ROSCAs in China

hui_loan

 

Introduction
Hui (simplified Chinese: 会; traditional Chinese: 會) refers to a group-based rotating saving and credit scheme that is popular among many people in China. Biao Hui (标会) is the Chinese verb when someone is engaging or participating in Hui.

 

How it works?
The basic premise of the model is a group of close friends and family members coming together once a month and contributing a fixed amount of the money into a money pool. Every time, one member of the group will be chosen to withdraw the entire lump sum from the pool, often for purpose of down payments towards houses or cars or to start a new business. When the same group of people comes together again in the subsequent month contributing the same fixed amount, another member of the group will be chosen to take the lump sum. This process is repeated until every member in the group had a chance to withdraw the lump sum in a given month.

Establishment
A particular Hui is usually initiated by a trusted figure/influencer within a community. This person is considered as the group leader and is in charge of recruiting and vetting all participating members. While other participants can also vouch and extend the invite to their friends and family members, their participation still requires approval of the group leader. The group leader is usually held responsible for any frauds, embezzlement or defaults within the group, should anyone fail to follow through on their commitment. In this case, the group leader has to cover the losses with their own money to make all other group members whole.
Typically, group leaders will host all of group members at his/her residence to collect everyone’s monthly contribution and facilitate any borrowing requests. To compensate for group leader’s risk and hard work, he/she often has the priority in borrowing the money from the group on any given month when needed. In fact, this is one of the main reasons one become a group leader of a hui, to fulfil his/her upcoming financing needs.

interest_free

Differences to other schemes
Unlike similar schemes in other cultures, where all the savings and borrowing among the group members are interest-free and the order of the withdraw are determined by the group leader, Hui adopts a market-driven interest rate approach: In any given month, all members currently interested in taking the money pot have to submit an interest amount they are willing to pay to the group. Typically the person who is ready to pay the highest interest will receive the pot, with the interest amount being evenly disbursed among the other group members. Typically, the interest payments are higher and more competitive during the early months of the Hui, and tend to decrease towards the end of the Hui.

References
1. Lulu Chen (22 October 2009). “For Chinese Immigrants, Money Pools Offer a Risky Promise”. Retrieved 18 January 2016.
2. Matthew Forney (15 November 2004). “China’s Shadow Banks”. TIME. Retrieved 18 January 2016.
3. Mark Arax (30 October 1988). “Pooled Cash of Loan Clubs Key to Asian Immigrant Entrepreneurs”. Los Angeles Times. Retrieved 18 January 2016.
4. Shereen Marisol Meraji (6 April 2014). “Lending Circles Help Latinas Pay Bills And Invest”. NPR. Retrieved 18 January 2016.
5. http://www.investorblogger.com/whats-a-hui-how-you-can-borrow-and-lend-money-in-china/

Rotatory saving and credit associations

A rotatory savings and credit association is a group of people who agree to meet for a certain period of time in order to save money together. This enables everyone in the group to have access to loans. F.J.A. Bouman described ROSCAs as “the poor man’s bank, where money is not idle for long but changes hands rapidly, satisfying both consumption and production needs.”[1]

rotatory-saving-group-in-Mali

Application across different cultures

Rotatory saving as a mean to access financial loan is widespread in many regions in the world. It is known as tandas in Latin America, partnerhand in West Indies, cundinas in Mexico, ayuuto in Somalia, hagbad in Somaliland, susu in West Africa and the Caribbean, hui in Asia, palawugang in Philippines, Gam’eya in Middle East, kye in (계) South Korea, tanomosiko in (頼母子講) Japan, pandeiros in Brazil, juntas or quiniela in Peru, C.A.R. Țigănesc/Roata in România, and arisan in Indonesia.

The structure of rotatory saving

The meeting sessions for these groups are based on member’s agreement. At the meeting each member contributes some amount and only one member (loan receiver) gathers all the amounts once. It is usually agreed that the loan receiver pays back the original loan plus a very small interest. This helps members have access to larger loans at the future. Since each transaction is seen by all the members and no money is kept, there is high transparency and trust inside such groups.

These groups have two very important features that give the low-income class of a society extra benefit. One, normally due to the unstable economics and inflationary conditions in some societies, purchase power for an accumulated saving is gone or weakened. A rotatory saving group provides loan is relatively shorter time and easier process to the loan applicants. Two, credit associations and banks mostly prevent to serve credit worthy borrowers due to operation costs, regulations or other reasons. Meanwhile in a rotatory saving group the members known as highly creditable.

Usually the members in these groups select each other; this ensures the security and trust among the members. In some countries, Brazil for instance, a third party agent or intermediary hemps forming the group and process the continuous affairs. This is what Care organization is doing in some parts of the world. They provide a simple lockbox, train agents to teach VSLA groups and administrate this ongoing process till the end of each loan cycle.

How Care organization works on international development?

Care has spread standardized Accumulating Saving and Credit Associations (ASCAs) to reach 2 million people in Africa[2]. These standardized ASCAs are called Village Savings and Loan Associations (VSLAs), and they usually comprise 10 to 20 participants who conduct saving and loan activities for a fixed period, usually 12 months. Unlike informal ASCAs, these use a triple-locked box to secure the funds, have standardized election procedures and maintain a careful separation of various duties, such as record-keeping, money-counting, meeting facilitation etc. Interest rates on loans typically vary from 5-10% a month, while cycle-end pay-outs in most groups range from 30-60% of invested capital[3].

As of the end of June 2012 development agencies (including CARE, Oxfam, CRS and PLAN) were carrying out projects reaching 1.8 million members in 23 countries, mostly in Africa. The Savings Group Information Exchange, a project of the Bill and Melinda Gates Foundation, provides researchers with an on-line database where indicators like savings and loans per member, country, return on assets and percentage of female members can be compared.

References:

1. F.J.A. Bouman, Indigenous savings & credit societies in the developing world in Von Pischke, Adams & Donald (eds.) Rural Financial Markets in the Developing World World Bank, Washington, 1983
2. William J. Grant & Hugh Allen. CARE’s Mata Matsu Dubara (Women on the Move) Program in Niger. Journal of Microfinance, Brigham Young School of Business, Provo, Utah, Fall, 2002.
3. Hugh Allen and Mark Staehle. Village Savings and Loan Associations (VSLAs) Programme Guide, Field Operations Manual. VSL Associates, Solingen, 2007.