Why Use ROSCAs When You Can Use Banks? Theory and Evidence from Ethiopia

31 Pages Posted: 20 Jun 2011

See all articles by Abbi M. Kedir

Abbi M. Kedir

University of Leicester - Department of Economics

Richard F. Disney

University of Nottingham; Institute for Fiscal Studies (IFS); Axia Economics

Indraneel Dasgupta

Durham University - Department of Economics and Finance; IZA Institute of Labor Economics

Abstract

Much of the existing literature on the use of informal credit arrangements such as ROSCAs (Rotating and Credit Saving Associations) theorises the use of such institutions as arising from market failures in the development of formal saving and credit mechanisms. As economic development proceeds, formal institutions might therefore be expected to displace ROSCAs. We show, using household data for Ethiopia, that in fact use of formal institutions and ROSCAs can co-exist, even in the same household. We examine usage of both formal and informal institutions across the household income gradient, and provide a theoretical model consistent with these empirical facts.

Keywords: household saving, credit institutions, ROSCAs, Ethiopia

JEL Classification: O16, O17

Suggested Citation

Kedir, Abbi M. and Disney, Richard F. and Dasgupta, Indraneel, Why Use ROSCAs When You Can Use Banks? Theory and Evidence from Ethiopia. IZA Discussion Paper No. 5767. Available at SSRN: https://ssrn.com/abstract=1867036

Abbi M. Kedir (Contact Author)

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

Richard F. Disney

University of Nottingham ( email )

School of Economics
Nottingham NG7 2RD
United Kingdom
+44 115 951 5620 (Phone)
+44 115 951 4159 (Fax)

Institute for Fiscal Studies (IFS)

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Axia Economics ( email )

38 Concanon Road
London SW2 5TA
United Kingdom

Indraneel Dasgupta

Durham University - Department of Economics and Finance ( email )

Durham, DH1 3HY
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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