Savings and Finance in Slums

Abstract: Most people think of slum dwellers as living just above subsistence. But that is not often true. People come to cities because of the higher wages there. While those who cannot afford formal housing live in slums, they are also able to save money over time. Until recently, slum dwellers could not put their savings in bank accounts as banks required account holders to have formal addresses and slum dwellers are squatters. Instead, slum dwellers came up with and used alternative investment vehicles. This chapter examines a number of the most common vehicles. One category is rotating credit and savings associations (ROSCA’s). What is intriguing about these is that ROSCA’s are ubiquitous even though they are quite complicated and that males and females participate in different types of ROSCAs. In female member ROSCAs, participants contribute equal amounts at each meeting and then draw straws, with the winner taking the entire kitty. In male member ROSCAs, the participants bid to take a portion of the kitty and the person who bids the lowest portion gets to take that portion, with the rest of the kitty rolled over for the next meeting. We explore how these ROSCAs formed and why males and females have different ROSCA rules. Another category of investment vehicles is homes: people save by building new rooms or floors. We examine why this is the case and how this creates rental markets in slums. It also complicates efforts to regularize slums by giving people low-income homes or land rights. A common dispute is whether benefits should be given to the informal owner of a home or the informal tenant. Our chapter will describe and try to explain how and why these different investment and financing vehicles arose and how new programs such as the government’s new JDY accounts affect economic activity in slums.