With the ever growing popularity of microfinance it is important to recognize that there are other financial mechanisms that have been in existence for centuries. One such mechanism is the Kenyan “merry-go-round”, also known to a few Economists as rotating savings and credit associations (ROCAS).

The basic idea of a merry-go-round is simple. A group of people get together and form a savings club that works as follows. Each meeting each member contributes to the pot. Each meeting one member takes home the pot (often chosen at random without replacement). The next meeting that person is excluded from taking the pot but still has to contribute, and the club cycles through all members until everyone has received the pot. After the cycle has completed everyone has received what they put in and have effectively turned their small payment at each meeting in to larger lump payment that is more useful in for making  large (indivisible) purchases, such as paying school fees.

The economics of these merry-go-rounds are kind of interesting. Ex ante (at the beginning) the merry-go-round scheme is attractive because on average you are expected to receive the pot before you have completely saved that amount. Lets say you have a group of 10 people that save $10 over 10 weeks. You can expect to receive the pot of $100 before the 10 weeks are over. Ex ante you have a 1/10 chance of getting the pot in the 1st week, 1/10 chance in the next, and so on for all the weeks. Thus, you would have a 90% chance of receiving the pot before the 10th week.

The merry-go-round also has the interesting property of being both savings and a loan. For someone who receives the first pot, the merry-go-round resembles a loan; as they are required to still make payments after they receive the pot. For someone who receives the last pot, the merry-go-round resembles savings without interest. For the people that receive the pot sometime in the middle, the merry-go-round is savings up until you receive the pot and is a loan repayment afterward. Pretty sweet, huh?

Merry-Go-Round by a Women's Group in Nungeni, Kenya

It is important to recognize that merry-go-rounds (ROCAS) of various sorts exist in the informal sector and in poor communities throughout Africa, Asia, and elsewhere. Forming a merry-go-round is way to build community and build good financial habits (e.g. savings and loan repayment). Anderson and Baland (2002) conducted a wonderful study of merry-go-rounds in 520 households in a the Kianda village of Kibera. Kibera is commonly known as Africa’s largest slum with around 1 million people living in abhorrent conditions on the outskirts of Nairobi, Kenya.*  The researchers discovered the following descriptive statistics of merry-go-rounds in this area. The merry-go-rounds of Kibera:

• had 15.8 members, on average
• has existed for two years and 4 months, on average
• most commonly contributes every month (49%), followed closely by weekly contributions (35%)
• has a median cycle that lasts 6 months
• comprises only women (65%), or both men and women (30%)
• was started by friends, relatives, or neighbors (85%)

The researchers collected household expenditure data and are able to show that households that participate in merry-go-rounds are able to (save and) spend more on school-fees, the largest non-food expenditure.** The result is most striking for the poorest of the poor and the most well off of the poor (households in the bottom and top two income deciles). While the data of this study is not comprehensive, or recent enough to be compelling evidence, it certainly suggests that merry-go-rounds have the ability to help not just the poor but the poorest of the poor. And perhaps more importantly, merry-go-rounds are a simple way to build community bonds and create interest-free loans and promote savings.

————-

*Though it is often claimed to be the largest or second largest slum in Africa at up to 1 million people, the population of Kibera is highly uncertain. Kenya is currently preparing for an extensive census in August 2009 that may shed more light on it’s true population. An independent NGO is also trying to extensively map Kibera. they have completed mapping of Kianda village and state it’s population at 15,219 with 50% of people from the Luo tribal ethnicity. To get a frame of reference the average monthly rent in Kianda village, Kibera is 1,150 ksh. (~ $14.50).

**Notice here the survey took place before Kenya introduced “free” universal primary school. However to this day, paying school frees is a leading leading public service need. In January 2009, we conducted a small survey in another Nairobi slum (Mathare) that indicates Education and School Fees as the top public good need after access to clean water and sanitation facilities.