Deterministic ROSCA: Financing Efficiency, Risk And Networks

Being a major form of ROSCA, the deterministic ROSCA is a common informal financial institution in rural areas. This paper studies the financing efficiency, risk and networks of the deterministic ROSCA. Firstly, through to the cash flow analysis of participants, we study the financing efficiency under the risk-free conditions. Secondly, we put the risk into two categories-strategic risk and natural risk, and then study the structure factors of the deterministic ROSCA using the risk model. Finally, based on the theoretical analysis how the social networks affect the strategic risk, we make empirical analysis.We conclude that: on the one hand, based on strong networks and special structures, both strategic risk and natural risk are very low; on the other hand, as long as there is no risk, the financing efficiency of the deterministic ROSCA is relatively high. Thus, deterministic ROSCA would be the financial institution of both low risk and high financing efficiency.Firstly, in the perspective of networks, the stronger the inter-networks effect and external-networks effect are, the greater the potential benefits and losses of breaking the agreement are. Thus, the probability of beginning is high and the probability of breaking is low.Secondly, in the perspective of structure, the more the sum of participants and the more the sum of fund are, the higher the probability of breaking is. Thus, in order to enhance the safety, the structure of the deterministic ROSCA is important, such as the sum of participants, the sum of the fund.Thirdly, in the perspective of financing, the deterministic ROSCA is a financial institution financing between two groups. Taking into account the local market's conditions, the financing efficiency of the deterministic ROSCA is high.It is suggested that the government should allow and encourage the development of deterministic ROSCA. And in order to promote the healthy development, the government should make it clear the legal status about the deterministic ROSCA, as well as the sum of participants, the sum of the fund, the rights and obligations of participants.