some groups.
In the “Banker Ladies,” a documentary about ROSCAs produced by DiSE, a Somalian immigrant, living in Toronto, Canada, and banker for her ayuto or ROSCA, claimed the police seized her group’s funds during a drug bust and refused to return the money. This loss is just one example of risks for members if the banker is compromised.
Also, health and safety concerns posed by COVID 19 have caused members to decrease their gatherings or discourage elderly participants from attending meetings. Either way, the fewer members participate, the less they save and the lighter their bottom line, according to Hugh Allen, founder of Village Savings and Loans, which is headquartered in Germany.
“One of the secrets of successful saving is saving small amounts frequently,” Allen said. “For example, If I can save $1 weekly, at the end of the month, I have $4, but if I meet monthly, that may reduce that amount to $2.”
A ROSCA alternative for small business owners and entrepreneurs
Allen has observed the use of ROSCAs among people, entrepreneurs, and small business owners in various African countries for close to 30 years.
Though similar risks can haunt any grassroots savings group, Allen thought the tendency of ROSCA members to collect money and not pay it back was ineffective for building social capital that groups could depend on when needed continuously.
A similar but distinct model — accumulating savings and credit associations — differ in that members pool money for lending purposes.
Participants in ASCAs can give what they can, and money from the fund seeds loans that can be acquired when needed and paid back within three months with interest. At the end of each year, all savings and all interests are shared out proportional to each member’s contributions.
“At first, I thought it was crazy because I said, look at it, people are taking money out of their pockets and putting it on the table and then borrowing it,” Allen said. “That doesn’t make sense. Then my country director said that’s what happens when I go to my bank. I save there, but I borrow from it, too.”
Allen ultimately embraced accumulated savings and credit associations in the early 1990s, after observing 14 West African savings groups transact, complete their cycle, experience a 100 percent repayment rate on their loans, as well as a 20 percent interest boost to their savings.
“The average person who works in a savings group,” he said, is making 19 percent interest on their savings. “I have a bank account three kilometers up the road and my return every year is a quarter of one percent. So, I’d much rather put my money in a savings group. Unfortunately, we don’t have too many of those in Germany.”
Today, Allen’s ASCA group offers facilitation, training, and performance-tracking for 3,832 savings groups encompassing 13 million people in 75 countries. He said women comprise approximately 75 percent of these groups’ membership.
Familiar challenges — and opportunities
Like ROSCAs, when these groups convene during the pandemic era, wearing masks is required, and for their own safety, elderly people and children are discouraged from attending. Members may not always be able to make their regular contributions, due to job losses and family issues, which is another challenge.
The flexible nature of ASCAs and ROSCAs has helped these groups survive without forcing members to leave the collective.
“COVID 19 has created some hardships, but we can adapt when needed. We had a member whose mother was in the hospital, so she did not have her contribution. We understood because we’re all in this together,” McKnight said.