Underground banking in Malaysia: a case study of ROSCAs
| Pages | 99-111 |
| Published date | 01 January 2006 |
| Date | 01 January 2006 |
| DOI | https://doi.org/10.1108/13685200610645256 |
| Author | Elsa Bawani Satkunasingam,Bala Shanmugam |
| Subject Matter | Accounting & finance |
Underground banking in
Malaysia: a case study of ROSCAs
Elsa Bawani Satkunasingam and Bala Shanmugam
School of Business, Monash University Malaysia, Selangor, Malaysia
Abstract
Purpose – To provide arguments in favour of legalising rotating savings and credit associations
(ROSCAs) as they play an important role in savings and credit for women in Malaysia.
Design/methodology/approach – The paper refers to previous studies on ROSCAs in Malaysia
and extracts information that shows that ROSCAs are used mostly by women as a method of
forced-savings, credit and insurance against uncertainties. It suggests different methods that can be
used to make ROSCAs more efficient. Finally, it provides suggestions for amendments to existing
legislation which will not interfere with the social structure that supports ROSCAs, yet permit
participants to sue defaulters.
Findings – The findings show that ROSCAs are widely practised in Malaysia especially in the rural
and suburban areas. The participants are mostly women from middle income and low-income groups
who used it as a form of savings or credit. The benefits of permitting ROSCAs outweigh the risks.
Legalising ROSCAs will not remove the benefits but will substantially reduce the risks.
Originality/value – This paper provides arguments to legalise ROSCAs in Malaysia and provides
suggestions to ensure greater efficiency and a lower default rate. It also suggests amendments to the
legislation to enable participants to take quick and cheap legal action against defaulters.
Keywords Savings, Credit,Banking, Women, Malaysia
Paper type Research paper
Introduction
Rotating savings and credit associations (ROSCAs) have been a major part of the
Malaysian informal financial market arrangements for a long while. This is indeed
surprising in view of the fact that ROSCAs are not legal under the Kootu Funds
(Prohibition) Act 1971. Despite its illegality there is ample evidence of participation in
ROSCAs throughout Malaysia especially among women, more so in the rural and
suburban areas. A plethora of recent literature has portrayed ROSCAs as helpful to the
urban poor as well as those in rural communities especially women. It has attra cted
attention because it provides informal credit to those who are least likely to obtain it
from the formal financial markets. It is also perceived as a forced-savings instrument
which can be used to bring benefit to the participants’ households especially children.
While ROSCAs clearly have some benefit, this practise also carries risks. This paper
seeks to explore whether ROSCAs should be legalised in light of the recent positive
literature on the practice. It will lay out the advantages and disadvantages of the
practice in Malaysia and then proceed to examine whether the risks involved in
ROSCA participation can be reduced by financial and legal arrangements spe cifically
tailored for this purpose.
The definition of ROSCA
ROSCAs are known by several different descriptions such as contribution club, slate,
mutual lending society, pooling club, thrift groups, friendly society, rotatin g credit
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1368-5201.htm
Underground
banking in
Malaysia
99
Journal of Money Laundering Control
Vol. 9 No. 1, 2006
pp. 99-111
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/13685200610645256
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