Why do members join indigenous informal financial institutions - RoSCAs? : an empirical evidence from equbs in Ethiopia

Abstract: Cooperation among human societies can be traced back to the ancient times when people started to live together. There are evidences showing that ancient civilizations had practiced cooperation among themselves from cooperative farming to establishing informal saving and loan associations (www, Umanitoba, 2011). Those informal financial institutions are still widely used in many low income countries and are channels by which substantial amount of economic and social activities are carried out. Scholars, however, are calling for the transformation of those informal institutions to formal ones. Suggestions had also given to the government to come up with a better policy to utilize as well as incorporate those institutions to the formal system. But before discussing and recommending policy improvements about the linkage, the reasons why the members join informal financial institutions should be studied. This will help to come up with the proper recommendation about how to utilize those institutions. The objective of this study was basically to investigate why members join equb while they can use other alternative. In addition the study was interested to look if the motive is different based on attributes like the size and location of equbs. The study is conducted using an empirical data collected in Ethiopia on Ethiopian RoSCAs known as Equb. Transaction cost theory is used as a grand theory. Earlier suggestions given by previous researchers on the field (that could be considered as middle range theories) are also used as the theoretical bases to conduct the research. Based on the theories, hypotheisis has been drawn and tested using the empirical data collected. Accordingly, the results revealed that the motive of members differ based on the size of the equb they are participating. The social motives owtweigh the financial motives for those individuas in small equbs, i.e small equb participants are more interested on the social life they enjoy form participation. To the contrary, the big equb members are financially motivated. The “durable good motive” have found appropriate for the medium size equb members. All those motives, however, can be satisfied using other institutions. Low transaction cost as well as high commitment feature in equbs is the reason why individuals join equbs instead of using other options. This is a different outcome as compared to previous studies conducted in the field where a generic proposition was forwarded irrespective of the different attributes that individuals and RoSCAs possess. Future research areas could be the change on the equb structure and operation if there is any, the trends of the change and why, how much reduction in transaction cost in informal institutions could attract members of equb, and the possible impact of introducing developed and modern “saving side” and “withdrawal side” commitment mechanisms in formal banking system on attracing equb members.