Informality and access to finance during socialism and transition – the case of the rotating savings and credit schemes

Although access to finance has grown rapidly all over the world, largely based on the expansion of the banking sector, informal finance is still common. Rotating savings and credit schemes have been diffused in many countries across the world, including socialist countries, generally stimulated by a lack of access to loans. These schemes are informal (with no formal binding obligations or written rules) and voluntary, and their functioning depends on successful collective action. Although free-riding and other collective action problems would be expected, such cases have been rarely reported. Based on a set of in-depth interviews targeting individuals who were involved in such schemes in four different post-socialist countries, this paper shows an explanation to the question why free-riding was not the dominant strategy. The paper argues that the reputation and other social capital-components coupled with pressuring instruments used for enforcement of socialist ideology have been the key mechanisms that enabled the functioning of the rotating savings and credit schemes. The importance of trust and reputation received a high value in the selection of the schemes’ coordinator, group members and size. These enabled the successful implementation of the rotating savings and credit schemes.