Determinants of participation in rotating savings and credit associations in urban informal settlements: Evidence from Mathare Slums, Nairobi.

Abstract

Participation in rotating savings and credit institutions is very prevalent in developing countries including Kenya. This is despite the fact that such participation is costly in terms of the opportunity cost of time spent in meetings and there is the risk of loss from defaulting participants. A question arises why people participate in roscas instead of saving on their own. Although studies on participation in rotating savings and credit associations in Kenya have been conducted in the past, they have not been rigorous and they have ignored the effects of such factors as ethnicity, religion, individual discount rates and recent innovations in electronic money transfer systems on participation in roscas. The objectives of this study were to determine the characteristics of rosca participants, to determine the motives of participation in roscas and to determine how allocation decisions are made and to find out the preferred periods of receiving the pot. It uses both descriptive analysis and estimates econometric models of rosca participation, motives allocation decisions and preferred periods of receiving the pot using household level data generated from Mathare, in the oldest and one of the poorest Kenyan slums. The key finding on rosca participation is that gender, individual discount rates, household size, education level and proportion of wife’s contribution in the household’s budget are on the upper hand the main determinants of participation in rotating savings and credit associations. Ethnicity and electronic money transfer services do not seem to affect participation in roscas. The study finds that xix participation in roscas is for varied motives the main ones being saving, insurance, keeping away money from spouses and socialization. Those who participate for the saving motive include those households where spouses are not co-habiting, singles and the employed. Those who do so for socialization motive are those not co-habiting with their spouses, Muslims and the employed. The ones not co-habiting with spouses and those in informal business are the ones who participate for insurance motives while those co-habiting with their spouses and Muslims are the ones who participate to keep the money away from their spouses. Majority of the participants do not prefer receiving the pot at the beginning of the rosca cycle which negates the hypothesis that participation in roscas enables participants to receive goods earlier than they would by saving alone. Majority also do not use the pot to purchase a durable good, shattering the lumpy-expenditure argument. Multinomial regression results show that households where both spouses live in the same house prefer to receive the pot at the end of the rosca cycle and so is the case for Muslims and households where the wife’s contribution to the household budget is high. Negative and significant coefficients were observed for preferences at the time of opening schools for respondents who are employed either in the private sector or engaged in business regardless of whether such business is formal or informal. Age, gender and marital status affect positively the decision to allocate the pot by balloting at the formation of the cycle while spouse living in the same house and household size affects such allocation decisions negatively. Positive coefficients for xx allocation at the beginning of the rosca cycle were observed for age, discount rates and gender. Balloting at each meeting was positive for discount rate but negative for level of education. As the study has shown that the majority of slum dwellers can and do save, then the feeling that they are too poor to save should be discarded. As roscas have been seen as commitment devices for saving, the study recommends those designing microfinance products to design programs which would ensure commitment through small but regular contributions. As roscas serve several motives, design of micro-finance products should have the motives in mind and the target should be the participants with the characteristics which have been identified as the critical for participation to ensure a greater possibility of success.