Roscas' Funtions And Financing Of Small And Medium-Sized Enterprises

The private economy has made rapidly progresses in China since 1980s.During this period, because of the policy of 'financial restraint', small and medium-sized businesses can hardly get credit from formal finance and are widespread to face the problems of funds. The rigid banking system and flourishing small businesses encouraged the existence of informal markets in China, which have a plethora of different institutions. Among these are ROSCAs, especially in Zhejiang, Fujian and Guangdong Provinces. The role of ROSCAs on the capital formation of small businesses is very significant. On the foundation of the B-L model, this paper discusses what mechanisms are responsible for enforcement of the agents and inter-temporal allocation of the pool. The analysis on the bid strategy points out only the active agent who is having the highest expected returns would get the 'pool' at each round in bidding ROSCAs. We find the volatility of interest rates implicit in winning bids is caused by the change of expectant returns. Furthermore, the paper indicates that the blood relationship and ground trust are the foundations of ROSCAs' operation, so they can run well if being kept in some extent and satisfying some conditions, including the activities of other informal markets reaching corresponding level, the quantity of agents being reasonable, the invested fields being limited and the organizers having a certain ability. Finally, drawing lessons from historical experiences, we provide some valuable and new suggestions that improve upon current practice in microfinance programs.