ROSCA stands for Rotating Saving and Credit Associations. This is the umbrella term originally used by academics and NGO's to discuss a financial product found around the world. I like to compare the term ROSCAs to using the word bread - societies in every region have something like it, and in each case it's an everyday staple, but mostly known by its local name. Still, any visitor recognises bread when they see it. We like to share a list by the Global Development Research Centre that illustrates over 100 names in 70 countries that everyday people use for their alternative to banking: ROSCAs.
What fascinated me, and became the core of my post-graduate thesis, was the high-street banking product that consorcios (a Brazilian term for ROSCA) had become. As I started my research, most analysis on ROSCAs focused on micro-lending and informal economies. But that is just the tip of the iceberg. In Brazil, based on the Central Bank's numbers, over 5 million Brazilians are using ROSCAs at any given time. Consorcios exist for financing fridges and washing machines as well as cars, small businesses, and homes. In fact, ~£3 billion in property per year was purchased by everyday Brazilians via collaborative finance. There's no reason why the same couldn't work in the UK, and beyond.
ROSCAs appear in such widely spread countries and varied economies because they work. They fill a need effectively and understandably - even in places with low levels of literacy. I believe that ROSCAs are a viable, peer-to-peer alternative to traditional lending when (1) sufficient access to credit for qualified borrowers is failing and (2) the buying power of savings erodes over time because of interest rates below price increases of the goal purchase (UK housing, anyone?). ROSCAs are also highly adaptable. They can be flexed to fit any budget - from micro-lending to London property. The key is to effectively match each group (what StepLadder calls circles) so that the target sum and length of commitment are the same for each specific circle.
This feature of forming fixed membership groups is a defining strength of a ROSCA. Since each circle is made of particular cohort of members, who are matched based on affordability and budget, there is no dependence on finding new participants for a particular circle to continue to operate once underway. This is why emphatically and demonstrably, ROSCAs are NOT pyramid or Ponzi schemes. They are self-contained units - each circle more independent from each other than branches of the same high street bank. I believe this makes them tough, as well as efficient.
The following illustration may help by using numbers: imagine a group of six members, each contributing £100 for six months. Over six months each member contributes £600 (6 months x £100) and the total circle £3,600 (6 members x £600). Also, each month for six months, there is a lump sum available of £600 (6 members x £100). The member who draws the first £600, in month one, gets their £100 monthly contribution back plus £500 total from the other five members (5x £100). But the member who draws in month one must continue to make the next 5 fixed monthly contributions so that the other members can each get their lump sum in turn.
Whether drawn first or last, each member's monthly contributions stay the same throughout their time participating. It is important to understand that members who have been drawn early still make the same on-going fixed monthly contributions to the end of the circle's fixed term. Each circle, once underway, is a fixed group which generates it's own capital from the fixed monthly contributions of each of the members over the full term of the circle.
In sum, we are bringing ROSCAs to the UK. I believe that ROSCAs, which are mostly unknown in the U.K., can bring a innovative solution to a generational crisis in home ownership. It takes an outside-the-box, private-sector solution to make a meaningful impact. Crucially though, we offer ROSCAs on the firm knowledge that they work worldwide, we know why they work, and we know what StepLadder can do to make them a solution for you.
In a couple years, ROSCAs, as StepLadder circles, will be like coconut water has become in the last three years - a fresh, widely available alternative that has been hiding in plain sight elsewhere in the world for generations. Join us on the journey - joinStepLadder.com
Matthew Addison
Matt is the Founder and CEO of StepLadder. He started StepLadder to make a lasting positive impact on UK first-time home buyers and fix a broken system
